In the early onset of the COVID-19 pandemic, retail was an almost immediate victim as governors and mayors across the country issued stay-at-home/shelter-in-place directives, forcing many retailers to close their stores for a time and some eventually made the difficult to decision to furlough or layoff their employees.
For the first time in history, all 50 states were simultaneously under a federal disaster declaration and 38.5 million jobless claims have been filed in two months, another historic figure.
After the initial shock of stores and restaurants closing temporarily or pivoting to takeout and delivery only, the retail real estate marketplace mindset shifted in a manner of days from an offensive approach of investors closing new deals and seeking additional opportunities to a defensive one, salvaging the deals in place and appeasing their tenants that were being forced to close or adjust operations.
“Most retailers are trying to figure out how to keep their businesses solvent,” says Nick Banks, principal and managing director of Avison Young’s Gainesville, Florida office. “And most landlords are trying to figure out how to keep their properties and investments solvent.”
Early to mid-March is when the wave of letters started coming from both the retailers to their landlords and vice versa. Some of those correspondences were collaborative and understanding in nature, while others were not. Urban Outfitters, The Cheesecake Factory, AMC Entertainment and Pier 1 Imports, among others, informed their landlords that they wouldn’t be paying April rent. Bloomfield Hills, Michigan-based Taubman Centers reportedly issued a letter of its own, saying the company expects its tenants to meet their lease obligations.
Chris Stewart, senior vice president of leasing for shopping center owner and developer PEBB Enterprises, says that the Boca Raton, Florida-based company’s approach to rent relief is custom-made for each of its tenants across its 12-state portfolio.
“PEBB Enterprises is granting rent relief on a case-by-case basis,” says Stewart. “We are working with all of our tenants across our portfolio and keeping an open dialogue about their needs.”
The categories of retailers allowed to operate during the pandemic come down to what the state governments deem an essential business (i.e. ones that the public depends on for everyday life). Grocery stores are viewed as essential across the country, while categories like auto repair stores, liquor stores and cannabis retailers differ depending on the state.
Additionally, brokers say that the size of the retailer impacts their negotiation approach with their landlords.
“National retailers are taking a more assertive approach and declaring force majeure because they can’t operate,” says Rox Pollard, vice president and director of the retail services team at Colliers International’s Columbia, South Carolina office. “They’re implying that they’re not going to pay the rent, but in most cases they do intend to work out a repayment condition.”
Like their retail tenants, shopping center landlords don’t always control their own fate as they have various ownership and capitalization structures that impact their ability to offer rent deferrals.
“Solutions to meet rent relief requests will vary across the board as landlords depend on rent to service their debt obligations, and in many cases require approval from lenders or their partners in order to modify lease agreements,” says Stephanie McCullough, partner at TSCG’s Jacksonville, Florida office. “The ability to provide rent relief, as well as the need for relief, differs. It’s no surprise to see such a broad spectrum as a result.”
Various approaches
By and large shopping center owners have shown a willingness to concede to rent relief for their tenants, understanding that retailers aren’t in this predicament because of mistakes or foreseeable headwinds.
Jeff Dervech, vice president of Tampa, Florida-based Plaza Advisors, says it’s also good business for landlords to work with their tenants because of the lengthy nature of backfilling vacancies, which could be exacerbated by reduced demand for space post-pandemic.
“A traditional retail space takes anywhere between six to 12 months to lease, and in this environment it may take 12 to 18 months,” says Dervech. “Looking at every tenant, use and property is important. Landlords still want their rent so 90 percent of them are deferring rent payments. Many are coming up with a payment plan now while some are willing to revisit the plan later.”
Dervech says one of his landlord clients offered its tenants two options at the onset of the outbreak. Either they could have three months of half-rent payments, with the normal rent schedule resuming in the fourth month, or they could defer rent payments for three months and then pay the full amount back before the end of the year.
Julie Gardner, principal of Katz & Associates in Charlotte, North Carolina, says that some landlord clients are advising their tenants to seek rent relief elsewhere entirely.
“I’m hearing about a lot of ‘form letter responses’ from landlords that are hard line and unlikely to renegotiate terms until everyone has a better idea of when the dust will really settle,” says Gardner.
Pollard says a large swath of landlords chose to defer collecting rent for April, May and June, and tenants are responsible for paying back the amount by the end of their lease term or their lease gets extended by three months if the end of the lease term is soon.
“We’ve seen some cases where tenants will begin paying the deferral within a few months after they reopen,” says Pollard. “In other cases it’s spread out over six months or even longer. Some are willing to start paying sooner than others.”
Publix Super Markets Inc., which owns 282 shopping centers throughout the Southeast, made waves in March when it announced it was offering rent forgiveness to its tenants, including waiving common area maintenances (CAM) fees and taxes.
“Our immediate focus is on tenants that have had to temporarily close their businesses due to COVID-19,” says Publix spokesperson Maria Brous. “We understand that these are unprecedented times, and smaller businesses may need additional assistance as we navigate through these times together. We’re hoping this opportunity provides a little less stress and more opportunity to these businesses.”
