Get Real (Estate)

Renegotiating retail rents was never easy, even during the recession. As the economy improves, the time to talk landlords down is ticking.

Over the past two years, a number of businesses have benefitted from the recession-induced real estate slump by capitalizing on falling rents. But for jewelers—especially those located in high-end retail spaces—those opportunities have failed to materialize.

“Historically, we’ve opened three to five stores a year,” says Steve Davolt, vice president of marketing at Ben Bridge Jeweler Inc., which has been in business since 1912. “But opportunities weren’t there in 2009 and 2010.” The company did open one store in Santa Monica, Calif., in summer 2010 to take advantage of a newly renovated shopping and dining area in the heart of the beachside Los Angeles enclave.

Now with the economy improving and the real estate market slowly recovering, rents are on the rise again in many markets. And jewelers with multiple shops—the ones typically located in large, top-tier malls and at high-end retail addresses—have had few options to renegotiate leases because occupancy rates have remained high.

“At the better properties, there’s not a lot of negotiation,” says Bill French, an Indianapolis-based senior vice president with commercial real estate firm Cassidy Turley. “Even when General Growth Properties went bankrupt, there was not much rent renegotiation,” says French, referring to the April 2009 bankruptcy of one of the largest mall operators in the country.

Simon Property Group Inc., another mall owner with a national presence, saw a rise in revenue amid improving rents and occupancy rates in February. Occupancy at the company’s regional malls and premium outlets—where many high-end jewelers are seeking to establish stores to shed risk—rose to 94.2 percent at the end of 2010 from 93.4 percent a year earlier. Meanwhile, the average rent per square foot climbed 1 percent over the same period.

Chief executive officer Theo Killion of Zale Corp., which owns the Zales retail chain, recently said in an investor conference call that the company has met with its critical partners, including landlords, to try to minimize costs. “I recently had lots of conversation with our partners at Simon,” Killion said, referring to the aforementioned mall owner. “We intend to have more conversations on an offensive total portfolio basis so that we are all making money in a way that makes sense for us.” But he remained vague on the outcome of these discussions.

“It’s very difficult for retail REITS”—an acronym for Real Estate Investment Trusts—“which own large shopping malls, to give lease renegotiations, which really depend on the vacancy rate,” says Cynthia Groves, the head of retail services for Newmark Knight Frank, a real estate service firm.

Satya Jewelry’s 8-year-old boutique on Bleecker Street in Manhattan’s trendy (and pricey) Greenwich Village

Renegotiating leases in large metropolitan areas such as New York City and Chicago, where demand for retail space has largely remained strong, is even more challenging. Satya Jewelry opened one of the first jewelry stores on Bleecker Street in Manhattan’s West Village eight years ago. Locked into a 10-year lease, the retailer—which now has four stores in the Big Apple—wasn’t able to renegotiate its rent during the recession; fortunately, that didn’t greatly affect the store’s bottom line. “We got a great deal,” says co-founder Satya Scainetti, adding that her landlord will likely increase her rent when the lease is up. She’s also looking to open a fifth store in Grand Central Terminal—a spot where, incidentally, rents have been constantly on the rise for the past 10 years.

Marshall Pierce & Co., a jeweler with two stores in downtown Chicago, including one located at 29 E. Madison St. for the past 85 years, hasn’t been able to lower its rents either. “I did bring it up to my landlord,” says president Jerry Bern Jr. “But in downtown Chicago, even though there’s a little glut of retail space, they would not renegotiate because I have too much money invested in the store.” He added that he’s trying to expand his other store on Michigan Avenue, which the company has had for five years, but the rent there will likely remain at its current level, too. “Michigan [Avenue] has held up too well.”

For Signet Jewelers, which owns Sterling Jewelers Inc., talk of expansion is premature. The company said in its 2011 earnings conference call at the end of March that it is not likely to begin ramping up square footage in the near term given the low supply of high-quality real estate, although it would like to expand. “We are ready, willing, and able to open even more stores, but there is limited high-quality real estate currently available that meets our demanding store site selection criteria,” the company said.

Signet Jewelers plans to open 25 stores this year: four Jared the Galleria of Jewelry locations and 21 Kay Jewelers—the first significant expansion among the jewelry majors since the recession. But the company also intends to close 30 regional locations. The situation is likely to continue improving in the long term. In the next few years, Signet management expects to grow Kay by about 400 stores, mostly outside of malls, and Jared by 120 stores.

“This equates to a roughly 35 percent to 40 percent incremental footage growth opportunity,” wrote JPMorgan Chase & Co. analyst Ike Boruchow in a report published at the beginning of April, noting that the square footage of a single Jared store equals the footage of four Kay stores. He added that the fact that a good portion of the sales growth for both brands would come from new centers rather than established malls means the plan could take a few more years to come to fruition.

Signet Jewelers—which own the Jared the Galleria of Jewelry chain—expects to add approximately 120 new Jared stores over the next few years.

Signet Jewelers isn’t the only major retailer with its sights set on expansion. Net demand for retail space was at 315,000 square feet in the fourth quarter of 2010, which was the second quarter in a row of positive demand, according to real estate firm Reis Inc. The improvement followed two and a half years of retailers’ shedding space. As demand for space improves, landlords know that filling vacancies is becoming increasingly easier.

“Despite the prior recessionary environment, prime locations are still in demand and can command a premium price,” says Kenneth Gassman, president and founder of the Jewelry Industry Research Institute.

For smaller independent jewelers located in lower-end strip malls and shopping centers, opportunities to renegotiate rents have by all accounts been easier to come by, considering that those landlords have historically had a harder time holding on to tenants.

“A few specialty jewelers have told me they have been able to secure rent abatements,” Gassman says, adding that most of the landlords temporarily lowered their rents at the height of the recession in 2009 up until this year.

Some landlords have been more willing to renegotiate in order to retain a well-known brand, especially in light of the bankruptcies of retailers such as Borders Group Inc., Blockbuster Inc., and Pathmark, which is part of the Great Atlantic & Pacific Tea Co. Many would rather accept lower rents than continue to amass thousands of square feet of empty store space.

Small independent jewelers that cannot afford space in high-end malls focus on second- and third-tier retail centers that are still facing anemic demand and downward pressure on rents. The vacancy rate for these mid-tier malls and neighborhood shopping centers is expected to top 11.1 percent later this year, up from 10.9 percent last year, according to Reis. The drop has been—and should continue to be—beneficial to smaller jewelers.

Zale Corp. CEO Theo Killion recently spoke about minimizing real estate costs for its stores, such as this Zales location in Northpark, Texas.

Jewelers of all sizes, however, should keep some rules of thumb in mind when considering their rental situations. The most obvious is to not be shy about asking landlords to lower rents, especially when jewelers are in financial distress.

“Be completely up front and honest with landlords,” advises Domenic Rinaldi, president and managing partner of Chicagoland Sunbelt, a business brokerage firm. “I see so many tenants skipping payments.” Instead, he says, jewelers should talk to their landlord early on if they are having trouble making payments. He also advises them to research their markets and their landlords’ financial situations; that kind of information can only help when trying to lower rent or get the most advantageous deal when signing new leases.

But he notes that even for those few jewelers who were able to take advantage of landlords’ distressed situations and renego­tiate rents during the recession, prospects for reducing costs are shrinking. “Right now the economy is starting to come back and landlords aren’t as willing to renegotiate,” he cautions. “The window is kind of closing.”

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