US DEPARTMENT STORES CLING TO POWER OVER LANDLORDS ON MALL UPGRADES
Department stores may be struggling to draw customers, but they have not relinquished their hold on America’s malls. The ageing retail juggernauts are exploiting contracts with landlords that give them the power to dictate how a property can be developed, covering everything from parking to signage to what types of operators are allowed into a centre. Known as reciprocal easement agreements, or REAs, the contracts were put in place decades ago, when landlords relied on department stores to lure suburban shoppers. A majority of malls in the US are encumbered by an REA, tying developers’ hands as they try to keep up with rapid shifts in retailing, according to Ryan Rivera, a partner at law firm Hartman Simons & Wood.
“Twenty or 30 years ago, they made sense,” Rivera said. “Today they are a hindrance.” Department stores, hit particularly hard by the rise of e-commerce and changing consumer tastes, have been in decline for 15 years, according to DJ Busch, a managing director at real estate research firm Green Street Advisors. The dated restrictions imposed by the REAs are partly why many malls have struggled to evolve, he said. In many cases, what worked 50 years ago is now obsolete.
For example, “Department stores are extremely possessive of their parking spaces”, Busch said. “It’s not hard to argue they don’t need as much as they used to.” One of the thorniest issues for mall owners is that REAs give anchor stores the final say over how a property can be used. Developers are often blocked from installing businesses such as gyms, bowling alleys and medical services, according to Rivera. Those are exactly the types of tenants landlords are pursuing, to fill space left by closed stores and offer customers experiences they can’t find online.