RCS’ Spence Mehl On How Merchants Can Protect Against Slumping Sales

Look at the names of retailers that have disappeared or filed for bankruptcy in just the past few years: Sears, Kmart, ABC Carpet, Alex and Ani, Neiman Marcus, Lord & Taylor, Borders Books, Belk, the Guitar Center, Century 21 (which is plotting a comeback), Stein Mart, New York & Co., Brooks Brothers, Chuck E. Cheese, GNC, 24-Hour Fitness, Le Pain Quotidien, Hertz Rent-A-Car, J.C. Penney, and that’s just a partial list. 

Guys like Spence Mehl are dedicated to keeping companies off that list, and helping you negotiate this brand-eating world. As a senior vice president for RCS Real Estate Advisors, Mehl and his cohorts help retailers in their lease negotiations stay alive in a world that sometimes seems out to get them — or help them liquidate, if all else fails.

He hopped on a Microsoft Teams call for a few minutes in late June to explain what he does. His remarks have been edited for length and clarity.

Commercial Observer: RCS stands for Retail Consulting Services. What exactly does RCS do?

Spence Mehl: Our business started in the early `80s, and our DNA was restructuring real estate for bankrupt retail. Then the bankruptcy code changed pretty dramatically, and our business morphed because the bankruptcies were lasting two or three or four years. Now about 25 percent of our business is being a full outsource real estate environment for large retail chains.

For about 25 percent of our business we maintain the existing fleet of stores for retailers, meaning we handle all their current issues, such as lease negotiations. Twenty-five percent of our work is in the true restructuring world, where a lot of companies are in dire need. And 25 percent of our business is more growth-oriented. We’re helping them with their growth plan, their strategic plan.

So it sounds like you started out ushering businesses through liquidation, and now it’s a more positive thing.

We always measured success in helping a business survive, even if it was in a Chapter 11 situation. We always saw ourselves as turnaround guys. That was our No. 1 goal. It’s very exciting to work with real growth tenants right now.

According to information I received, you guys helped The Loft, Anne Taylor and Lane Bryant stay up and running. How is that going? Seems like those are the kind of businesses that might be subjected to the pressures of e-commerce. And yet they are at least surviving?

It’s not easy for a retailer to ever come out of a Chapter11 unless they are bought. It’s very difficult for a retailer to go into a Chapter 11, restructure, and come out without someone buying them or buying the assets.

We’re working with a chain of bridal stores that, during the pandemic, was left for dead, because there were no weddings, and sales were negative because all their dresses were being returned. The company changed their inventory, and is doing fantastic right now.

We’re working with a home furnishing group that was spun off from a large publicly traded company, and their sales are up about 30 percent, which is great in a very, very troubled environment right now.

We really don’t love to look at monthly data. Retail is always a lagging indicator.

The stock market, housing, crypto, bonds, retail, real estate — everything is kind of blowing up right now. We are being very cautious about signing new deals.

The buzzword you hear a lot these days around retail is “omni-channel.” And what I take that to mean is that retailers are agnostic as to whether you buy online or in-store or out of a catalog. They don’t really care, so long as you buy. So the ones who are successful are learning to strike a balance between having an online presence and having a physical presence. What’s your take on that?

A couple things. The pandemic has absolutely sped up online digital purchasing. The consumer’s habits are changing. But think about a company that has to ship a 40- or a 60-pound bag to somebody’s front door. And they’re covering the shipping costs. It sounds great that they don’t need the brick and mortar, but it’s not always profitable.

You need a real balance. We have a lot of companies coming to us now that are mostly digital sales, and they want to build up their brick and mortar stores. And, on the flip side, we have a lot of retailers that are working with us who are over-stored. And they are trying to shrink not only their store size, but the amount of stores in particular markets where they feel they are over-stored. So you’re spot-on.

So, in short, you see a role in the future for the physical store even in a world where people are buying stuff on their phones, laptops and tablets.

Absolutely. Stores have seen their online sales decrease when a retailer has pulled out of a market altogether. To have a store in a market is beneficial to digital sales. It’s almost a form of advertising.

