As vast numbers of U.S. retailers struggle with disappointing sales results month after month, the pressure has grown on landlords to grant relief. And after rebuffing such requests earlier in the year, many landlords are now reconsidering. The catch is that retailers need to truly prove the case that concessions are warranted.
By all accounts, retailers have flooded landlords with concession requests all year. In extreme cases, some retailers have sent form letters to landlords asking (or demanding) blanket rental reductions. Those sorts of efforts don't sit well with owners and managers. And it's this kind of strategy that's led to landlords denying most concession requests.
Yet as the recession slogs on, it seems landlords are loosening up a bit and starting to makemore often, industry sources say. The concessions are happening in cases where retailers are taking a more tempered approach and conducting portfolio reviews and making requests on a case by case basis. And instead of granting rent reductions outright, retail center owners are instituting temporary rent relief measures in exchange for some lease concessions from the tenants.
"The general consensus I hear is that landlords are looking to help people through a rough time, but when the market comes back, they want to go back through those merchants and recapture the assistance they provided," says Peter Morris, senior vice president of real estate management services with Colliers International, a global real estate services firm.
There is no question the leasing market has tipped in tenants' favor, with vacancy rates rising and asking rents for shopping center space, at $18.01 per square foot, falling 1.52 percent from the fourth quarter of 2008 to the first quarter of 2009, according to research from Colliers. (For the full report, check this Traffic Court blog entry.) As a result, the vast majority of tenants, even those that are not facing strained financial circumstances have been approaching landlords about re-negotiating rents, says Joanne Podell, executive director of retail in the New York office of real estate services firm Cushman & Wakefield, Inc.
Retailers need to prove their cases, notes John Bemis, executive vice president and director of leasing with Jones Lang LaSalle Retail, an Atlanta-based third party property manager. For example, should a retailer approach Jones Lang LaSalle about the possibility of rent relief, the firm's leasing staff expects to see the retailer's corporate financial statements and sales reports for the stores in question. If the tenant's financial situation is indeed strained, but not so dire that the chain is heading for bankruptcy court, it has a good chance of working out a deal. In Bemis' estimation, Jones Lang LaSalle, which manages a 57.8-million-square-foot retail portfolio in the U.S., grants less than 10 percent of concession requests.
"Every company is going to have stores that are more profitable than others—that's the cost of doing business," Bemis says. "In an instance where we feel that the retailer is a viable entity and rent relief is warranted on both the macro and the micro level, we'll consider it."
Some tenants have found that many landlords are amenable to temporary relief measures. For example, a major specialty retailer of crafting, decorating, and sewing has been asking for concessions where they are warranted at its nearly 1,000 locations and has mostly gotten positive answers, notes according to its director of real estate. The concessions have ranged from keeping the rents flat when the lease called for an annual increase to the company paying only 25 cents per square foot for the space just to keep the lights on. In exchange, the retailer has agreed to waive some of its lease options, including the right to terminate leases early based on sales results. In those cases where landlords have refused the retailer's requests it has been primarily due to the fact that the rents the retailer was paying were still significantly below market. "We've gotten very few ‘no's for the sake of no," the director of real estate says.
But landlords are still trying to avoid outright rent abatements, says Morris. Instead, they are opting for partial rent deferments that last from three to 12 months with some sort of an expedited repayment schedule in place. Depending on the market, such rent reductions can range in value from 10 percent to 30 percent of the regular rental rate. Another popular measure is to change from fixed base rents to percentage rents, though Morris cautions landlords to ask for a fixed operating cost payment to make sure they get some form of guaranteed income. Less common, but still viable, are solutions that involve shorter operating hours for centers, which help tenants save on labor and utilities costs, notes Podell.
The landlords are not agreeing to such measures free of charge. In the majority of cases they ask retailers to give up options in their leases that could affect occupancy levels. Tenants are giving up options to terminate leases early. Others include exclusive use agreements, which might prevent a shopping center owner from bringing in a potentially viable new tenant into the property, and cotenancy clauses, which can drastically reduce rents for the entire center if a key tenant decides to leave. Some landlords are also agreeing to speed up lease renewal schedules and negotiate lower rents in exchange for the security of locking in retailers for longer terms.
In the end, there are two main issues that serve to make the negotiations between tenants and landlords difficult, according to Podell. The first is that nobody has a good idea of when the retail sector will regain some semblance of health, and that makes it difficult to estimate for how long a tenant might need a rent deferment or how quickly it can pay back rent. The second is that only healthy landlords have the luxury of granting concessions, while those that are struggling to refinance their mortgages or face other issues with their lenders might not be at liberty to reduce their tenants' rents.
"If a landlord has a lender, he may not be permitted to do this, and that's the problem," says Podell. "They've got a bank behind them saying ‘You need to pay $500 per square foot for this space and no way will we accept $400 per square foot.'"