Month after month, retailers start paying more rent as states lift shutdown orders and consumers make it more convenient to shop throughout the year Coronavirus pandemic. However, the sometimes heated negotiations between tenants and landlords continue.
Commercial rents are still sky high in some cities and popular shopping areas. Tensions continue to mount as malls and malls owners grapple with retailers who want to permanently close, downsize, or attempt to rewrite contracts in their favor. And the pressure is expected to rise by 2021. There is typically a new wave of retail store closures at the beginning of the year as businesses re-evaluate their in-store footprints after the holidays.
Less than a third of businesses paid at least 75% of the June rent, according to a study by the National Retail Federation and investment bank PJ Solomon published Thursday. By July, the number of tenants had almost doubled to 65%. The study interviewed 48 C-level executives at retailers with at least 10 stores and sales of more than $ 100 million from July 15-28, 2019.
The survey also found that 73% of retailers who have missed payments plan to repay at least half of rent owed since a nationwide shutdown began in March. More than half of the respondents said they could get some kind of rent relief from their landlords, with deferrals until the end of 2020 or 2021 being the most likely concession.
“If you are a retailer with extensive store space, effectively managing these fixed costs was critical to saving cash while keeping brick and mortar sales under pressure, even as online sales are skyrocketing for many,” said Jeff Derman, a managing director Director at PJ Solomon.
When retailers pay less or no rent, there are consequences. Landlords like the owners of the shopping centers Simon Property Group and CBL & Associates feel the pain. CBL is now expected to file for bankruptcy protection until October 1st while Simon has taken some of his tenants, such as Gap Inc., to court. And Brookfield Properties’ retail division is laying off 20% of its employeesor about 400 people as it appears to be dumping 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. However, landlords have opposed this type of structure in the past as it makes it harder for them to predict future sources of income. While there might be some concerns about hitting such a deal, landlords might surrender to keep a place occupied.
“We wanted to avoid litigation and were largely able to stay out of court,” said Ami Ziff, director of national retail for Time Equities, which operates more than 120 retail properties in the US If we gave everyone a free rental, I would be out of business. ”
Related Cos., Owner of Hudson Yards Mall and Columbus Circle stores in the Time Warner Center building in New York, In late August, CNBC announced that it was collecting just over 50% of retail rents for its Manhattan malls. That percentage was expected to rise when the malls reopened, which they finally did earlier this month. The numbers paint a picture of the pain that can be felt across the industry well into the fall season.
One of the most prominent litigation cases during the pandemic was that of Miami landlord Bal Harbor Shops, which sued the eviction of high-end department store chain Saks Fifth Avenue, claiming the retailer did not pay more than $ 1.8 million in rent . Saks has since taken action against Bal Harbor Shops, alleging defamation, breach of contract and breach of fiduciary duty.
In another case, the Austin, Texas-based Alamo Drafthouse Cinema chain stopped paying rent in a San Antonio location after it got dark in mid-March. His landlord sued. And then the Alamo countered, seeking relief from the court so the theater could skip its rent payments until its business was back up. Alamo said its supply chain has been disrupted as court documents show fewer new films are to be released.
The largest US mall owner sued Simon Property gap in June for Owe $ 66 million in rent. Gap followed suit with his own suit to get rent relief. Simon then filed a second lawsuit against the retailer, alleging Gap “opportunistically exploited” the pandemic to avoid paying overdue rents of $ 107 million even as Gap’s stores reopened.
“I think we’ll see more litigation,” said David Marmins, co-head of the retail team at Arnall Golden Gregory law firm, which represents Alamo. “There will be no general agreement. There are tenants who have leverage and are fighting for more leverage. More negotiations still need to be conducted.”
“I think we’re getting to the biggest problems,” added Marmins. “A lot of agreements have been made, but now we are in the particularly difficult situations that are coming to a head.”
Another part of the problem: Analysts say rents still have to fall in some markets because they have gotten too high for many companies to warrant paying. The supply of retail space and the demand for retail space are no longer synchronized and more sales are being made online.
A decline has already begun around New York. During the second quarter, which ended June 30, average asking rents in 16 major Manhattan retail corridors fell for the 11th straight quarter, falling to $ 688 per square foot, according to a report from commercial real estate services company CBRE. The decline was the first time prices fell below $ 700 since 2011This corresponds to a decrease of 11.3% compared to the previous year.
The number of first floor leases tracked by CBRE in Manhattan’s 16 retail corridors hit a record 235, beating a previous high of 230 in 2013.