US department stores cling to power over landlords on mall upgrades

The owners of the Sunrise Mall in Northern California have a vision for updating the 45-year-old centre, but tenants there are making it difficult to get it done.

Proposed changes have been held up by the property’s department stores, which include Macy’s, JC Penney and Sears. Shoppers in the area, meanwhile, are turning to other, more modern centres as the redevelopment stalls.

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.”

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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.

“These documents prohibit any other use that’s inconsistent with a first-class shopping centre,” Rivera said. “Think of a bowling alley in a typical enclosed regional mall in the ’80s – they weren’t first-class operations.”

For Ami Ziff, director of national retail at Time Equities, which buys outdated malls and renovates them, the REA is among the first things he looks at when evaluating an acquisition. Signage restrictions are often a sticking point. Anchor tenants typically don’t let other vendors place signs on the exterior of an enclosed mall, effectively funnelling foot traffic through their stores. New tenants want to install their own signs, Ziff said.

“The anchors own the outside of your mall,” he said.

It is theoretically in the best interests of all involved – including the department stores – to refresh a struggling centre’s tenant mix with companies that are likely to draw larger crowds. Still, different tenants are bound to have different ideas about what is best for the property, Ziff said.