Month by month, retailers are starting to pay more rent as
states lift shutdown orders and consumers become more comfortable venturing out
to shop during the coronavirus pandemic. But negotiations, sometimes heated,
continue between tenants and landlords.
In some cities and popular shopping districts, commercial
rents are still sky high. Tensions keep brewing, as mall and shopping center
owners grapple with retailers looking to close stores permanently, downsize or
try to rewrite contracts in their favor. And the pressures are likely to roll
into 2021, with the start of the year typically drawing a fresh wave of retail
store closures as companies reevaluate their brick-and-mortar footprints after
the holidays.
Less than a third of companies paid at least 75% of June
rent, according to a study released Thursday by the National Retail Federation
and the investment bank PJ Solomon. By July, the number of rent payers had
almost doubled to 65%, it said. The study polled 48 C-level executives at retailers with at least 10
stores and more than $100 million in sales in 2019, from July 15 to July 28.
The survey also found that 73% of retailers that missed
payments are planning to pay back at least half of the rent owed since a
nationwide shutdown began in March. More than half of respondents said they
were able to get some sort of rent relief from their landlords, with deferrals
into late 2020 or 2021 being the most likely concession.
“If you’re a retailer with an extensive store footprint,
effectively managing these fixed costs has been critical to preserving cash
while brick-and-mortar sales remain under pressure, even as online sales surged
for many,” said Jeff Derman, a managing director at PJ Solomon.
When retailers pay less or no rent, it creates a ripple effect
of consequences. Landlords like the mall owners Simon Property Group and CBL
& Associates are feeling the pain. CBL is now expected to file for
bankruptcy protection by Oct. 1, while Simon has taken some of its tenants like
Gap Inc. to court. And Brookfield Properties’ retail arm is laying off 20% of
its employees, or about 400 people, as it looks to dispose of some of its
malls.
Real estate experts say retailers are increasingly looking
to pay rent as a percentage of sales, making it a variable expense on their
balance sheets rather than a fixed one. Landlords, however, have resisted this
type of structure in the past, as it makes it more difficult for them to
predict future revenue streams. While there could be some hesitation to strike
a deal like this, landlords could end up capitulating to keep a space occupied.
“We’re looking to avoid a legal fight, and we were able to
stay out of court for the most part,” said Ami Ziff, director of national
retail for Time Equities, which operates more than 120 retail properties across
the U.S. “But if we gave everyone free rent, I would go out of business.”
Related Cos., owner of Hudson Yards mall as well as The
Shops at Columbus Circle in the Time Warner Center building in New York, told
CNBC at the end of August that it was collecting just over 50% of retail rents
for its malls in Manhattan. It expected that percentage to pick up as its malls
reopened, which they finally did earlier this month. The numbers paint a
picture of the pain being felt across the industry, even into the fall season.
One of the most publicized legal battles during the pandemic
has been Miami landlord Bal Harbour Shops suing to evict the high-end
department store chain Saks Fifth Avenue, alleging the retailer failed to pay
more than $1.8 million in rent. Saks has since countersued Bal Harbour Shops,
alleging defamation, breach of contract and breach of fiduciary duty.
In another instance, the Austin, Texas-based theater chain
Alamo Drafthouse Cinema stopped paying rent at a location in San Antonio, after
it went dark in mid-March. Its landlord sued. And then Alamo countersued,
looking for relief from the court to allow the theater to skip its rent
payments until its business was operating again. Alamo said its supply chain
had been disrupted since fewer new movies are slated to be released, according
to court documents.
The biggest U.S. mall owner Simon Property sued Gap in June
for owing $66 million in rent. Gap followed with its own suit seeking rent
relief. Simon then filed a second suit against the retailer, alleging Gap was
“taking opportunistic advantage” of the pandemic to avoid paying $107 million
in overdue rent, even as Gap’s stores started reopening.
“I think we will see more litigation,” said David Marmins,
who co-leads the retail team at the law firm Arnall Golden Gregory, which is
representing Alamo. “There is not going to be an agreement across the board.
There are tenants that have leverage and are fighting for more leverage. There
is still more negotiating to be done.”
“I think we are just now getting to the biggest problems,”
Marmins added. “There have been a lot of agreements worked out, but now we are
at the particularly hard situations that are coming to a head.”
Another part of the problem: Analysts say rents still need
to fall in some markets because they have become too high for many businesses
to justify paying. And supply of retail space and demand of retail space are no
longer aligned, with more sales moving online.
Around New York, a descent has already begun. During the
second quarter ended June 30, average asking rents along 16 major retail
corridors in Manhattan declined for the 11th consecutive quarter, falling to
$688 per square foot, according to a report from the commercial real estate
services firm CBRE. The drop marked the first time since 2011 that prices
dropped below $700, the firm said, representing an 11.3% decline from a year
earlier.
And the number of ground-floor leases available in
Manhattan’s 16 retail corridors tracked by CBRE hit a record of 235, surpassing
a previous high of 230 in 2013.
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