Topics: Five Below, leasing deal

Transcript:

Chris Ressa 0:01
This is retail retail, the story of how that story ended up in your neighborhood. I’m your host, Chris ReSSA. And I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC management.

Before jumping into the podcast today, we have a quick new segment called Data drops brought to you by pacer.ai.

Today’s data drop is all about recovery.

The coffee comeback is continuing with Starbucks, Panera Bread, and Dunkin all seeing visit comparisons to 2019 levels improve.

Since the start of 2021, they’ve seen a steady and significant recovery each month. By June visits for Starbucks and Panera were down just 3.1% and 7.6% respectively, compared to June 2019. The best mark for both brands since the start of the pandemic’s retail impact.

Dunkin had remarkably already returned to visit growth by April, with may in June, June, seeing major visits increases of 6.2% and 7.9%, respectively.

The impressive rebound for these brands is being driven by a few key factors. First, the wider retail recovery is being felt across industries. And second, the return of work and school routines is giving a boost to players that fit within those routines, and few sectors fit that description as well as breakfast oriented chains. visits between six and 9am made up 9.9% of nationwide visits in June 2019, a number that dropped to 7.5% in 2020, and has already returned to 9.3% in June 2021.

Everyone, welcome to retail retold. I’m your host, Chris ReSSA. And today we have three fascinating retail topics to talk about.

One is this craze in retail Buy now pay later to

is an interesting perspective on supply chain. And three is a story of how Five Below ended up in Cheektowaga, New York.

Let’s dig in. The Buy now pay later craze is astounding. Big business and investors are literally pouring billions of dollars into these technological platforms that provide the option to buy now pay later. And for those who don’t know buy now pay later is a platform where you either go online or you go in a store and it allows you to purchase the product. pay a portion now and pay the rest over time. Goldman Sachs is purchasing green sky for 2.2 billion Pay Pal is purchasing peytie For multibillion dollars square purchased after pay for multibillion dollar deal all in the matter of months. Well turns out there’s approximately 53 million adult Americans who do not have traditional credit profiles. This was recently quoted by The Wall Street Journal. And it was something that FICO put out. retailers want to access the wallets of these 53 million people, many of which are Gen Z years and millennials who love this concept of buy now pay later. There are flexible payment options, lower interest, and it doesn’t take away of their available credit on a credit card. All potentially beneficial to the consumer and certainly beneficial to the retail or afterpay says on their website, that typically retailers and merchants who sign up for afterpay Pick up about 30% 30% new customers who have never connected with the brand, revenue goes up, conversion rate goes up. These are all phenomenal metrics for retailers. Given the billions of dollars invested into these platforms, the uncanny growth of merchants signing up to be on these platforms, this by now pay later, is not going anywhere. It’s just heating up. Stay tuned. I want to jump in now to supply chain. And I don’t want to talk about what we all know that it’s delayed, and there’s backlogs and costs are going up and ships are caught in the ocean. We’ve heard it all. One of the things I recently heard that I found interesting that maybe you have or you haven’t heard is that there’s a cohort where that might be affected less than other retailers. Obviously, everyone’s affected. But what is that cohort, and that cohort are the retailers who never stopped ordering. Everyone’s faced with the same challenges. However, if you stopped ordering, because you were shut down, or you had a negative impact from the pandemic, and you had to slow down ordering, whatever it might be. When you started back your typical ordering process, you went to the back of the line. The retailers and brands that never stopped ordering, they got to be first. And while they faced the same challenges everyone else, they’re first in line. And that’s part of the reason you see some stores and some online websites that are well stocked and some that are less than well stocked. I thought it was an interesting perspective as I spoke to some retailers. I hope you do too. Okay, finally, let’s jump into the story. Let’s find out. A Five Below ended up in Chico log in New York, because it’s a real fascinating one. And now a message from one of our sponsors. WL s lighting systems is a full service Commercial Lighting company focused on energy efficient lighting solutions for all types of exteriors, interior and specialty lighting projects. W LS works with you from design and site audits through post installation on everything from led upgrades for existing properties to new construction projects. Their goal is to provide you with the finest controls and lighting solutions to meet your design and budgetary needs. In 2010 WL s developed net link controls the first sight lighting wireless control system for the shopping center industry. With over 100 manufacturing partners and 1000s of completed projects across the country. W LS knows the importance of staying on budget which meets or exceeds expectations. WMS lighting systems provides the utmost value in design and product choices that are sustainable, aesthetically pleasing and enhances value in your property. Learn more at W LS lighting

