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Apple Stores Boost Business, Rents in American Malls

Posted on March 11, 2015 in

Apple Gets Sweet Deals From Mall Operators

Apple stores are so popular that they can increase overall mall traffic and sales. But the success often means higher rents for smaller retailers.

By
Suzanne Kapner
March 10, 2015 1:16 p.m. ET
Apple Inc. ’s huge gravitational pull on mall traffic is distorting the market for mall rents, winning the iPhone maker sweetheart deals and putting upward pressure on other tenants’ leases.

Apple draws so many shoppers that its stores single-handedly lift sales by 10% at the malls in which they operate, according to Green Street Advisors, a real-estate research firm. That gives Apple the clout to negotiate extremely low rents for itself relative to its sales, while creating upward pressure on prices paid by mall neighbors who might not benefit from the traffic.

In the past, malls typically operated according to a straightforward bargain. Department stores that anchored the ends of the malls either owned their own stores or paid almost nothing aside from fees to maintain common spaces in exchange for drawing much of the traffic, while specialty retailers in the smaller spaces between the anchors typically paid the bulk of a mall’s rent.

Apple has upended that model by using its bargaining power to pay no more than 2% of its sales a square foot in rent. That compares with a typical in-line tenant, which pays as much as 15%, according to industry executives.

A crowd in front of the Apple Store at the Natick Mall in Massachusetts awaiting the release of the iPhone 6 last September. Photo: Getty Images

Rents paid by mall stores are based on the sales the retailer expects to book in that space, which are in part a function of the mall’s overall productivity.

“As department stores close, Apple is replacing them as the main driver of traffic to the mall,” said Raymond Cirz, chairman of Integra Realty Resources, a real-estate valuation and consulting firm.

Apple doesn’t get the same terms as anchor tenants, because those stores still do a better job of getting shoppers to fan out to other retailers in the mall.

“There are a lot of people who go to Apple and leave,” said DJ Busch, a senior analyst at Green Street. “Apple doesn’t promote cross shopping as much as healthy department stores do.”

Nick Leahy, an Apple spokesman, declined to comment on the rent the company pays or its sales.

Apple opened its first two retail stores in 2001 at Tysons Corner Center in McLean, Va., and the Glendale Galleria in Glendale, Calif. The stores quickly won over customers with their clean design and easy shopping experience. Apple now has about 450 stores world-wide, of which 265 are in the U.S. While the stores accounted for just 12% of Apple’s $183 billion in annual sales in the year that ended Sept. 27, they draw about 1 million visitors a day, according to Mr. Leahy.

With the launch of the Apple Watch, unveiled on Monday, the company is crossing into high-end fashion and its stores will offer a new shopping option to suit that type of customer. People familiar with the matter say Apple Stores are being redesigned to include a space where customers, by appointment, can try on the smartwatch.

The average Apple store generates about $6,000 in sales a square foot, though its highest-grossing stores can pull in as much as $10,000, the industry executives said. Apple’s share of gross sales at 45 enclosed shopping malls averaged 14% in 2013, up from about 2.5% in 2002, according to an analysis by Mr. Cirz. In a handful of malls in New England, Apple accounts for as much as a third of total sales, Mr. Cirz said.

Apple’s strong sales mean the company pays a lot of rent in outright terms. But Apple enjoys breaks in addition to paying a low percentage of sales. Landlords typically require tenants to pay additional rent if their sales exceed a preset trigger, for example, but Apple doesn’t pay this extra amount, the industry executives said.

The traffic drawn by Apple gives mall owners leverage as they try to wring higher rents from other tenants.

Simon Property Group , the largest mall owner, which counts 54 Apple stores in its 190 properties, has the potential to gain bargaining power with tenants if it is successful with its $16 billion unsolicited bid for Macerich Co. , the third largest mall operator. Macerich owns 59 shopping centers, some of which have Apple stores.

“We love having Apple in our malls but that does not give us leverage in negotiating rents,” said Les Morris, a Simon spokesman.

Many factors play a role in how rents are set, but at the most basic level they are a function of the sales volume a retailer expects to produce in that space, which is in part determined by the mall’s overall success.

For that reason, retailers ask landlords to exclude Apple from mall sales when calculating rents to eliminate the distortion, similar to the long-standing practice of excluding the sales of anchor tenants like department stores.

Alyssa Gates, the director of real estate for Lush Fresh Handmade Cosmetics, said she always asks owners for their mall’s sales without Apple’s results.

“We’re aware of the lift that Apple brings to a property,” Ms. Gates said. “It acts like a department store.”

Other retailers including J. Crew and Abercrombie & Fitch had the ability to bump up mall traffic during their heydays, said Jim Bieri, a principal with Stokas Bieri, a real-estate consulting and leasing firm. But Apple is an extreme case.

