Appraisal Matters

A regional mall’s temporary tenant is a sure sign of either a weak retail economy or that the mall is in a declining competitive position.  You’ve seen lots of these and probably haven’t really noticed that they are temporary tenants.

How do you spot a temporary tenant?

• The level of finish inside is of a materially lower quality than the other tenants.  Sometimes it’s nothing more than pegboard walls.
• They don’t have the level of stock that long-term tenants have.  You’ll see wide aisles and lower quality items.
• The type of merchandise sold may seem strange for the mall.  Calendar stores, low-quality furniture stores, seasonal stores like Christmas ornaments or Halloween costumes, puzzle stores, board game stores, etc. are common examples.
• Frequently they do not have the same depth as the other stores.  Half-depth stores are the best example.  The landlord puts up a wall and the rear of the space becomes enclosed and dead in most cases.
• The quality of the tenant’s sign usually leaves much to be desired.
• You probably won’t recognize the name of the store.  It’s likely one-of-a-kind.
• They rarely take up large space and typically confine the stores to 1,500 square feet or less.  Since they don’t pay much rent and/or CAM, they rarely take large inline bay spaces in the 3,500 to 6,000 square foot range; it is just too much risk and they have no use for the extra space.

So what’s the big deal about a temporary tenant?

• Temporary tenants rarely have leases - they have license agreements.  The license agreement allows them to leave anytime with advance notice between 5 and 30 days.
• Many temporary tenants don’t pay rent.  They pay a portion of common area maintenance (CAM).  Essentially, all this does is help pay for expenses, but even then the landlord can still be losing money.  For instance, one temporary tenant in a recent mall appraisal paid $3.42 per square foot (it was an atypically large space temporary tenant with 3,500 square feet).  Yet CAM was $8.90 per square foot.  The landlord was losing $5.48 per square foot toward the operation of the center, but that was better than no tenant and losing the full $8.90.
• Temporary tenants sometimes spark attempts by long-term tenants to renegotiate their leases.  How successful they are depends on the terms of the lease.

So what does the temporary tenant tell you?

• It signals to tenants that will be renewing their rent that they are in a position to request better release terms.
• The long-term tenants that will be coming up for renewal may also decide to simply move to a more competitive mall and use that as leverage during renegotiation.
• Temporary tenants may also signal to mall shoppers that the mall is “hurting” because these stores have a greater tendency to come and go, so shoppers see new spaces vacant at different places in the mall, giving them the impression that times are tough for the stores.  Shoppers talk, as we all do, so the word starts to get around.  I have a habit of speaking with shoppers and tenants in malls with temporary tenants and almost universally, temporary tenants are noticed.

From a profitability and market value perspective, it’s clear that malls with material numbers of temporary tenants (and reduced numbers of national tenants and perhaps vacant major or minor anchors, stages one and two of my “decline scale”) show poor levels of profitability and, frequently, a financial loss.  That’s great for a tax appeal but bad news for the owner.  It also shows a declining competitive position.  If the vacancy and number of temporary tenants is too great, a regional mall may become a target for redevelopment.  Essentially, a mall in this position is reaching the end of its economic life, although it can be turned around or repositioned in its market.  But that’s for another blog…

John Simpson, MAI