MASTER OF SCIENCE, 30 CREDITS, SECOND LEVEL STOCKHOLM, SWEDEN 2020
The rent negotiation process and retail rents
The gap between retail and real estate owners in a transforming market Filip Gyllenberg & Johan Koppfeldt
ROYAL INSTITUTE OF TECHNOLOGY
DEPARTMENT OF REAL ESTATE AND CONSTRUCTION MANAGEMENT
Title Author(s) Department
Master Thesis number Supervisor
Keywords
The rent negotiation process and retail rents Filip Gyllenberg & Johan Koppfeldt
Real Estate and Construction Management TRITA-ABE-MBT-20576
Berndt Lundgren & Cecilia Hermansson Rent negotiation, Retail, E-commerce, Anchoring, Rational expectations
Abstract
This study aims to examine what factors retailers and real estate owners deem important in the process of determining expected rent levels in today's climate within retail where e-commerce is growing at a quick pace. The elements of the research questions stand on the foundation of the theory of rational expectations as well as the theory of anchoring.
The method used is of qualitative nature where a case study consisting of two cases have been conducted. One in which interviews with representatives from three geographically distinct selected shopping centres have been carried out and another in which representatives from well-established retail companies have been interviewed. From these two case studies, insights regarding the existing discrepancy between the two parties, retailers and real estate owners, have been gathered. It is concluded that expectations about the future have significant impact in rent negotiations and that differences in expectations might be adding to the existing discrepancy. Moreover, results of the study indicate that retailers and real estate owners might be subject to self-inflicted anchoring in rent negotiations.
The study contributes to research in further generalizing two well established theories by providing insights on how the rational expectations' theory as well as the anchoring theory could be applied on rent negotiations.
This thesis has been conducted at the Royal Institute of Technology in Stockholm and constitutes the final element for the MSc programme in Real Estate and Construction Management.
First of all, we would like to thank our supervisors Berndt Lundgren PhD, Associate Professor at and Cecilia Hermansson PhD, Business Studies, for providing us with the research problem which has been fundamental in this study. It has been an honour working with you. We would also like to extend our sincere thank you to Berndt Lundgren for the unconditional support and guidance throughout the process of writing of this thesis.
Finally, we thank everyone who has contributed to this study with intelligent and interesting insights. A special thank you to everyone who participated in our interviews despite the difficulties we are all facing in times of global crisis caused by the pandemic. We are immensely grateful for your contribution.
Stockholm, May 2020
Filip Gyllenberg & Johan Koppfeldt
Titel Författare Institution
Examensarbete Master nivå Handledare
Nyckelord
Hyresförhandlingen och butikshyror Filip Gyllenberg & Johan Koppfeldt Fastigheter och Byggande
TRITA-ABE-MBT-20576
Berndt Lundgren & Cecilia Hermansson Hyresförhandling, Handel, E-handel, Anchoring, Rationella förväntningar,
Sammanfattning
Denna studie syftar till att undersöka vilka faktorer butiks- och fastighetsägare anser vara viktigast i att bedöma förväntade hyresnivåer mot bakgrund av dagens klimat inom fysisk handel där e-handel tar marknadsandelar. Studien tar avstamp i teorin om rationella förväntningar samt teorin om anchoring.
Metoden som har använts är av kvalitativ natur där två fallstudier har utförts. En fallstudie där intervjuer med representanter från tre geografiskt skilda köpcentrum har utförts samt en fallstudie där intervjuer har genomförts med representanter från väletablerade butikskedjor.
Genom dessa två fallstudier har insikter gällande den upplevda diskrepansen mellan de två parterna utkristalliserats. Det går att konkludera att förväntningar om framtiden har en betydande påverkan på förväntade hyresnivåer och att en anledning till den ovan nämnda diskrepansen kan vara att förväntningarna om framtiden skiljer sig parterna emellan. Dessutom visar resultaten av studien på att butiks- och fastighetsägare, i vissa fall, kan vara föremål för en självförvållad anchoring-effekt vilket innebär att de blir låsta vid vissa hyresnivåer i samband med hyresförhandlingar.
Den här studien bidrar till forskningen i att ytterligare generalisera två väletablerade teorier genom att ge initial vägledning i hur teorin om rationella förväntningar samt anchoring kan tillämpas på hyresförhandlingar.
Den här uppsatsen har skrivits på Kungliga Tekniska Högskolan i Stockholm och utgör det avslutande momentet av mastersprogrammet Fastigheter och Byggande.
Till att börja med vill vi tacka Berndt Lundgren, Tekn. Dr, och Cecilia Hermansson, Ek. Dr, för ert bidrag till frågeställningen som har utgjort grunden för det här arbetet. Det har varit en ära att få möjligheten att arbeta tillsammans med er. Vi vill dessutom rikta ett särskilt stort tack till Berndt Lundgren, för ditt stora engagemang och din vägledning genom hela arbetets gång.
Till sist, vill vi rikta ett stort tack till de som, på ett eller annat sätt, har bidragit till arbetet med intelligenta och värdefulla insikter. Ett särskilt tack riktar vi till de individer som har tagit sig tid att delta i våra intervjuer trots de svårigheter som vi alla möter i tider av global kris orsakad av en pandemi. Vi är oerhört tacksamma för ert bidrag till det här arbete.
Stockholm, Maj 2020
Filip Gyllenberg & Johan Koppfeldt
1 Introduction ... 8
1.1 Delimitations ... 9
2 Literature Review ... 10
2.1 Structure of a Lease Contract ... 10
2.1.1 Fixed rent models ... 10
2.1.2 Turnover rent model ... 10
2.2 Factors determining rent levels ... 11
3 Theoretical framework ... 14
3.1 Rational expectations theory ... 14
3.2 Anchoring ... 15
3.3 Agency Theory ... 15
4 Methodology ... 17
4.1 Qualitative Method ... 17
4.2 Research Philosophy ... 17
4.3 Case Study ... 18
4.3.1 Selecting respondents... 19
4.4 Primary data/interviews... 20
4.4.1 Interview guide ... 20
4.5 Ethical Considerations... 21
5 Empirical Findings ... 22
5.1 Case 1 – Real estate owners ... 22
5.1.1 Rent Determinants ... 22
5.1.2 Current Market ... 26
5.1.3 Future market ... 27
5.2 Case 2 - Retailers... 29
5.2.1 Rent Determinants ... 29
5.2.2 Current Market ... 32
5.2.3 Future market ... 34
6 Analysis and Discussion ... 36
6.1 Rational Expectations ... 36
6.1.1 Lease term and its implications on investments ... 36
6.1.2 Lease terms and moral hazard ... 37
6.1.3 Uncertain future of physical stores ... 38
6.2 Anchoring ... 40
6.2.1 Reference rents... 40
6.2.2 Anchoring on real estate values ... 41
6.2.3 Retailers anchoring on OCR (Occupancy Cost Ratio) ... 42
6.3 Long term perspective and sustainability ... 42
7 Conclusion ... 43
8 Limitations ... 45
9 Suggestions for further research ... 45
References ... 46
Appendix A – Interview Guide ... 49
8 The retail industry is undergoing fundamental changes as a result of booming e-commerce with sales moving from physical to online stores. Today, e-commerce accounts for an increasing portion of total retail sales globally and patterns are similar on the Swedish market (Statista, 2019). A consequence of the new environment on the retail market is that physical stores are forced to close, a development seen especially in the US where traditional shopping malls and physical stores are losing competitiveness. At the same time, focus is turning towards omni- channel and boundaries between offline and online shopping are becoming increasingly difficult to distinguish making turnover rents inefficient and tenants are demanding greater flexibility (CBRE, 2020).
