The retail shopping center world received a major shock last week when the 700 mattress retail store mattress, "Sleepy's" notified all of its landlords it was reducing it's rent or lease obligation by 25%.
Naturally property owners and their lawyers are outraged. " They have no right to unilaterally change their rent," said one lawyer for a major Boston law firm.
The Boston Business Journal stated, " retail tenants are brazenly leveraging the weak real estate market to demand substantial rent discounts from landlords.
It has become commonplace for retailers to ask for rent reductions to offset slumping sales in an environment where big box stores are fighting to stay alive.
However, few retailers have gone as far as Sleepy's which announced last week a merger with Dial-A-Mattress, and issued ultimata."
Sleepy's can usually be found in small, local retail plazas where the store- whose footprint averages 5,000 square feet--is one of the biggest tenants. In many cases, those landlords don't have the deep pockets to fight the chain in courts.
Many retail owners are hyper-aware of many store closings such as Linen' N' Things, Sharper Image , Circuit City and so on and the growing retail strip and shopping center vacancy problems. The numbers are big.
With 700 stores Sleepy's occupies about 350,000 SF total ( or 8.3 acres of retail space). At an average rent of $ 20.00 psf this amounts to $7 Million annually. Knock off 25% and the lease savings to Sleepy's is $1,750,000 per year.
On the other side the loss to shopping centers owners of also $ 1,750,000 and at a Cap Rate of .o7% equals a loss of property value ( indicated by the income value) is a cool $25 million.
Many more retailers will now probably attempt to follow Sleepy's bold lead.
I anticipate the while this is probably good news for many lawyers representing shopping centers owners many will now negotiate. Sleepy's wasn't at all asleep and has changed the rules of the game at least for now.
Potential "investor buyers" of shopping centers are watching this carefully. One thing is clear: everyone is now really reading all of the fine print in every commercial retail lease.
Humm, I wonder, Did Sleepy's have a "personal guarantee" on those 700 leases?
Bill McInerney
BUYING OR SELLING? CALL BILL MCINERNEY 617 816 3933
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