Broaden Those Retail Use Restrictions in 2014

On behalf of Kaplin Stewart Meloff Reiter & Stein, P.C. posted in on Nov 1, 2016.

As a result of the growth of internet shopping, retail real estate is going through a transition of how and where people shop. Grocery stores, restaurants and certain types of service providing tenants have continued to open stores and have not seen a major change in customer shopping habits as a result of the internet. Many clothing, electronics and other merchandise selling retailers, however, are in the process of adapting their business models in order to integrate the internet with their bricks-and-mortar stores. The result is that some of the larger square foot tenants are transforming their proto-type stores to a smaller footprint, with the sales being executed on-line. Along with the slowly recovering economy, the internet has caused more competition between shopping center and mall owners for potential retailers in order fill their vacancies.

In the previous strong retail real estate market, most retailers required use restrictions in their leases to cause shopping centers and malls to consist of only clothing, electronics, books, food and other merchandise selling retailers, as well as restaurants and certain service providers. These leases specifically prohibited office and residential type tenants, since these types of tenants were not thought of being able to attract the type of people that would shop and increase the gross sales of the retail tenants.

In this economy and in the foreseeable future, however, there are not a sufficient number of retailers and restaurants to fill the vacancies caused by the competition from the internet and the recession. As a result, real estate owners are forced to expand their potential tenant mix and reconfigure the shopping center environment to include offices and day-care type facilities, as well as hotels, apartments and condominiums.

Facing the alternative of operating retail stores in vacant shopping centers, some retailers are re-evaluating what tenant mix will maximize their gross sales. These retailers are realizing the benefit of operating next to offices with patients, clients and employees potentially shopping before or after their appointments or work days. The potential tenant mix could include banks, insurance companies, travel agencies, brokerage firms, medical clinics and other similar service businesses. Hotels, apartments and condominiums are also being viewed as increasing gross sales due to the potential customers living in and visiting these units.

In negotiating use restrictions in retail leases in this economy and the foreseeable future, real estate owners should contemplate the potential for a living, working and shopping complex that an existing shopping center or mall might transition into in the future.