This situation is playing out at shopping centers across the country: A retailer in a suburban center has a solid relationship with its landlord, a record of profitable sales, a gorgeous store, loyal customers and a bright future that includes expansion plans. But the retailer awakens one day to find its world has changed — dramatically. Every retailer is facing a similar plight. But somehow, it's a whole lot different when it's your world.
This is a story hitting many of SRS Real Estate Partner's clients today. In a matter of six months, one of our retailers saw sales plummet, transactions diminish and traffic all but vanish. Scratching their heads, the company executives hoped that business would improve, but consumers, buried in bad news at every turn, did not flock back.
In the end, the retailer fell behind its rent first by one month, then two, then three. We were grateful they called us first. And the first thing my team and I did was open the dialogue, minds and ears of both the tenant and the landlord.
We had negotiated this retailer's initial entry into the market so we were familiar with them, their store and the landlord. Our team had experience in the market and with the people. Our first charge was to listen attentively and to think creatively.
Retailers can ask for solutions such as rent abatement for duration of term, or outright free rent, and there's also short-term rent reduction that is re-billed and spread throughout the term. But the tenant absolutely has to be prepared beforehand.
Tenants have to be ready to show good faith and a willingness to meet their landlords somewhere in the middle. Preparing for such negotiations means retailers need to bring their rent payments current. This show of good faith may also mean paying common area maintenance, taxes, signing a confidentiality agreement to keep all negotiations private and disclosing store sales. Doing this, a landlord can even treat the current tenant like a new one, extending the term and making concessions on the front end.
With landlords, there's soul-searching, too. They must consider how tenants can be retained without immediately jumping to rent concessions, which are costly and dilute a center's currency. How does the tenant affect the center's overall traffic and sales and other tenants? Does this retailer enhance the image of the center? What can the landlord do for the retailer that they can't do for themselves?
So, what did we do for this retailer and landlord? For starters, the tenant paid what they were able to in past-due rent. The landlord gave them additional space in which to expand the new line of merchandise they believed would boost sales. We negotiated the termination of the previous lease and signed an expanded five-year lease that included free rent and tenant improvements money. We provided the short-term relief both the tenant and landlord were looking for with a long-term relationship into the future. The tenant got more space and a better lease; the landlord received the benefit of a longer term and higher occupancy that aided him in the potential sale or refinance of the center.
If you look at the challenges at the moment based upon the state of the business today, it's dizzying. Retail business has ground to a halt except for fast food, grocery and value-oriented retail. Rent concessions for retailers are at their highest in 22 years and consumer confidence is at its lowest in the history of the indicator. All tenants are asking for rent concessions and vacancies are triggering co-tenancy clauses creating a domino effect.
These facts about the retail real estate landscape would be an easy place to start this discussion, but it's a truth we all know, and have been hammered with for months now. These are demanding times with a lot of questions; they simply demand more creative answers.