In order not to accelerate the closing of physical stores retailers argue that rents must be decreased. Current market rent forecasts however, indicate that real estate owners show little or no will to agree to such demands although the continued existence of physical stores should lie in the interest of both parties. Regardless of the development of new business models in the retail sector, consensus is that e-commerce will continue to grow and that profitability of traditional retail stores will continue to decline. (JLL, 2019)
An extensive amount of research has been conducted on rent determinants and different factors various effect on rent. Existing literature mainly cover what, in this study, will be referred to as static factors. Location, size, anchor- or non-anchor tenants are examples of such factors which are fairly easy to observe or to quantify. Moreover, lease structure and its effect on rent levels have been studied and different structures have also been practiced for a substantial amount of time enabling for researcher to retrieve good data to analyse. In all essence, above mentioned factors are undoubtedly influential in the process of rent determination i.e. a rent negotiation, it has been proven. There are however, layers to be added to the knowledge on rent negotiations.
There are several theories targeting the process of economic decision-making, one of which is the rational expectations theory. According to the rational expectations' hypothesis, which was introduced by John Muth (1961) and later developed and applied by Robert E Lucas (1972), development of the economy is greatly influenced by current expectations of future development. Agents make use of all available information and all additional information could potentially change the expectations. A frequently used example to describe the rational expectations hypothesis is on wage formation. Expectations about future inflation and labour demand will have significant impact on the contracted wage for a specific contract period which in turn will have a significant impact on realized inflation. Another well recognized theory is the theory of anchoring, introduced by Tversky & Kahneman (1974). The theory can, in short, be described as a decision makers’ judgment biasness towards an initially presented value. This value is referred to as the anchor value.
Given the knowledge on how anchoring and rational expectations impact economic decision it is adequate to apply such theories in real estate economics and more specifically in the context of rent negotiations. Anchoring effects, as well as expectations on future rent levels should
9 have a significant impact on economic decisions made by retailers and real estate owners in rent negotiations and thus affecting the settled rent levels. In an environment where retailers and real estate owners appear to have wide spread expectations on rent levels, a deeper understanding on what drives such expectations is desirable.
The aim of this study is to identify what factors, both retailers and real estate owners deem important in the process of determining expected rent levels given a trend of increasing e- commerce and decreasing profitability in physical stores. Furthermore, the results will be analysed with background on the rational expectations theory as well as the anchoring theory.
The research problem was introduced by Berndt Lundgren and Cecilia Hermansson and the findings in this thesis will provide the fundamentals for a future research project at the Department of Real Estate and Construction Management, KTH. To achieve this purpose the following research questions are to be answered:
• What specific factors influence the expected rent levels on retail space?
• How does expectations about the future affect rent negotiations and is the theory of rational expectations applicable on the relationship between retailers and real estate owners?
• To what extent does an anchoring effect influence negotiated rent levels on retail?
By providing knowledge on how expectations on future rent levels as well as anchoring affect decision making in the rent negotiating process real estate owners and retailers could reach new, more adequate rental agreements. Succeeding to do so could have a direct impact on profitability for both retail actors and real estate actors.
1.1 Delimitations
This paper will investigate a rising phenomenon in a large business, Retail. Due to the magnitude of the retail business today and the time boundaries for this paper, some delimitations are necessary. Firstly, the authors will focus solely on the Swedish retail industry.
Secondly, the main focus will be on well-established real estate owners and retail firms operating in multiple locations across the country. The latter to be able to get a general understanding on expectations and its implications, enabling for general conclusions to be drawn from the data collected. As the work has been carried out during the period of January to June 2020 the breakout of the global pandemic Covid-19 has affected the research as it has in almost all businesses. Because of this exceptional situation, the study does not consider any possible effects the pandemic may have on the subject.
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2 Literature Review
Existing academic literature primarily covers the main determinants for retail rental levels. The majority of research worth mentioning has been published in the mid 90’s or beginning of 00’s and the determinants are still thought of to have an impact on the rental levels. The following literature review will firstly introduce the traditional structures of lease agreements within retail properties, mainly to provide the reader with fundamental understanding of different retail lease models and its structure which is essential for understanding the nature of rent determination.
In that sense, chapter 2.1 will not focus on particular factors that are considered actual rent determinants. Chapter 2.2 on the other hand will focus on pointing out the most common rent determinants mentioned in earlier literature and hence will not on the contrary take the structure of the lease agreement in account.
2.1 Structure of a Lease Contract
In order to fully understand how retail lease contracts and rent work it is important to understand the framework of which conventional lease contracts are derived from. In retail, two broad models could be considered conventional: Fixed rent models and turnover rent models.
2.1.1 Fixed rent models
The simplest of rent models is the fixed rent model where a base rent is set with no additional performance or sales metrics. The base rent is often subject to periodic adjustment over the duration of the lease and such adjustments are often linked to inflation enabling for real estate owners to hedge against inflation. A fixed rent model is often associated with office or residential market but is the dominant model on the UK retail market.
2.1.2 Turnover rent model
A turnover rent model is a structure where the traditional base rent is accompanied with a performance-based rent. In a conventional turnover rent model, the variable part of the rent is usually calculated as a percentage of total sales achieved above a certain threshold.
