Apple Store Boots Business, Rents in American Malls
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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.
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 Suzanne.Kapner@wsj.com