Retailers, Landlords Adjust Business Models, Leasing Practices Amid Pandemic

The impact of COVID-19 has forced retailers, restaurants and service providers in the Northeast to improve their digital channels and adapt social distancing policies to continue serving customers. With retailers struggling to pay rent, landlords could find mutual benefit in reaching a compromise with existing tenants before temporary closures become permanent.

Unfortunately, for many small businesses the virus has activated a
Darwinian battle of the fittest among retailers with primarily physical channels. Meanwhile, e-commerce giants like Amazon are thriving in market conditions tailored to their already digital-focused business plans. Grocery stores and pharmacies have also found themselves to be arguably the most essential of services during the outbreak, as many have struggled to keep fresh food, toilet paper and other supplies on their shelves.

But even after medical professionals and politicians give the “all clear” to reopen the economy completely, it is still unclear when consumers will feel comfortable returning to their favorite stores and restaurants. Shopping Center Business recently caught up with three real estate professionals to gain their insights into how the virus has impacted their local markets.

Below are edited responses from Ronald Dickerman, president and founder of Madison International Realty, which provides equity capital to real estate owners and investors; Chase Welles, partner at retail brokerage firm The Shopping Center Group; and Joseph French, senior vice president and retail specialist at Institutional Property Advisors, a division of Marcus & Millichap (NYSE: MMI), which specializes in investment sales.

Shopping Center Business: How can retail landlords help tenants whose stores have been forced to close in response to COVID-19?

Ronald Dickerman: Landlords can do a lot to assist retail tenants. Some larger national landlords are proactively matching tenants with government assistance programs. That is a win-win scenario. What is good for the tenant is good for the landlord, but it’s not necessarily a zero-sum game. Some landlords are pounding the table and saying, “You must pay the rent.” And there are tenants who are saying, “My stores are closed by state mandate, what do you expect me to do?”

In the gray middle ground, some tenants are apathetic about their positioning. We have situations where essential tenants are open but not paying rent. Meanwhile, we have non-essential tenants that are closed but are still paying rent. Grocery stores in particular are generally doing well. They’re open, they’re essential and they’re packed — inventory is flying off the shelves.

Chase Welles: The short answer is that landlords are forgoing rent. The longer answer might be landlord and tenants compromising on a creative rent solution for a number of months, which would involve percentage rent. Some landlords are offering to forgo rent for now but add it to next year’s rent. That doesn’t help the tenants because, obviously, they were not able to make that money.

Some landlords are making it easy, but some of the big ones and the REITs that have an obligation to their shareholders are drawing a fairly hard line. It may still take several months to tell what is going to happen.

Joseph French: You have two primary philosophies going on, and then you have everything in-between. Some big mall owners have taken a stand that they are not going to help any tenants — they either pay or they are in default.

Supermarkets, which tend to own a lot of their properties and have different types of tenants, are giving them deferments. Some owners have gone to their bank to get forbearance from their lenders. Then they work with their tenants from there.

Some of the smarter landlords are seeing this as an opportunity to remove restrictions from their leases, such as exclusivity use clauses that prevent them from filling vacant space. Some landlords are working with mom-and-pop tenants, helping them get their disaster aid.

SCB: Within the market(s) in which you are active, how much disruption are you anticipating in terms of reduced occupancies? Do you anticipate slower rent growth or a decline in rents for retail product?

Dickerman: We are definitely expecting turbulence, dislocation and significant falls in rental collections, which we hope is just on an interim basis. We are doing everything we can to bolster liquidity and speaking with lenders about forbearance.

On the other hand, we are focused on what the reopening of the economy and the return to work looks like. We are looking at this as a temporary phenomenon. This is not the end of retail or real estate, it’s just going to be a serious amount of turbulence in the interim.

Welles: We anticipate negative rent growth. As far as reduced occupancy, a lot of sectors will be affected differently. Urban and suburban properties are two different [animals]. Urban retail is a mix of national, international and local tenants.

The international retailers are not going to close their stores. They are going to fight with the landlords. They are really well-capitalized companies that are willing to go to the mat with the landlords on paying rent versus not paying rent, and that is going to be a grown-up argument.

The national retailers, like Starbucks and Bed Bath & Beyond, are not going to reopen stores that were not performing well, even before the virus. They’ll figure that out with their landlords on their own. Then there’s the regional and local retailers, meaning businesses with one to five or maybe up to ten stores, mostly in food and services. I think we’ll only see about 60 percent of those guys reopen, because reopening costs a lot of money. They have to restock the shelves and rehire employees.

For a store that was just barely getting by in the first place, it’s just not worth the money.
There’s no way they can tell right now how many customers will even come back when they do reopen.

French: Nobody that I know of is evicting tenants yet, even if they are defaulting. The question is how many of these tenants will survive? Tenants that were not in a good financial position before this pandemic will declare bankruptcy.

E-commerce is experiencing a huge boom, so consumers may not return to brick-and-mortar retail after this. It may be a year or more before we see the real fallout. I also wonder how fast we’ll see customers returning to restaurants until there is a vaccine.

SCB: How would you describe the retail investment market’s initial reaction to COVID-19? Have you seen a stronger push to bring deals to market, adjust prices or dispose of assets in the name of freeing up capital?

Dickerman: There was already caution from investors looking to put more money into retail well before  the outbreak of the COVID-19 virus. Malls were virtually untouchable because there is virtually no market now for regional malls in the private markets. Power centers were somewhere in the middle. But the whole retail trade has been quite cautious, and the virus outbreak only exacerbates that caution.

Welles: There are just no buyers out there right now. Even if a landlord is incurring an unexpected vacancy and wants to sell, there’s nobody out there to buy the asset. There’s just no liquidity for  retail product.

French: A lot of owners are freaked out, trying to figure out how they are going to survive and deal with their tenants. Then there are groups that have been sitting on the sidelines, salivating. They want owners to fail so they can buy the properties, but they are not looking to spend yet because the prices haven’t been adjusted. Lenders are still lending, and some deals are still closing, but a lot fewer than before.

SCB: How have traditional retail tenants adapted to market conditions caused by COVID-19, and how do you expect those adaptations will continue to influence retailers in the future?

Dickerman: It’s very likely that we could still have social distancing and capacity limits once the economy reopens. Until there’s a vaccine, we’ll still have some residual caution about interacting in the world. It’ll also be a weeding out process in a sense because the strong will get stronger and the weak will go out of business. The middle will struggle, but maybe some of them will adapt to survive.

Welles: We see a lot of curbside delivery and takeout. A lot of businesses are improving their websites, and restaurants are simplifying their menus. Even at fancier restaurants, the waiters are now working as delivery people. Some of them are even still wearing the same tuxedos, taking care to elegantly package the food and hand it off to the customer with some ceremony. The lower-end restaurants just leave it on a table outside the front door. Everybody is doing something differently, and it all stems from minimizing physical contact.

French: I was first surprised at how restaurants have survived through takeout service. It’s going to be a while before customers are comfortable going back to sit down in a restaurant, but they’ll probably continue to order takeout when they want to enjoy higher quality food. Services like Instacart have grown in popularity during a period when people are scared to go to the grocery store, and those services will likely continue to expand. Some customers have found they actually save money ordering groceries, because they make fewer incidental purchases when they make specific lists online.

This article originally appeared in the May 2020 issue of Northeast Real Estate Business, a sister publication to Shopping Center Business.

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