Mall Retailers Feeling the Heat as Rents Rise and Sales Slow

A slowing economy and heightened competition have reduced retailers' turnover, but many mall managers refuse to hear about reducing their rent.

Rents for retailers in some of the country's malls have become "unsufferable," says a senior executive at one of Israel's leading fashion chains.

"The rate as a percentage of sales keeps growing," he added. "Our ability to pay rent is declining but the malls haven't acknowledged the change. "

Comments like this express the problematic balance of power in the commercial real-estate market. A slowing economy and heightened competition have reduced retailers' turnover, but many mall managers refuse to hear about reducing their rent.

The advantage that malls have over their tenants is evident in the terms of leases. For example, at the Grand Canyon mall in Be'er Sheva, violation of a major clause of the contract entitles the landlord to NIS 300,000 in damages if he chooses to evict the tenant and to NIS 60,000 if he allows the tenant to stay despite the infraction.

Two weeks ago, a group of retail chains reached breaking point and decided to organize themselves under the banner of the Tel Aviv and central region Chamber of Commerce. This marks a major change in attitude. For years, the chains didn't dare to talk publicly about their grievances with the malls.

But the worsening economy has given them courage. "In the last few months we've experienced a 7% drop in sales, while our costs have risen," said the the owner of a medium-sized chain with 30 outlets. "People aren't buying like they used to. After they cover food and housing expenses they don't have money for luxuries."

He considered trading his mall locations for downtown sites, but found that downtown landlords were setting their rents by what malls are charging. "Everyone in the country is suffering, but only the mall owners are prospering," he said.

Dov Pollak, who owns the Vendome chain as well as stores selling Nike and Lacoste products, says the fashion business in general is feeling lower sales.

"Consumers are holding back and we've been forced to move our end-of-season sales forward, which account for a big part of our turnover, so our gross profit margins are falling," he said, estimating that sales are down between 6% and 7%. "If the crisis in Europe gets worse and reaches us, and the malls don't lower the rent and management fees, it will be a real problem for a lot of the retail industry."

Pollak says rent is typically 15% of turnover and can reach as much as 25% in some malls. "That means we're are losing money at some of the stores," he said.

Turnover at retails chains, which include food as well as fashion, cosmetics, footwear and books, fell 0.9% in the second quarter from the first, according to the Central Bureau of Statistics.

But Melisron, the biggest operator of malls in Israel, posted record results in the first quarter: NIS 261 million in rental income, up from NIS 90 million for the same period in 2011. The increase was partly due to accounting changes, but also to the fact that rents rose.

"The management fees the group collects are fair," the company said in a statement. "We are unaware of the clause in the Grand Canyon Be'er Sheva contract. It is an old agreement that was signed before we entered [the business]. We would be glad to meet with the tenant and resolve the problem."

Azrieli Group, another big mall operator, reported a 9% increase in first-quarter net profit as rental income climbed 14%. Azrieli declined to comment.

"At the Azrieli Mall in Kiryat Ata, our rent comes to 30% and 40% of turnover, and at other malls to 14% and 15%," said an executive of a medium-sized chain. He said that, when the mall's managers tried to interest him in opening at one of their less-successful malls and he turned them down, they brought up the matter of renewing his existing contract.

Tamir Ben Shahar of the Czamanski & Ben Shahar research and consulting firm said there is no reason why rent at malls should exceed 10% of a store's turnover.