The second floor of the Somerset Collection mall in Troy, Mich., had always been the busiest, as that is where shoppers could cross over from one section of the mall to another. Then Apple opened on the first floor in 2002 and changed the mall’s dynamics.

“Traffic on the first floor substantially increased after Apple opened,” said Ken Nisch, the chairman of JGA, which works with retailers on store design and brand positioning.

Write to Suzanne Kapner at .(JavaScript must be enabled to view this email address)

Source: http://www.wsj.com/articles/apple-gets-sweet-deals-from-mall-operators-1426007804

Apartment Values Rise, as Do Rents

Posted on October 27, 2011 in

By DAWN WOTAPKA

Strong growth of rents and occupancy levels of rental apartments have pushed some building values to record levels as Americans shift away from home ownership.

While concerns about the economy are cooling the market for most other types of commercial real estate, apartment rents and occupancies continue to be boosted by demand from millions of people who are victims of foreclosure or are unwilling or unable to buy their own homes.

At the end of the third quarter, 5.6% of the nation’s apartments were vacant, down from 5.9% in the second quarter, and the lowest level since 2006, according to Reis Inc., a real-estate data service.

Rents are up even in some cities that have been hard hit by high unemployment and the housing crash, like Orlando, Fla., Detroit and Phoenix. Effective rents, which include landlord discounts in some markets, rose to $1,004 a month in the third quarter, up 2.3% from a year earlier, according to Reis. Of the 82 major markets that Reis tracks, only Las Vegas saw rents decline compared with a year earlier.

Forecasters say rent increases could slow or stop if the economy weakens further. But for now, these trends are producing outsized returns for real-estate companies, compared with other commercial-property classes.

Values of apartment buildings in the best locations—with modern amenities like resort-style swimming pools and outdoor movie viewing areas—went into record territory in the third quarter, according to an index compiled by Green Street Advisors. The previous record had been set in the second quarter of 2007.

Investors who bought apartment buildings just a few years ago are selling for big profits. Regency Club, a 372-unit complex in Jackson, N.J., with two swimming pools and tennis courts, sold for $44 million in August, compared with $39.9 million in early 2009, according to Marcus & Millichap.

At the same time, though, the rise in rents is squeezing large swathes of the middle class by increasing living costs just as wage increases are anemic and unemployment high.

Glen Guile, a 40-year-old information technology and marketing employee for an auto-parts company in Raleigh, N.C., says he’s looking on Craigslist, an online classified-ad service, for a roommate because he just heard his $629 rent for a one-bedroom apartment could be increased another $30 to $40 a month. He’s already working a second job at a Costco store. “I don’t get a day off. I work seven days a week,” he said.

But thanks to rising rents and occupancies, some analysts predict that real-estate companies will have the highest growth in property net income this year and next year since 2006.

Associated Estates Realty Corp. kicked off the earnings season for apartment-building companies Monday by reporting a 12.5% year-over-year increase in funds from operations, a common metric used by real-estate companies to measure performance. When looking at apartments owned for a year or more, rents for Associated’s 12,000-unit portfolio were up 4.6% compared with the third quarter of 2010.

“Some people try to make the argument that what’s going on in the job market affects apartment demand,” said Jeffrey Friedman, Associated’s chief executive. “We don’t believe that.”

The apartment sector has been insulated from high unemployment because it continues to inhabit a sweet spot in the economy created by demographic factors and the anemic home sales market. The U.S. is expected to see 1.5 million rental household formations in 2011, a record year, according to Green Street.

The main reason for the rental increase is a faster-than-expected decline in the home ownership rate, according to Green Street. The nation’s rate came in at 66% in the second quarter, down from 66.4% in the first quarter and 66.9% in the second quarter a year ago, according to the Census Bureau.

Some industry watchers say the rate could fall to as low as 60%. Each 1% decline in the home-ownership rate represents the movement of one million households to rentals.

If a current tenant balks about a lease renewal including higher rent, Mr. Friedman says he isn’t overly concerned. “There’s someone coming right behind them who can afford it,” he said.

To be sure, the economics of apartment investments aren’t detached from the concerns about financial problems in Europe and the possibility of a double-dip recession in the U.S. As a result, landlords have started to temper rent growth in some areas, including Denver, Atlanta and the Baltimore area, according to Green Street.

If another recession hits and unemployment rises, millions of renters could likely double up or move home with their parents, putting a crimp in demand. “People just aren’t going to write bigger and bigger rent checks into infinity,” warns Andrew McCulloch a Green Street analyst.

The high rents are also being supported by a lack of new supply. Developers have scrambled to launch new projects, but most of them won’t start hitting the market until late 2012. Roughly 8,200 new apartments hit the market in the third quarter, the second lowest number since Reis began tracking data in 1999.

http://online.wsj.com/article/SB10001424052970203911804576653403871400400.html