Okay, how did five below end up in Cheektowaga New York. I think this is an interesting story. We used to own this center Walden consumer square. In Cheektowaga, New York. This is a suburb of the buffalo MSA Office Depot was a 25,000 square foot Junior anchor. They had wanted to downsize and make their space smaller, lower their gross occupancy. These downside scenarios for those who don’t know we’re not easy. Taking an existing tenant making that space smaller is costly. Typically, the existing tenant doesn’t want to close during that construction. That adds complexity. And then the landlord has to figure out what to do with the balance in the space. No landlord wants to spend money to get less noi. So it’s complicated. So we took the first step. The first step is design a plan, an actual drawing of what the space would look like, post amaizing so that you can see what that space looks like. And then you can see what the new vacancy would look like. We ended up working through a plan had to bring the Office Depot down to approximately 17,000 square feet. This left us enough space that we thought had enough frontage and width was a good shape to lease and was the end cap in the center. Now, after we did that, we started to work on what the economics of this new space for Office Depot might look like. Who was doing what construction? What were those costs? Who’s going to bear those costs? What would the new rent be? What would the new term of the lease be, we started going through this process, while simultaneously going to the market to find a tenant for the adjacency, we weren’t going to do this until we had that done, that would make everything work, we would be able to increase the total noi of the space, hopefully, getting Office Depot to pay a higher per square foot, but lower total gross occupancy and replicating something similar or more on the adjacent space. Fortunately, at the time, we had about three centers in Cheektowaga. At one time, we had four. So we knew all the tenants who are trying to penetrate the cheek Tolaga market, which retailers were looking to open stores, we ended up finding a credit worthy tenant who wanted to be adjacent to Office Depot. And this tenant was expanding in Buffalo quickly. And the deal actually happened quicker than the Office Depot, there was a lot of things going on with the Office Depot scenario. And the deal like happened, it didn’t happen. It happened, it didn’t happen. And it was going back and forth. And I worked with my friend Nick Roth, and it was a great experience. But we ended up finding a tenant for the adjacency. We signed that lease quickly. That lease was contingent on me getting possession of the space from Office Depot, I had to get possession. Not only did I have to have a termination signed with Office Depot. But that deal was contingent on me getting possession from them. That meant that I had to have access legally. And it’d be my space no longer Office Depot leasing the space that they were giving back. Well, as luck would have it, the Office Depot deal took a long time. And over that course of time, and we’re talking about two years, the tenant I was working with or had a signed lease with on the space that was going into the space, we were creating the adjacency some there were some market shifts going on. And they were going to pull out of this if that was what they really wanted to do. Now they were going to live up to a lease obligation, but they really were not convicted anymore. Time had bought its course. Right Elise, so that a little bit the obligations to the lease? Well, my possession date came, we had legal possession, and there was potentially some argument whether I had physical possession, and the tenant declined possession said we didn’t have it and terminated the lease. Well, now I’ve gone awful circle, I made the deal with Office Depot, I spent the money. And now I have a legal battle with the adjacent tenant. And whether they’re obligated to take the space or not. As that was going on. We had a lot of things moving in the market. And we alerted Five Below about this. Five Below is interested, we started to make a deal with five below the tenant that we’re working with originally, still holding their ground that we didn’t actually have possession. So we amicably came up with a termination, some terms to the termination and we terminated the lease with that tenant. They didn’t want to be there. Anyway, we wanted to make sure we had a tenant who actually wanted to be there. We ended up quickly making a deal with five below, which was important to obviously this whole transaction otherwise, the Office Depot downsize when it made sense for that, but not necessarily for us as a landlord. Less rent now I have a new vacancy. And there was no imminent term expiration for Office Depot. There’s no impetus to do that downsize well. Five blow opened Office Depot opened their new space and all worked out and it was really great scenario. I think the punch line is really in the valuable lesson for me is this. What is possession of a space and commercial real estate? Because legally I had documents that said that space was mine. There was some things in the space. They were Office Depot, office depot’s there was obviously construction going on so Office Depot, people going in and out of space. It could be argued that physically, it didn’t seem that I had possession. And that was by that date. But legally, I had a document that said I did. And we could have went to court and I think the courts would, it would have been interesting to see what the courts would have said, there was pictures that showed like an Office Depot fixture in there. And so how could I have possession of Office Depot fixtures were in there was interesting. So had the deal being tied, meaning 100% effective with that adjacent tenant? On the date of termination, with Office Depot of the adjacent space, that did happened previously. But when did I actually have possession right was months after we had said we had legal possession. That document said I had possession I had, I had documents with Office Depot that said I had possession of the space, but physically, it could be argued, I guess, that I did. So how commercial real estate deals get structured and what makes them become 100% hard when everyone’s obligated, I think is important in this story had a lollipops and rainbows outcome because at the end of the day, we amicably terminated because they didn’t want to do business in the center anymore. And they never even opened their doors and we wanted someone who wanted to go in and sign a long term lease and really wanted to be there. And that happened to be five below and they opened up and it’s been a success. But I think it’s a valuable lesson on what is possession. And what are the contingencies in a real estate agreement that make that deal? Get 100% hard after signature are really critical. Hope you enjoyed the story. Thanks so much. Stay tuned for more exciting episodes of retail retold coming soon. Thank you for listening to retail retold. If you want to share a story about a retail real estate deal that you were a part of on our show. Please reach out to us at retail retold at DLC mgmt.com

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