Traditionally, retail leases with a turnover rent model has been the dominant contract arrangement. The development seen on the retail market in recent years however, indicates that while retailers often prefer a performance-based rent, real estate owners are drifting towards alternative models. It has been reported that 90 to 98 percent of total rent in the US now consist of base rent and 95 to 100 percent in Europe. (ICSC, 2015)
It has been concluded that the optimal risk sharing contract for a risk averse tenant and a risk neutral landlord is a pure turnover rent. However, in the presence of moral hazard, an optimal incentive contract is rather one including a fixed rent as well as turnover rent. The level of turnover rent in relationship to base rent has been thoroughly studied and it has been found that it is highly related to externalities and lease structure can be considered helpful in reducing the conflict in interest between risk-averse tenants and landlords. (Lee, 1995, Miceli and Sirmans, 1995, Brueckner, 1993)
Further studies on retail lease structure indicates that, from an agency theory perspective, since efforts from all parties, anchors, non-anchors as well as developers, affect sales lease contracts
11 can and should be constructed to stimulate desired actions from all relevant parties. By doing this, contracts are written certain ways to internalize externalities using both base and turnover rent resulting in optimal allocation of space in shopping malls (Gould et al. 2005).
Furthermore, Ciang et al. (1986) and Benjamin et al. (1990) both considered the trade-off between base rent and the level of turnover rent and found that a lower base rent is often correlated with a higher turnover rent rate.
In contrast to what Chiang et al and Benjamin concluded, later research has produced evidence suggesting that, in retail lease contracts, a lower base rent is often associated with a lower turnover rent. Tenants are distinguished as externality generators and externality recipients where the latter have sales highly dependent on traffic generated by anchors and thus the exact mix of other stores in proximity is vital. With this conclusion, externality recipients should be willing to pay a higher turnover rent in order to incentivise real estate owners to maximize store turnover by keeping an optimal mix of tenants. Conversely, externality generators are less dependent on tenant mix since they generate their own traffic and thus, they do not need high turnover rent to align their interest with the real estate owner. Hence, the trade-off between the two does not exist and the lease structure is rather used to sort between externality generators and recipients (Wheaton, 2000).
2.2 Factors determining rent levels
Apart from composing the bridge between a landlord and a tenant, a lease agreement contains a lot of information regarding expectations from each party. According to Benjamin and Chinloy (2004) some terms in a lease agreement could be seen as a quality sorting of the tenant and landlord. The beforementioned authors develop this statement on the premise that three terms (base rent, turnover rent and security deposit) in the agreement is based on how one party perceives the other party in terms of quality and risk of default. The level of the base rent and turnover rent is, from a landlord's perspective, negatively correlated to the perceived quality of the tenant. This implies that the higher the expectation a landlord has on a tenant's performance, the lower the percentage and base rent. When evaluating the tenant’s risk of defaulting the magnitude of security deposit demanded from the landlord is positively correlated meaning that the higher the perceived risk of defaulting a tenant beholds, the higher security deposit will be demanded from a landlord.
In a quantitative research carried out in the early 90’s the authors, Sirmans and Guidry (1993) pointed out four main determinants affecting the market rent in shopping centres in Louisiana;
customer drawing power, design/configuration of the property, locational characteristics and market conditions.
Customer drawing power is in turn substantiated by the size of the centre and it is argued by the Sirmans and Guidry (1993) that the size is positively correlated to the level of the rent.
Furthermore, customer drawing power is affected by the age of the centre implying that the age is negatively correlated to the market rent in the centre. Lastly a third factor impacting the customer drawing power is the type of anchor tenants located in the centre. Nationally well- known retailers are known as traffic attractors giving a positive effect on the drawing power and hence increases the market rent.
12 The design/configuration of the shopping centre also, according to the authors, has an impact on the rental levels. By design or configuration Sirmans and Guidry does not mean design in architectural terms but rather how the shopping centre is built and how the tenants are positioned. It is according to the authors important to focus on having anchor tenants in places with high visibility and in that way attract traffic to the anchor tenants as well as other tenants.
Optimized disposition of the tenants in a shopping centre has an increasing effect on the rental level.
When investigating what effect the locational attributes and market condition of the shopping centre has on the rental level, some main sub-factors is determined by Sirmans and Guidry (1993). Population density, growth potential and income in the area is argued to be the main locational attributes that has a positive correlation with the rental level. It is also stated that the amount of vacant space and general economic conditions has a substantial effect on the market rent.
Research has shown that rent levels in a shopping centre differs a lot depending on what type of tenant that is discussed. Gould et al. (2005) carried out a quantitative research trying to define the difference in rental levels between anchor tenants and non-anchor tenants. The first hypothesis was that anchor tenants received discount on rents due to their ability to draw customer traffic to a shopping centre, not only to their own stores but also to the other stores in the shopping centre. The second hypothesis was that non-anchor tenants paid, that is tenants exploiting on this customer traffic drawn from anchor tenants, in contrast pays rents on premium. Their regression model based on approximately 2500 contracts in the US proved the hypothesises most likely to be true where anchor tenants represented 58% of the leasable area but only accounted for 10% of the rental revenue. The fact that anchor tenants, or customer drawing tenants, generally enjoys what could be viewed as rent subsidies is often referred to as rent discrimination. Despite its discriminating nature towards smaller tenants, rent discrimination is widely recognized and considered fully rational from a property owners' perspective (Pashigan and Gould, 1998 and Williams, 2014). Furthermore, arguments on the importance of anchor tenants has been carried out by Gatzlaff et al. (1994) where the authors used data from shopping centres in the Florida region that recently lost an anchor tenant. Their results showed that the loss of an anchor tenant decreased the customer drawing power, increased the overall vacant space (not anchor tenant space included) and hence decreased the rental level.
The store location factor and its effect on retail sales and in extension retail rent have been widely studied with multiple approaches. Carter and Vandell (2005) applied bid rent theory and shopping centres indicating that there is a relationship between rent and distance to the center of the shopping mall. At district or regional level, the trade-off between location and retail agglomeration (i.e. clustering) have been studied with results showing that clustering is of greater importance for explaining consumer patronage than location (Eppli and Shilling, 1996). In a context of ground floor commercial activities, the importance of centrality for retail concentration have been established where centrality is defined as a function of closeness, betweenness and straightness (Porta et al., 2009).
E-commerce and its effect on retail leases have been, at least partly, studied. As retailers shift focus from on-site to off-site sales the role of the physical store is going through great change and as part of that also transferring revenue from physical stores to online stores. Such a
13 transformation is also subject to changes in parameters going into a rent negotiation. As the purpose and business models of physical retail change, lease agreements need to be altered with turnover rent being a lease structure better fit for the past rather than the future. (Baen, 2000 and Miller, 2000)
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3 Theoretical framework
In the following chapter, three theories relevant for the study is presented. The rational expectations theory and anchoring theory are of particular importance as the presented research questions are based, in full, on these two theories. However, when studying rent negotiations and contractual arrangements, agency theory is an inevitable element which will be of importance throughout the research. Rational expectations theory and anchoring theory should however be considered the primary theories of this study.
