Retail Rent Reductions Aren't Widespread--Yet

Executives at many major retail chains across the country made it clear for months that they intend to ask their landlords for rent concessions as a way to deal with weak sales during the recession. Williams-Sonoma is doing it. Charming Shoppes is asking for help. Quiznos is even in the fray.

Looking at the recent financial results of a few large retail REITs out there, it seems as though these efforts haven't paid off for retailers in any widespread manner. Yet. As shopping centers' occupancy rates worsen, this situation could change.

Cleveland-based Developers Diversified Realty, the owner of about 700 shopping centers across the country, received 672 rent-relief requests from retailers so far this year, management revealed during its second-quarter conference call. The number it approved? A total of 20, or three percent.

One problem, explained Daniel Hurwitz, DDR's president and chief operating officer, is that after making these requests, retailers rarely follow up with financial information that the REIT requests to substantiate the need for the reductions. Of the 20 instances in which the firm did help a tenant, he said, it was generally over the period of a year in the form of one deferred payment.

During its first-quarter conference call, Tanger Factory Outlet Centers' management was not as forthcoming as DDR's about rent reductions. When asked about it by an analyst, President and CEO Steven Tanger simply said: "Concessions are not prevalent, and they are abating."

The quarterly numbers of the REIT, which is based in Greensboro, N.C., and owns 31 outlet centers, back up what Tanger said. On leases renewed during the quarter, there was a 14.5 percent increase in average rental rates -- not a sign that retailers are getting many deals in that portfolio.

But there is a sign that both DDR and Tanger, and many other REITs, might have to change their hard-line policies. Shopping center owners' occupancy rates are declining across the board. In the case of DDR, the firm reported a rate of 90.7 percent in its most recent quarter, down from 95.6 percent during the same quarter in 2008. Tanger fared a bit better but still saw a drop, from 95.3 percent to 93.5 percent, and company executives expect that number to keep falling as the year progresses.

If occupancy continues to drop, and more stores vacate retail centers, shopping-center owners might have not choice but to offer concessions, meaning that the 20 DDR has given so far are just a beginning.