Landlords adapting to smart-phones: ICSC panelists

‘Percentage rent’ system under pressure from mobile device technology

TRD New York /
May.May 22, 2012 11:30 AM

Brick-and-mortar stores have been under direct pressure for years from web-based competitors like Amazon. Now it’s the landlord who is wrestling with competition from the web.

New in-store price-comparison smart-phone applications — which allow customers to compare prices and buy products as they walk the aisles of stores like Home Depot and Walmart — are forcing both tenants and landlords to adapt, real estate executives speaking at a panel Monday at the International Council of Shopping Centers’ RECon, in Las Vegas, said.

Mike LaFerle, vice president for real estate and construction at Home Depot, said shoppers in their Manhattan stores would traditionally pay higher in-store prices, reflecting the higher cost of business generally there. But now, with smart phones, the retailer is competing with a national and even global marketplace on price.

“We are now competing with that. We are no longer competing with the retailer down the street,” LaFerle, one of the five panelists, said.

And those apps are expected to bring changes to an important part of a mall landlord’s leasing models, the percentage rent, Edward Hogan, national director of retail leasing at Brookfield Office Properties, said. Hogan is directing leasing at the World Financial Center, which is undergoing a high profile, $250 million rehabilitation in Lower Manhattan. There, it is competing for tenants with the World Trade Center retail.

The other panelists were Carl Muller, vice president at Walmart Stores; John Clifford, principal at Midtown South-based architecture firm Perkins Eastman; and Marci Troutman, CEO of mobile web consultant SiteMinis.

The panel was one of many held during the four-day RECon, which concludes tomorrow.

The show, the largest of its kind in the world, is expected to attract at least 32,000 professionals involved in the retail real estate industry, organizers said last week, but updated figures were not immediately available. Last year about 31,000 people attended. The most ever was in 2007, when more than 50,000 people registered.

Top brokers such as Barry Gosin, CEO of Newmark Grubb Knight Frank; Robert K. Futterman, CEO of Robert K. Futterman & Associates; and Christopher Schlank, managing partner of Midtown-based landlord Savanna, were walking the aisles Monday.

The impact of price-comparison apps discussed in the panel is particularly important to landlords that are paid in percentage rent, such as Brookfield is at World Financial Center, because the landlord is losing part of its revenue if customers visit a store, but then make an online purchase later.

That’s because in the percentage-rent system the tenant pays the landlord a percent of sales either in addition to, or instead of, a fixed rent.

The trend of consumers comparing prices while browsing in stores — and then making purchases online with the same retailer or a competitor — is only expected to continue, the panelists said.

At times it is not clear where a sale is made, and therefore whether the retailer should get some part of the sale, Hogan said.

He said retailers can use mobile phone data tracking systems to identify where customers were when they checked the price of an item or where they were when they bought it, either in the store or later at the office of at home. He said any sale generated in the store should be part of the percentage rent. But with the other sales, it is not clear.

“It is a very blurry line. So I think it is a question that is on everybody’s mind,” he said. “What might happen — if it is something that we can’t quantify — we might see [the base rent go up].” That might happen because landlords are unsure what their revenue on the percentage rent will be, and they will instead seek that revenue by increasing the base rent, he said.

The Toronto-based Brookfield owns 18 million square feet of office space in Manhattan, as well as 200,000 square feet of retail in the World Financial Center.

The panel also touched on the topics of the difficulty Walmart has encountered opening smaller footprint stores in urban areas, because it was a major departure from the traditional shopping model it built its business on.

“[The urban store] is a totally different customer, a totally different [shopping] experience and a totally different way of doing business. So there is a lot of brain damage as you figure that out,” Muller said.

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