3.1 Rational expectations theory
In the beginning of the 1970’s the climate within macroeconomic theory fundamentally changed. This because of Robert E. Lucas’, who was later awarded with the Nobel prize, theory of rational expectations. The theory was first introduced by Lucas’ mentor John Muth (1961) but did not gain great attention until Lucas developed it and published his article Rational expectations and the neutrality of money (1972). Lucas challenged the traditional Phillip’s curve and changed the way of looking upon the fundamentals of the effect of monetary policies and how economic decisions are made. His article explained that there are reasons to believe that expectations about the future has much more importance than has been stated in the past.
To explain the theory, the Phillip's curve makes a good example. The basic of the Phillips’
curve is that rate of inflation and rate of unemployment is reversed related to each other meaning that higher inflation lowers the rate of unemployment. This macroeconomic theory has enabled policy makers to increase the inflation rate through expansionary monetary policies and hence lower the rate of unemployment. (Friedman, 1968)
Lucas (1972) argued that people change their perceptions about the future constantly as new information is received. An example of new information could be a change in monetary policies. If policy makers in an economy would publish news that they will execute an expansionary monetary policy, for example through quantitative easing (QE), companies would accordingly change the price level of products as well as the salary levels. This would then, according to Lucas theory of rational expectations, increase the inflation rate in an economy without affecting the rate of unemployment. Another example is a situation where the central bank lowers the interest rate to stimulate the economy. The rational expectations theory implies that companies and households would assume that the interest would be even lower in the future, ending up in stagnated economy, mainly due to rational expectations. This goes for almost any economic decision; buying stocks, buying a car or negotiating lease agreements.
The latter is a part of the fundamentals of this paper. The literature review has highlighted the main “static” factors determining rent levels. It is reasonable to assume that rational expectations might also affect the rent negotiation processes in various ways. Mainly, there is reason to expect that expectations about the economic market situation in the future have large impact on the outcomes of rent negotiations.
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3.2 Anchoring
The anchoring effect have been studied for nearly 40 years and is one of the most robust theories in all decision-making processes. Tversky and Kahneman (1974) became first in introducing the anchoring-and-adjustment heuristics with their work Judgement under Uncertainty. According to Tversky and Kahneman, the anchoring effect can be described as a decision makers judgement biasness towards an initially presented value, referred to as an anchor value. They argue that anchor values serve as the reference for individuals to adjust their boundaries for plausible correct answers. Assume that an individual, before being faced with an anchor value, have a range of plausible answers to a specific question. If such an individual is faced with an anchor value more extreme than the initially thought of range of answers, it is likely that the boundaries will be adjusted thereafter.
The concept of anchoring has been widely studied from a wide range of perspectives. The anchoring-and-adjustment, as described above, is one but it has also been investigated from the perspective of selective accessibility and attitude change. The latter describes that anchors could influence the information processing meaning that any information received after the appearance of anchors will be biased towards the anchor. Simplified, the anchor is treated as a
“hint” to a reasonable answer. (Blankenship et al., 2008 and Wegener et al., 2001, 2010) The perspective of selective accessibility is based on the concept of confirmatory hypothesis testing where individuals test out the hypothesis that an anchor value is the correct answer. Individuals doing so, will search for answers similar to the anchor value. (Chapman and Johnson, 1999, Mussweiler and Strack, 1999, 2001 and Strack and Mussweiler, 1997)
The literature on anchoring also covers the human factors believed to influence the sensitiveness of different individuals. The level of expertise and its effect on anchoring have been studied with early research showing that knowledgeable individuals are less influenced by presented anchors (Wilson et al., 1996, Chapman and Johnson, 1994). However, more recent studies have provided contradictory results indicating that knowledgeable individuals are in fact significantly influenced by anchors (Mussweiler et al., 2000, Englich and Mussweiler, 2001 and Englich et al., 2005). Furthermore, factors such as personality, motivation and cognitive ability have been studied but with contradictory findings (Furnham and Boo, 2011).
The theory of anchoring can be applied on a wide array of decisional tasks, one of which could very well be rent negotiations. A conventional rent negotiation evolves around two parties where at least one part presents an expected or required rent levels. Tversky and Kahneman (1974) concluded that different starting points will yield different estimates. With that knowledge on how anchoring influences decision making progresses it is adequate to assume that pledges on rent levels from either part in a negotiation might affect the outcome.
3.3 Agency Theory
One of the most frequently studied relationships is known as the relationship of agency. Such a relationship exists between two or more parties when one acts on behalf of, or as representative of the other in a contractual situation. An individual acting on behalf of another is referred to as the agent and the counterpart is referred to as the principal. Essentially all contractual arrangements contain elements of agency, as for example, between employer and
16 employee or between the state and the governed. Problems associated with agency theory are mainly moral hazard and adverse selection. (Ross, 1973)
Agency relationships, or principal-agent relationships, are subject to moral hazard as a result of asymmetric information that arises as a result of individual actions being unobservable.
Hence, when individuals engage in a risk-sharing activity, unobservable individual actions may affect the probability distribution of the outcome. An established method intended to manage the risk associated with moral hazard situations is to invest resources in monitoring actions taken by counterpart. Naturally, complete monitoring is impossible except in very simple situations and they are costly. Situations often exemplified in the context of principal-agent and moral hazard theory is insurance and labour contracting. An insurance company cannot observe the level of care the insured individual is taking and an employer cannot observe the effort level of its employees. As monitoring is considered costly, and in most cases ineffective, the solution is contractual arrangements where incentives are vital. By rewarding or punishing particular behaviours one can create incentives for both parts to act in a desired way. (Grossman and Hart, 1983 and Holmström, 1979)
As stated above, essentially all contractual arrangements are subject to principal-agent dilemmas and that includes lease contracts between real estate owner and retailers. The existence of contractual arrangements such as turnover rent somewhat confirms that it is a relationship with obvious elements of agency. The existence of agency problems in retail leases is also covered in the literature (Lee, 1995, Miceli and Sirmans, 1995). As a retail lease is a two-party agreement where both parties are greatly reliant on each other's success the primary reason for adopting a turnover rent contract is to incentivise efforts for real estate owners and tenant. In terms of expectations, which is of essence in this study, agency theory in general and information asymmetry especially is important since a rent negotiation is a situation with obvious elements of information asymmetry.
