'Ransom Payment' No More: Mall Anchors Losing Their Leverage As Owners Ramp Up Redevelopment

Decades-old accords known as reciprocal easement agreements, or REAs, made with anchor tenants at the nation’s mall have torpedoed owners’ redevelopment plans for years. But as the retail landscape shifts, these REAs are beginning to lose their power, providing more flexibility for upgrades at the same time landlords seek ways to bring shoppers back to their properties.

These agreements, a relic of the mall development boom that took American suburbs by storm in the 1970s and 1980s, require owners to get consent from their biggest tenants before making significant changes to the property.

In the past, anchor tenants often saw these situations as an opportunity for a payout, landlords said. Now, faced with decreased foot traffic and the challenge of e-commerce, many of them have changed tack and are less resistant to redevelopments that are potentially key to the long-term viability of the entire mall. 

“Historically, it was a ransom payment,” Unibail-Rodamco-Westfield Senior Vice President of Development Kim Brewer said at a recent Bisnow event.

Owners used to have to write checks to get approval from an anchor tenant to proceed with a redevelopment. Now, the owners have more leverage and the anchor tenants are playing ball more quickly, Brewer said.

Redevelopments, though they might disrupt business at some anchors or diminish parking, are increasingly viewed as a vital part of maintaining the viability of a shopping mall. The value of many malls is dropping, fueled in part by the increase in department store closures that accelerated in 2018, The Wall Street Journal reported in July.

Mall owners are trying to keep their properties relevant and interesting as a new generation that grew up able to buy new shoes with a few taps on a phone ages into real buying power. That means adding uses, including not just new retail and entertainment concepts but office, like Macerich is doing with its Flatiron Crossing shopping center outside Denver, or residences and walking trails, as is the plan of the Texas-based owners of suburban Cincinnati’s Tri-County Mall. 

Meanwhile, the country’s biggest department store brands like Sears and Macy’s that for so long anchored malls have either vanished or are suffering from reduced sales and foot traffic. The businesses that served as a draw to a mall 40 years ago are now sometimes an afterthought for shoppers headed to specialized retailers, dining options or entertainment venues like a movie theater.

Over the last five years, Pacific Retail Capital Partners Chief Operating Officer Donna Blair said she has also seen a shift in the tone of the relationship between owners and tenants, which has become more collaborative. 

One executive for a tenant in a property managed by Blair’s company said his company maintained a line item in its budget just for the payments it would get from landlords seeking to make upgrades. Now, she said, it is more common for both parties to come together and work to find a way all parties can be satisfied. 

“Fortunately, times have changed a bit, and they realize it’s a mutual relationship,” said Blair, whose firm has a retail-focused portfolio across the country, from New York to Hawaii. 

But that relationship doesn’t necessarily mean tenants are just giving away their bargaining chips.

Tenants are definitely still exchanging their consent to redevelop for benefits to their business, but those benefits are “probably not as sweet of a deal as what they were previously getting,” Allen Matkins partner Elizabeth Wilgenburg said. 

Instead of what amounts to veto rights for a major project, they may instead secure certain perks around parking or a permanent outdoor dining space.

Wilgenburg said many tenants have begun to understand that viewing these interactions with their landlords as nothing more than, say, a line item in a budget is short-sighted. Instead, they are taking a long view, recognizing redevelopment as an opportunity to improve a retail center and improve their business in the process. 

“No one’s going to survive at a dead shopping center,” Brewer said. 

The pandemic was a pivot point for the tenant-landlord relationship, landlords said. Owners began taking a much more individualized approach toward their tenants, working out deals with each tenant’s circumstances in mind to help them survive lockdowns, capacity restrictions and other guidelines. 

David Greensfelder, managing principal at Greensfelder Real Estate Strategy, said part of what is happening has to do with timing. In his decades of experience, many of the privileges anchor tenants have are nearing sunsets built into the contracts, he said.

This can contribute to the changing balance of leverage between owner and tenant, Greensfelder said. In some cases, owners secure approvals and get their ducks in a row for a project and wait out any tenants who aren’t amenable to the project. Greensfelder invoked the old saying, “Pigs get fed; hogs get slaughtered.” 

Anchor tenants are still looking to be compensated economically for their approval for owner redevelopment projects, even if they are in the best interest of the tenants, but Greensfelder agreed that he is seeing plenty of projects where retailers are willing to come to the table. 

Tangling with these agreements and with anchor tenants has also influenced the way mall owners write agreements with new tenants, Wilgenburg said. 

“My clients are being very careful of what they're granting these tenants in terms of abilities to control what happens in the common areas or the rest of the project or maintain a parking ratio,” Wilgenburg said.

When it comes to restrictive agreements that tie landlords’ hands, Wilgenburg said, “We all learned our lesson.” 

CORRECTION, OCT. 9, 12:50 P.M. PT: A previous version misstated the structure of REAs. The story has been updated.