Describe for me the need for your services. How does it compare to the past? And where do you think it’s going?

We feel we know the markets intimately. Everyone in my company is an ex-retailer, so we know where retailers are coming from.

A lot of guys in the brokerage community, they really know market rents, but you really need to dig a little deeper to understand what’s going to work for the retailer long term.

I am advising my clients to be very cautious right now, with the direction of the economy, and that they can’t look at current sales volumes because there’s going to be a retraction. We’re already starting to see consumer spending going to essentials. A lot of the free money that was out there for the last couple of years is drying up. There’s a huge burden on the lower-income population in our country right now. Everything is really being driven to essentials right now.

There’s been a tremendous amount of leasing activity. That does not always equate to higher rents. But there has been a lot of leasing activity where the centers, especially the suburban centers, are all pretty full right now, at historic levels. Not so much in the urban centers. But there will be quite a shift over the next six months

Earlier you mentioned a bunch of things that are being clobbered right now, like real estate and cryptocurrency and other things. And retail seems to be doing modestly well, which means it’s doing pretty darn well, relatively speaking. So I’m curious what you make out of that.

Well, again, I think it’s a lagging indicator. It’s the last thing to put the brakes on.

The consumer has no money to spend in-store. It’s not like the shopper will move down the street. So those stores where it’s not essential — like one has to buy gas, pay utility bills, and put food on the table, and all those prices are going up dramatically. They’re not going to have cash for nonessential items.

That goes directly to my business, where a retailer can only afford to pay rent of a certain percentage of revenue. And, once that revenue goes down, the percentage is out of whack. We’re suffering financially, and it’s nonproductive.

We’ve heard a lot about landlords who are taking a percentage of sales or profits in lieu of a static rent. Are landlords asking for that?

No, they like to lock in everything. We’re working with landlords now and having a pretty good amount of success with trying to set a fair floor based on sales.

And I tend not to look at current sales. I tend to throw out pandemic sales and look at `18 and `19 sales, and try to set a fair threshold to set a floor, a guaranteed rent, and then give some type of percentage rent kicker to the landlord if, if sales will be going up.

You’re trying to make the threshold more achievable for the landlord, but having a little bit of a lower fixed rent, so the landlord can pay something and give the retailer a little breathing room in case sales do retract on them.

Why do you think open-air malls have been outperforming both urban retailers and enclosed malls?

In the urban centers, there has been no tourism, and the office workers are working from home. So the restaurant industry in the urban centers is getting crushed; and all side streets in New York City, in Midtown are getting crushed right now. They’re really struggling. And there’s a real haves and have-nots situation, especially in restaurants. You walk around Midtown Manhattan at 12 in the afternoon, you see a lot of lunch places, national lunch places, that are completely empty.

But hasn’t there also been a comeback for big open-air suburban centers as opposed to big, traditional enclosed malls?

The malls were struggling pre-pandemic. We were definitely over-malled in this country. All the pundits were saying at least a third of these malls don’t really perform anymore. And the good ones are the ones in the right spot, and have the right tenants.

There’s a bottom 50 percent of malls that are really struggling. And the developers are working hard to find highest and best use for their centers, whether it’s mixed-use, whether it might be industrial, whether it might be colleges — everyone’s getting very creative out there with the highest and best uses for an unproductive, enclosed mall.

As far as the open-air strip centers, they’re more convenient for a consumer to just kind of run in, grab what they need and leave. And during the pandemic, it was harder to be inside.

So you and your company seem to think there’s going to be a day of reckoning coming, even for those who have found their footing in this uncertain market. What do you see on the horizon that your clients need to be concerned about?

We are very concerned that sales are going to drop based on inflationary pressures. And some retailers don’t even have products on their shelf. A lot of my tenants have their inventories pretty good right now. But a lot of retailers don’t have that luxury. We think there’s going to be a real softening of sales coming up, and we’re working hard to protect our clients from overpaying, and ensure that their rent payments are going to be in line with their revenue.

This interview was first published as part of Commercial Observer’s Tenant Talk newsletter. Please consider signing up for that and other newsletters here.