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4 Methodology
4.1 Qualitative Method
Since this thesis aims to identify what factors, both retailers and real estate owners deem important in the process of determining expected rent levels, a qualitative research will be conducted where the primary data will be retrieved through semi structured in-depth interviews. Semi structured interviews are preferable for the type of research questions which are to be answered in the current study since it facilitates that the participants can speak freely regarding their view on the rent determinants. Within the boundaries of semi-structured interviews, the authors will also ensure that leading questions will be eliminated and instead focusing on letting the participants develop their answers in a deeper sense. In the effort of identifying factors that determine the outcome of rental negotiations, which is a study of rather exploratory nature, it is adequate to conduct a qualitative study with the method further described in the following section. This because of the nature of the phenomenon and that a large amount of the reliability lies within the quality of the contribution from the participants.
A research with an exploratory purpose often aims at answering questions on “how” or “what”
and is preferred when attempting to understand on issue or phenomenon. Exploratory research is often conducted by interviewing experts, search of literature, in-depth individual interviews or by interviewing focus groups. (Saunders et al., 2016)
Choosing an exploratory approach to the current topic is adequate considering the nature of rent negotiations and the aim of the study. The study attempts to understand rent negotiations between real estate owners and retailers and the actions taken in that context. Considering the fact that actions taken in negotiations might be based on conscious or unconscious factors an exploratory approach has been preferable since it allows for respondents to determine the path forward rather than the research. A researcher applying this approach has to be willing to change direction as new data appears (Saunders et al., 2016). Not allowing for respondents to dictate the direction the interviews could narrow the possibilities of getting deep understanding of the respondents' thoughts and insights to the rent negotiation process.
4.2 Research Philosophy
The following thesis will be of interpretive nature. Interpretivists argue that people are social creatures affected by cultural differences and other circumstances leading to the argument that people is not to be seen upon in the same ways as physical phenomenon and one cannot draw law-like generalisations (Saunders et al., 2016 p.140). Interviewees are selected based on multiple criteria's and are likely to have different points of view within the area of the study.
Mainly because the participants will represent different parties within the relationship, retailer and landlord. However, it is reasonable to also expect unity between parties on some aspects of the study.
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4.3 Case Study
A case study is a research method where a contemporary topic or phenomenon is studied within its real-life setting. The research conducted can consist of a single case or of multiple cases where a “case” may refer to an organisation, a process, a person or many other types of case subjects. Once a case or cases are defined the method aims to understand the dynamics of a particular topic in its context or setting and it is the real-life setting that helps distinguish this research method from others. (Yin, 2014, Saunders et al., 2016) The case study method is often applied when the research is of exploratory nature and when the focus of the study is a contemporary phenomenon. As the current study aims to explore what factors, both retailers and real estate owners deem important in the process of determining expected rent levels, which is a research of exploratory nature, a case study research fits the topic well.
A common critique on case study research is the difficulty in generating generalizable results.
The critique is legitimate to some extent, the aim of any research should be to produce results of such quality that the researcher can draw general conclusions and hence contribute to the general knowledge. However, case studies do not aim at generalizing across populations or samples but to theoretical propositions. The aim of a case study should be to expand and generalize theories. (Yin, 2014)
The following case study research will focus on the rent negotiation process between retailers and real estate owners and is based on two cases where the first case will focus on the real estate owner's perspective and the second case will focus on the retailers’ perspective. Three real estate owners, operating shopping centres in different regions in Sweden, will be interviewed and studied for the first case. The aim when choosing real estate owners (I.e.
shopping centres) have been to find shopping centres of similar size and, if possible, with the selected retailers as tenants but in different regions. The selection of real estate owners is made based on who owns the three targeted shopping centres located in Stockholm, Malmö and Sundsvall. Interviewed representatives from each real estate company will preferably be individuals with deep insight in the rent negotiations conducted with tenants in each shopping centre respectively. In the second case, focused on retailers, the selected retailers are well established Swedish retail-firms with stores in all the selected regions. Hence, in the second case the current subject will be studied from the perspective of these four selected retailers.
Interviewees in the second case will preferably be individuals engaged in the establishment of new units and with experience of rent negotiations in multiple regions.
The aim has been to interview between six and nine individuals in order to collect enough data to enable for generalizable conclusions to be made. When carrying out the interviews it was notable that after three interviews with real estate owners and four interviews with retailers, we reached a somewhat saturation in terms of the information believed to be valuable for the study.
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Case 1 – Real Estate Owners Case 2 - Retailers
Citycon – Liljeholmstorgets Galleria Samira Grylin Allalou
Kappahl Hans Jepson Vasakronan – Triangeln
Lotta Sleight
KICKS Thomas Kling Diös - InGallerian
Maryanne Karlsson
Stadium Johan Reberg Kjell & Company Andreas Rylander Table 1: Structure of case study
4.3.1 Selecting respondents
The argument for conducting the case study with respondents in different regions is based on the assumption that market conditions might vary significantly depending on geographical location. It could be argued that the demand for retail premises is correlated with the growth in a region.
When selecting respondents from the real estate owner case (Case 1) an indirect selection has been made meaning that the shopping centres is selected and hence the real estate owners owning and operating the selected properties. One shopping centre from the southern part, the central part as well as the northern part of Sweden have been selected. There are other shopping centres that could be selected within this geographical distribution but the slected ones have characteristics similar to each other making it easier to crystallize potential regional differences. Something that might have been offset if selecting shopping centres that differ both characteristically and geographically. By gathering information from real estate owners in different regions we expect a relatively broad spectre of information which enables generalizations across cities and regions in Sweden.
Large retailers are not bound geographically as is the case of representatives from real estate owners. The contrary would probably be a more accurate way of describing the retailers involved in this study. Common to all retailers involved in this is that they are established with one or several stores in most parts of Sweden. The selection of respondents within the retailer case (Case 2) has been made based on a few conditions. Firstly, it has been important that the retail company is well established and have a large number of stores in the country. This to be able to interview representatives that could contribute with more general insights of the market situation and who is involved in rent negotiations in different regions and hence able to address potential regional differences. Smaller and local retailers are also exempted from this study, a conscious decision on the basis that drawing generalizable conclusion form information gathered from such retailers would be difficult within the framework of the present study.
Secondly, the selection has been made on the type of retail since insights between retailers might differ depending on what goods is sold and how resilient they are towards the growing e-commerce. Hence the choice of four retailers within; clothing, cosmetics, sporting goods and technical goods. There are of course other retail companies that could have been a subject of the study. It is believed though that other retailers within the same segments and size as mentioned above would have similar insights as the chosen retailers.
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4.4 Primary data/interviews
In order to answer the proposed research questions a collection of primary data is needed.
