Even though capital markets are opening up, U.S. retailers will continue to file for bankruptcy and close stores this year, due in part to their need to repay deferred rent from 2020. Declining foot traffic only adds to that pressure and it is unclear whether mall traffic will bounce back anytime soon. Last year, it seemed as though nearly every retailer in America was asking for rent deferrals. Now they’re staring at a “deferral bubble” of $40 billion-plus that they’re going to have to pay back, over and above their existing rent. When landlords initially agreed to those deferrals many observers still believed the U.S. economy would be booming by Q4 2020. But those hopes for an imminent V-shaped recovery faded, and many negotiations have shifted to rent abatement, not deferrals.
A&G was on the front lines of that shift: Last year, we reduced the occupancy costs for 61 retail and other operators by a total of $1.8 billion. We touched 13,600 leases in 2020, restructuring 10,450 of them and securing terminations on 950. It was like nothing we’ve ever seen. We continue to assist the likes of rue21, Cinépolis, Chico’s, Christmas Tree Shops, Ruth’s Chris Steak House, and many other companies with their real estate strategies.
Here are some insights that I issued in a recent call that was part of the Jefferies University series, sponsored by the investment banking firm Jeffries. The program was hosted by equity analysts Linda Tsai and Jonathan Petersen of Jefferies’ Retail REITs Team.
Landlords will need to grant more abatements in 2021.
In exchange for rent abatements granted by landlords in 2021, tenants may need to provide additional lease term and waive certain co-tenancy rights. Last year, in our Chapter 11 cases, we negotiated rent concessions of anywhere from 20 percent to as high as 40 or 50 percent on some of these locations. Otherwise, the stores would close. Landlords needed to waive past-due or deferred rent as well, for these retailers to emerge from Chapter 11. Despite all the 2020 closures, it could have been worse. Working closely with the landlords, we prevented thousands of stores from closing last year.
Retailers will have better access to financing.
Capital markets are opening up in ways that could support retailers’ real estate strategies. The January 14 announcement by apparel retailer Express that it had secured a $140 million loan agreement is one recent announcement that shined a positive light for retailers. Retailers need to buy the time to shore up liquidity during this extended Covid-19 crisis.
Theaters will continue to struggle, posing risks.
More struggles will likely be seen in the theater sector, which has been hard hit by lockdowns and streaming video. It’s clear the industry faces significant headwinds. This is going to have a negative impact on landlords and other neighboring tenants and restaurants. It also could trigger some co-tenancy clauses, which would translate into more closures. Landlords will continue to work with theater operators in 2021, despite some of the larger chains securing good liquidity from the capital markets. The support will need to be in the form of rent abatement and converting the rent to a percentage of sales. The theater sector is an example where the capital markets have opened up to help these operators buy the necessary runway to offset the industry’s woes.
There will be opportunities, too.
There are a number of emerging opportunities for the retail industry:
• Certain restaurant chains are raising money to take over second-generation restaurant space;
• some mall retailers are scouting suburban strips to secure better locations; and
• many landlords aim to woo tenants from competing properties by offering to pay their lease-termination fees. In particular, healthier tenants with short-term leases have some incredible relocation opportunities.
— Andy Graiser is co-president of A&G Real Estate Partners. The firm’s team has achieved rent-reduction and occupancy-cost savings approaching $8 billion on behalf of clients in every real estate sector, while selling more than $12 billion of non-core properties and leases. Founded in 2012, A&G is headquartered in Melville, New York.