The past year changed everything in retail, from how and where people shop to the very purpose of brick-and-mortar stores. One thing that didn’t change, however, was how most retail leasing models within large shopping centers are structured. While everything else in the world of retail was being upended, reimagined, or scrapped altogether, the tried-and-true leasing model fell behind.

But that appears to be changing, albeit slowly.

“Retail stores serve multiple purposes today, including becoming fulfillment centers,” said Sterling Raehtz, subject matter expert for shopper analytics at Sensormatic Solutions. “Unfortunately, their current leases don’t reflect that. And that’s ultimately bad for both parties involved.”

Let’s look at why staying the course on traditional leasing models negatively impacts both retailers and shopping centers — and what a better solution may ultimately look like going forward.

Before we discuss where retail leasing models appear to be going, let’s take a moment to examine how retailers got here in the first place.

The rise of ecommerce, its rapid adoption during COVID-19 and the parallel rise and acceleration of omnichannel ordering and fulfillment have collectively been a watershed for brick-and-mortar retailers. So much has changed today, in fact, that it’s easy to lose perspective on where we were only recently. Harvard Business Review recently highlighted two statistics from 2019 that might help recalibrate the scale:

• Just two years ago, fewer than one in three U.S. retailers had digital transformation strategies in place.
• An even smaller percentage of retailers at the time — around 4% — were offering BOPIS/BOPAC options to their customers.

Today, after more than a year of lockdowns, re-openings and re-lockdowns, we’re finally seeing some light at the end of the tunnel. But in the process of getting here, retailers had to change, well, virtually everything — including what constitutes an “in-store sale.” Does that include items initially bought online, but later picked up at a physical storefront? What about in-store returns for online purchases?

As the very nature of in-store shopping changes, so too are the business agreements that structure their built environment — and nowhere is that more apparent than in the case of the traditional retail leasing model.

For years, leasing models between shopping centers and retailers adhered to a relatively simple formula: Retailers paid a base rent, typically calibrated based on potential sales per square foot, that could also include a variable component, most commonly a share of in-store sales.

From the advent of large shopping centers until relatively recently, this model made sense. The transactions in question took place at cash registers within the shopping center, and the variable component was relatively easy for everyone to calculate since 100% of sales were generated right there inside of the store.

The rise of omnichannel, however, makes this model look like something from the Stone Age — and yet, many retailers within large shopping centers in the U.S. are still locked into them.

Consider a hypothetical retailer that historically relied on brick-and-mortar sales, but recently adopted a sophisticated omnichannel strategy in response to COVID-19. While this pivot may have helped them ride out the pandemic, it’s going to have dramatic effects on the shopping centers in which their stores reside. After all, if purchases made online but picked up at the store don’t count as sales for purposes of the lease agreement, that means the landlord doesn’t get a percentage.

“If you ask most landlords if a BOPIS or BOPAC sale counts as an on-premises sale, they’ll say ‘yes,’” Raehtz said. “But if you ask the retailers, some will say ‘no.’ This is the crux of the issue, and it’s why it’s time for both parties to come to the table and agree on a better solution.”

So, whether this is your reality yet, it’s coming. Here’s what you can do to prepare.

Even as safety protocols are gradually lifted across the country, many new consumer behaviors — including online shopping behaviors necessitated by the pandemic — are likely here to stay. One study by McKinsey & Company found that roughly half of consumers who initiated new behaviors during the pandemic said they planned to stick with them after it.

However, there’s also encouraging data that shows that consumers are gradually returning to in-store shopping.

“In terms of foot traffic, our latest data from mid-June 2021 shows that we’re currently down about 20% from where we were at this time in 2019,” Raehtz noted. “That doesn’t mean we’re back to 'normal’ by any means, but it’s a huge increase from what we saw at the height of the pandemic. And from a generational perspective, there are many indicators that Generation Z actually prefers to shop in stores rather than online.”

In fact, Gen Z prefers to shop in stores more than any other generation, according to findings from Kearney. That means in-store shopping isn’t going anywhere — but neither are BOPIS/BOPAC. Retailers simply have to make these shopping options part of their operating models going forward, Raehtz stressed, and their lease agreements should reflect those, too.

He also noted that these new leasing agreements should be structured in a non-zero-sum context. By leveraging the latest sensor technology, these leases can be turned into symbiotic — rather than competitive — relationships. Think: landlords and tenants empowered with shared data and working together. In so doing, both parties would be better positioned to win, delight customers, and create spaces where shoppers want to be and are eager to visit.

“We provide consumer analytics to both retailers and shopping centers, and when they both have a real-time understanding of foot traffic into and out of stores, they can come together to broker a lease agreement based on actual traffic, which allows retailers to test new concepts that may not be directly tied to selling products,” Raehtz said. “When both parties come to the table with meaningful traffic analytics, they can come to an agreement that’s both fair and mutually beneficial — and we think that’s the future of retail leasing.”

Watch “Omnichannel: The bull in the china shop-ping center” previously recorded LinkedIn Live discussion for more on this topic with Sterling Raehtz, subject matter expert for shopper analytics at Sensormatic Solutions and Brian Field, senior director, retail consulting practice at Sensormatic Solutions.

Watch a webinar on demand at Chain Store Age on the topic of “Omnichannel & Shopping Centers: Tenant and Landlord Pathway to Profitability.” Speakers include Sterling Raehtz, subject matter expert for shopper analytics at Sensormatic Solutions and Brian Field, senior director, retail consulting practice at Sensormatic Solutions.