Primary data is collected from semi-structured interviews which infers that interviews are structured with open-ended questions. Since the current research is of exploratory nature where the aim of the interviews is to gain insight into why the respondents act the way they do in rent negotiations, it is important that the interviews are not too formal and strictly controlled. Hence the choice of semi-structured interviews. This is also enabling the interviewer to probe on answers received from the interviewees to get a deeper understanding of factors and aspects that otherwise might have been disregarded (Saunders et al., 2016).
In the process of seeking information on the perception of rent negotiations, it is important to make sure that the interviews are carried out with the most suitable person from each represented company. For the first case study, the real estate owner case, the representatives chosen is working with rental negotiations daily in the shopping centres chosen for this study.
Therefore, the respondents for the first case have titles such as Leasing Manager or Asset Manager. For the second case, the retail case, the interviewees are employees working with the chosen retail companies' expansion, establishments and rent negotiations. The retail respondents are employees with titles such as; Vice President Expansion and Contract Manager.
When carrying out these interviews, one will lead the conversation while the other will take notes to ensure that all insights brought up by the respondents is gathered. This is a good way of enabling the interviewer to withhold the conversation while the secretary can collect all insights and ask the respondent to develop an answer if needed.
4.4.1 Interview guide
As stated above, semi-structured interviews constitute the primary source of information in this study. Prior to conducting the interviews an interview guide has been outlined to ensure that topics and questions align with the fundamental purpose and theories of the study.1
The interview guide is based on five main topics; market, rent negotiation, regional differences, historical development and theoretical questions. The order of the topics is set to make the interviews as natural conversation. Each topic aims at gaining insights connected to the presented theories without necessarily asking direct questions in regards to a certain theory.
The topics “market”, “regional differences” and “historical development” are sequentially connected to expectations and the theory of rational expectations. The majority of the questions within these three topics is assumed to be connected to expectations about the future, if expectations have changed in the last years and lastly, if expectations differ between regions.
The topic “rent negotiation” is a natural choice of topic since one of the main focus of the study is to investigate the reason for the perceived discrepancy between the two parties; retailers and real estate owners. The latter topic is also assumed to give insights connected to the theory of anchoring. To summarize each interview, the topic “theoretical questions” containing more direct questions connected to the chosen theories are asked. The purpose of these last questions
1 The complete guide can be found in Appendix A
21 is to distinguish differences in perceptions from each respondent and possibly identify insights connected to theory that would otherwise be disregarded.
4.5 Ethical Considerations
When collecting data from interviewees, ethical issues can occur. It is important in a research that the respondents have understood the purpose of the study as well as how the collected data is to be used in the study. Since this research is focusing on expectations and perception of the retail and shopping centre industry, the authors have not been interested in receiving data that may be considered sensitive, such as corporate KPIs. All the respondents received, before the interview started, a background of the topic and clarification on what kind of data that was wanted. Furthermore, all respondents have given consent in being recorded while carrying out the interview and has been given the opportunity to read and revise the transliteration from the interview.
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5 Empirical Findings
5.1 Case 1 – Real estate owners
Across Sweden, a wide arrange of real estate owners operate and develop retail properties.
Some are specialized in retail properties, such as Citycon, whilst others have a variety of property types in its portfolio, such as Vasakronan and Diös. Although real estate owners with different strategies are participating in this study, the process of selecting interviewees begun with targeting specific shopping centres in different regions. Representatives from owners of three shopping centres with similar attributes have been interviewed for the following case study. The aim was to interview individuals who are physically participating in rent negotiations with retail tenants hence all of the interviewees work with leasing in one way or another. Below is a short introduction of the real estate owners and the shopping centres subject for discussion.
Citycon – Liljeholmstorgets Galleria
Citycon is a listed real estate company traded at Nasdaq Helsinki stock exchange. The company owns 40 shopping centres in 5 countries in the Nordics; Finland, Estonia, Sweden, Norway and Denmark with a value of approximately 48 Billion SEK.
Liljeholmstorgets Galleria is a shopping centre located in the southern part of Stockholm with proximity to the city centre. The shopping centre has 94 stores (healthcare included) where retail premises occupy 27 000 Sqm of the total 41 000 Sqm Gross Leasable Area (GLA).
(Citycon.com, 2020) Vasakronan – Triangeln
Vasakronan is the largest real estate owner in Sweden with 174 properties, holding office- and retail-premises in the four biggest cities. The company is owned by the Swedish national pension funds and the market value of the properties is approximately 156 Billion SEK and the majority of property is located in Stockholm.
Triangeln is a Shopping Centre located in the Malmö city centre. The shopping centre has 120 stores where retail premises occupy 20 500 Sqm of the total 62 000 Sqm GLA. (Vasakronan.se, 2020)
Diös – InGallerian
Diös is a listed real estate company traded at Nasdaq Stockholm stock exchange. The company owns commercial and residential properties in the northern part of Sweden and the market value of the properties is approximately 22 Billion SEK.
InGallerian is a shopping centre located in the city centre of Sundsvall. The shopping centre has approximately 20 stores. (Dios.se, 2020)
5.1.1 Rent Determinants
All three real estate owners express similar thoughts regarding rent determinants with few regional differences. Locational factors together with other factors described below are
23 described as key determinants by Citycon as well as Vasakronan and Diös. Deviating from traditional contractual arrangements (read more about lease structure in chapter 2.1) are mentioned as a possible way forward with more flexibility and especially shorter lease term. A collective scepticism towards turnover rent is apparent, even though turnover rent might be the lease structure with the highest degree of flexibility.
Lease Structure
Samira Grylin Allalou, Head of Leasing Sweden at Citycon explains that lease contracts, as written back in the days, where usually signed at a five, seven or even ten years lease term.
Today greater flexibility is demanded from both real estate owners and tenants resulting in shorter lease terms where two- or three-year lease terms might be seen as the new standard.
Grylin Allalou also mentions so called break options as something Citycon uses to enable greater flexibility without necessarily endangering the willingness to invest in tenant improvements. A break option operates either one-way or two-way and gives the receiving part the possibility to end the contractual relationship on a given point in time. A break option can in turn be associated with penalties or other commitments to incentivise desired decisions. For example, a lease contract can be signed between the real estate owner and a retailer on 5 years, but the tenant has a break option at the end of year three conditioned with a penalty if exercised.
If conditions change in a way the tenant find unfavourable, the tenant will exercise the option.
Grylin Allalou says that undertaking these types of clauses is an obvious risk for real estate owners but on the other hand, signing a relatively long-term lease contract is a risk for retailers.
She explains that such agreements, which should be considered a type of risk sharing, is an effort made by Citycon and other real estate owners to achieve long-term sustainable relationship with retailers. If a retailer finds the relationship successful the break option will not be exercised, she says.
“Flexibility is an issue of negotiation, maybe they will have to pay more.”
As Grylin Allalou claims that break options, alongside other measures of flexibility, is a form of risk sharing, she also notes that risk have to be appraised and that flexibility in general presupposes an increased rent level. Apart from the risk aspect, she underlines the importance of return on investments. Too short lease contracts make it impossible to invest in the space and also, a tenant willing to sign a longer lease will be able to negotiate a lower rent. “It is not all about rent levels”, she says referring to that fact that Citycon might agree on a “lower” rent if something is given in return, for example a longer duration lease. With the same logic, in return for flexibility, Citycon will require higher rent.
Maryanne Karlsson, asset manager of InGallerian, Diös, also addresses the fact that flexibility in contractual arrangement is vital to reach agreements with both existing and new tenants.
Similar to the situation in Stockholm, explained above, Karlsson describes the contract structure similarly for InGallerian in Sundsvall with retailers demanding shorter lease terms and more flexibility. Standard practices are changing and the traditional base rent with a potential addition of turnover rent is not at all to be considered as standard today. For obvious reasons, pure turnover rent is believed to be the optimal structure by many retailers’, but real estate owners identify several problems with such an arrangement which will be explained further in a later section. When asked about pure turnover rent Karlsson explains that she is
24 currently experiencing that well established, “big” retailers are overrepresented in demanding such terms.
“Many retailers are talking about cooperation, but only decreasing rent is not cooperation to me. We have to think new, if I give you rent reduction, what do you give me?”
Lotta Sleight, assistant property manager and partially responsible for leasing at Triangeln in Malmö, says that turnover based rent has played its part. Even deriving a reasonable rent based on historical turnover is difficult in todays’ market where utility from a physical store is difficult to measure. Cooperation is important but sometimes difficult to accomplish, she says and further explains that retailers sometimes seem to believe only reducing rent is cooperation.
She also addresses the fact that tenant specific investments limit the room for flexibility and that every time a new tenant is considered it is often associated with a substantial cost.
Location and Customer Flow
Another important factor for determining rent is location. Two dimensions of location is mentioned by all three interviewed real estate owners. Geographical location, further referred to as macro location, and location within the shopping centre, further referred to as micro location. In terms of macro location, Samira Grylin Allalou mentions a few attributes she and Citycon consider desirable: proximity to public transportation, offices and residentials. Lotta Sleight and Vasakronan expresses similar thoughts on the importance of proximity to offices and public transportation. The location, Sleight says, needs a natural customer flow with people stopping by on their way to and home from work for example. Micro location works pretty much the same way, in Sundsvall and InGallerian spaces with entrance both from the street and inside the shopping centre is on high demand, Karlsson says, with the flow of customers outside the store being the main determinant of what’s a good and less good micro location.
The importance of customer flow is self-explanatory however it appears that it is still subject to discussion. There is a consensus around the fact that real estate owners are responsible for the customer flow into a shopping centre and such numbers are tracked and analysed regularly.
Visitor numbers are then used in promoting shopping centres to potential tenants. However, there is no concrete way of using visitor statistics for rent determination in neither of the three shopping centres operated by the Vasakronan, Citycon and Diös. Samira Grylin Allalou explains that she often experiences difficulties in presenting visitor numbers in a negotiation since several possible ways of interpreting and valuing such numbers exist. Objections on what kind of visitors that are reflect in these statistics are common.
Anchor Tenants and Externalities
“Anchor tenants are still important. However, who is considered an anchor tenant will probably change”.
Anchor tenants and externalities is a well-covered subject in the literature (see chapter 2) and have also been mentioned in the interviews. The concept of anchor tenants is recognized by all three real estate owners although the perceived importance of such a tenant is not entirely
25 Externalities, the term used to describe the value a tenant brings to others in a shopping centre, is in fact reflected on rent levels in Triangeln, Lotta Sleight says. Hence, a tenant that have a positive impact on the overall turnover in Triangeln is more likely to receive a relatively low rent compared to a tenant adding no value to its surrounding tenants. Similar thoughts are expressed at Diös but Maryanne Karlsson underlines that understanding a tenant's business is vital in her role. She says that anchor tenants do exist and that some stores obviously attract more customers to the centre than others but that externalities are created from having satisfactory tenant mix rather than from having a single anchor tenant.
Certain tenants, mainly large retail brands, are mentioned as tenants traditionally seen as
“anchors” and that having them as tenant in a shopping centre has probably been a hygiene factor traditionally. Grylin Allalou believes that this is about to change as people change their shopping behaviour with especially e-commerce driving such a transformation. Whilst transformation is already occurring in the durables-segment she also mentions grocery stores as being considered anchor tenants today. Grocery stores are not widely affected by E- commerce as of now but there is a real possibility of this happening in the next ten to twenty years, Grylin Allalou says. Such changes will also affect the perception of who is and who is not an anchor tenant.
Effects of e-commerce
When asking real estate owners on what actual effects e-commerce have on physical retail and rent levels challenges surrounding this subject are similar. All three real estate owners recognize that it has effects although it is difficult to quantify. Especially, it is of interest in discussing turnover rent. A common argument for rent levels being too high is that the growth in e-commerce have a negative effect on turnover in physical stores. According to the real estate owners however, it is not fair to only discuss the negative impact e-commerce have since there is also positive aspects for retailers to consider. All three real estate owners are experiencing difficulties in monitoring both upsides and downsides with e-commerce. Samira Grylin Allalou says that greater transparency regarding the actual effects are desirable.
E-commerce is said to be a key reason for real estate owners not relying fully on a turnover rent even though a slight willingness to adopt turnover rent to some extent is illuminated in the interviews. With omni-channel sales, turnover is not sufficient in determining whether a physical store is successful or not, is a view shared by all real estate owners interviewed.
Moreover, it is believed that physical stores are essential for online sales. “if you’re not present on the physical market, online sales tend to decrease”, one of them says.
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“We are extremely affected by historical rent levels”
The theory of anchoring has been thoroughly explained in a previous chapter and on questions on if and how anchoring might play out in practice answers are similar independent of which real estate owner is asked. To what extent anchoring is present differ however. While two out of three real estate owners recognize only limited anchoring effects in rent negotiations, one stands out in being “extremely” affected by historical rent levels due to its effect on property values. A decreased rent will have a direct impact on the valuation making the threshold for agreeing on reduced rent high since such measures have a negative financial effect. On the other hand, two of the answering real estate owners convey another picture where decreasing rents are closer at hand in order to achieve long-term success. If disregarding anchoring effects in the context of real estate valuation all three real estate owners mentions reference rents as an indicator for market rents in an area.
5.1.2 Current Market
When talking about the current market situation with the representatives from the real estate owner's perspective, a few insights are reoccurring while some insights differ between the representatives. Perhaps since attributes about the shopping centres and the background of the representatives differ.
Samira Grylin Allalou sees the current market situation as constantly evolving where she is experiencing a gap between retailers and real estate owners in terms of differences in time frame between the two parties. She explains that challenges in rental discussions appear when trying to agree on rental levels, and other terms such as the duration of the lease. When retailers are constantly affected by the quick market transformation due to e-commerce and changes in consumer behaviour, real estate owners have often undertaken large investments and are therefore in need of a longer timeframe and a long-term perspective. She also states that the retail market always has been going through change but never at the current pace.
Furthermore, Grylin Allalou states that the shopping centre she is working with, Liljeholmstorgets Galleria, stands out from many other shopping centres and claims that it is not as exposed to the growth of e-commerce and is hence more resilient and adaptive to changes in demand and consumer behaviour.
“The centre is a very stable shopping centre with high demand from retailers and with a lot of potential for development with its proximity to the city centre and the development of the
area”
Another gap that is pointed out by Grylin Allalou is the fact that retailers' margins are decreasing at the same time as real estate owners is pressured to maintain their property values.
Especially listed real estate companies where the aim is to generate return to its shareholders and depreciating property values would have significant negative impact.
Maryanne Karlsson, operating a centrally located shopping centre, InGallerian in the northern city of Sundsvall has other experiences of the current market than earlier mentioned by Samira Grylin Allalou. InGallerian has been undergoing large changes in terms of vacancy rates since
27 the shopping centre opened 17 years ago. From 90 retail tenants initially to the current approximately 20 tenants imply a change in the market situation. Karlsson explains that much of the earlier retail space has been converted to office space since the demand for office is large in the city centre. Strategically, Karlsson continues, they are moving retail tenants from premises on the upper floor to the ground floor to cluster the retail and to open for more office- space on the upper floor.
Furthermore, Karlsson see a change in consumer behaviour and the customers’ view on shopping in the city. She claims that it is no longer the shopping itself that attracts the people to a shopping centre but rather the experience of going there, that a shopping centre now act as a meeting point and where convenience and service gets more attention than earlier.
Lotta Sleight confirms that the retail business is going through fundamental changes and that such changes are associated with a lot of challenges for the retail sector. She continues with explaining that Vasakronan has been good in presenting retail in new ways to be able to keep up with the development on the market. The shopping centre Sleight is partially responsible for, Triangeln, is a city mall in direct connection with the train station as well as a large bus station. She identifies these attributes as the largest strengths for the shopping centre together with the mixed surroundings. The shopping centre has a lot of offices and residential apartments both on top the top floors but also in its surroundings, which provides Triangeln with a constant flow of people and Vasakronan is therefore putting large resources into making it as convenient as possible. For example, they open the shopping centre early and do not close until late.
When continuing the discussion regarding the market situation she explains that she thinks that the perception of shopping centres in general has changed and that it does not have the same status as earlier. Vasakronan meets this change in demand by developing it to become the city mall that is convenient for customers to visit when going to and from work or school etc.
Additionally, she states that Triangeln, together with other shopping centres, might have too much pure fashion retail stores in proportion to other retail tenants.
5.1.3 Future market
When asking the respondents from the real estate owners regarding the outlook of the future it is clear that there is more consensus about the future than regarding the current market situation but still with some insights that differ, or at least is expressed in some different ways.
Samira Gryllin Allalou suggests that it will, in the future, be less traditional retail on the market and instead some of these retailers might be exchanged with new concepts and other types of retail. This is mainly due to the shift in demand and the decreasing margins retailers are faced with. She claims that this shift is something most people in the business has agreed upon, that shopping centres in the future will have a smaller proportion of traditional retail. It is also pointed out by Grylin Allalou that the real estate owner she represents, Citycon, has been prepared for this shift for a long time and hence states that their operating team has been prepared for such a shift in the market. She explains that except the traditional retail tenants, Citycon also holds a large proportion of tenants in a wide range of other businesses, such as library, healthcare, service and groceries. Grylin Allalou is convinced however, that “good”
retail companies will still exist and be developed in the future.
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“It is the shopping centres that hold too much traditional retail tenants that will take the biggest hit”
Apart from the more conceptual or commercial future insights just mentioned above Grylin Allalou thinks that real estate owners need to find new more flexible models for the lease agreements to be able to keep up with the development of retail within shopping centres.
Both Grylin Allalou and Maryanne Karlsson expressed that they thought that the companies that, are today and have been for a long time, considered as anchor tenants might change.
Gryllin Allalou points out that in such quick transforming business as retail is some of the large players might be looked upon in other ways than before. Karlsson shares in some sense the same view but has more of a two-fold opinion regarding it but could conclude that it probably will change over time.
Furthermore, Karlsson thinks that the development of shopping centres will include making retail premises more effective for retailers by moving them to locations that fits a retailer better than their current premises as a consequence of development on the market. She continues with suggesting that a lot of retail space will be transformed into premises for other functions than traditional retail, such as offices or the service-sector. Due to this view on the future, Karlsson thinks that the rents in shopping centres will continue to grow. The shopping centre she is responsible for will in a few years be a completely different property than today, she would not even call it a shopping centre in the future but rather a meeting point in the city centre.
Lotta Sleight emphasises, just as Samira Grylin Allalou, that the market is in need for new models for the lease agreements in the future to be able to cope with the quick transforming industry. It is pointed out by Sleight that the traditional way of looking at a brick-and-mortar store will not be compatible with how the stores will be used by customers in the future. That is, the physical stores will to a greater extent be used as a marketing spot and not only a place for trading goods. Hence the importance of finding other ways of determining whether the physical store in a certain shopping centre is profitable for the retailer or not.
There is consensus from all respondents in the current case that the future shopping centres will contain a larger proportion of services. Sleight truly believes that a key factor for the future is what she calls the “selfish factor”, that is, concepts and services where you as a customer focuses on your own wellbeing such as different kind of beauty, gyms and other concepts within the category wellbeing. These concepts, Sleight explains, will probably be replacing some of the traditional retail such as fashion. Although it is unlikely that fashion retail will disappear completely, it is likely to be reduced. A trend that already has started but will continue to grow in the future according to Sleight. Regarding the future rental levels, she cannot say for sure what will happen as she claims that it is dependent on the economy as a whole. For a while rents might decrease and then turn back up again, perhaps because of new tenants. To summarize, she concludes that the tenant mix in shopping centres will change from today and that retailers and real estate owners must not see e-commerce as a threat but rather develop the strategy on how to work along with it.