Out of the Box Ventures, a subsidiary of Miami-based Lionheart Capital, announced a similar rent abatement program for tenants in its 30-property, 6 million-square-foot portfolio of shopping centers. Ophir Sternberg, the firm’s founder and CEO, says the landlord is charging minimal rent and foregoing profits during the closures, passing along any additional savings from public and private entities to its tenants in the process.
“We believe that we are in the same boat as our tenants — their success is our success,” says Sternberg.
Sternberg says that some of its retailers, which are mostly situated within former department store boxes across 17 states, are appreciative of the program and plan to extend their lease at the end of the term as a direct result.
Beyond rent deferral agreements, landlords, property managers and brokerage firms are assisting retailers to access other resources available to them. Developers and owners like Atlanta-based Jamestown are sending newsletters to their tenants with links to government programs and grants.
The most popular option for struggling tenants has been the Paycheck Protection Program (PPP), a product of the U.S. Small Business Administration (SBA) created by the $2.4 trillion CARES Act that helps small businesses keep their workers employed during the pandemic.
Barry Wolfe, senior managing director of investments at Marcus & Millichap and senior director of the firm’s National Retail Group, says that the PPP has been a little troublesome for some businesses to access.
“The PPP will eventually get money in people’s hands, but it’s taking way too long,” says Wolfe. “I had a franchisee call and he was told that he’d get money in six weeks, but what he told me is that if that’s the case they’re going to be out of business by then.”
In addition to PPP and other SBA programs, tenants are being advised to check their insurance policies to review business interruption standards. Dervech says that pandemics aren’t typically covered by insurance but that government-mandated closures could qualify.
Restaurant tenants could apply for the Restaurant Workers’ Community Foundation COVID-19 Emergency Relief Fund or the James Beard Foundation Food and Beverage Industry Relief Fund, among other programs. Some restaurants, such as the Gusto chain of healthy eateries in metro Atlanta, have also solicited their patrons in the surrounding community to invest in “restaurant bonds.” These act as discounted gift cards for future purchases at a higher value, giving immediate revenues to restaurants to help them stay afloat.
In response to closures due to stay at home directives, Gusto, a chain of healthy eateries in the Atlanta area, launched a Dining Bonds program wherein patrons could buy ‘bonds’ in the restaurant. The bonds act as gift cards for higher value to be redeemed in the future, and 100 percent of the revenues will go to keeping Gusto team members employed.
Ben Mandell, co-founder of Tricera Capital, says that his firm is communicating directly with its tenants to come up with a custom approach to navigate the immediate future.
“During those meetings, we are working with the business owner to create a 90-day business plan and ensure they have a plan in place to continue operating and ultimately survive the crisis,” says Mandell. “For tenants that have been mandated to close, those conversations revolve around near-term financial planning.”
The landlords that have been willing to help reduce or defer rent are making note of the tenants that are seeking assistance before rent discussions begin, and they also expect to review their financial information such as sales and revenues to chart the best course.
The store closures and rent deferment discussions have given landlords the opportunity to renegotiate some of the finer points in the lease agreements, including co-tenancy clauses and rent escalations. Wolfe says that in a year some owners may look back and view this time period in a positive light.
“Landlords can come out of this making their properties more valuable in the long-term,” says Wolfe. “It’s a win-win where the tenant gets rent relief and the landlord gets something in return.”
Going forward
In late April some state governments began to offer clarity for certain retail categories that could come back on line. Georgia Gov. Brian Kemp announced that as of April 24, gyms, fitness centers, bowling alleys, body art studios, barbers, hair and nail salons, estheticians and massage therapists were allowed to reopen while following social distancing and enhanced sanitation practices. Theaters and restaurants in Georgia were also allowed to reopen beginning April 27. The governor’s mandate states that local ordinances cannot block any reopenings.
South Carolina Gov. Henry McMaster made a similar announcement in April, saying retailers selling furniture, books, music, flowers, clothing and accessories, as well as department stores, sporting goods stores and flea markets, can begin reopening immediately at 20 percent capacity, or five people per 1,000 square feet.
Texas reopened the full gamut of retail categories Friday, May 1, and similar to South Carolina operators the retailers are advised to operate at limited capacity for the time being.
Even after stores begin reopening, brokers expect it to take a while for investment sales to kick back up again. For the near term, most are taking a wait and see approach until the pandemic has had a way to work its way through all levels of the industry.
“This is all very fluid, we don’t know if the tenants that are in the shopping center today are going to be there in 90 days when you go to close,” says Dervech. “Lenders are going to scrutinize these deals even more, asking borrowers to put down more equity.”
Retailers and landlords alike are also likely going to operate with more reserves in case of a second wave of shutdowns or if another recessionary level event occurs in the future.
Other long reaching effects of the COVID-19 pandemic will almost certainly include revisions to language in lease agreements, insurance policies, loan documents and tax and title paperwork to reflect pandemics, as well as federally and locally mandated store closings.
Scott Sherman, co-founder of Tricera Capital, says that one positive is landlords are now more prepared if COVID-19 or another health crisis ever surfaces.
“Landlords are going to learn from the instantaneous way this virus damaged the hospitality, restaurant and entertainment sectors and be even more mindful about the tenant mixes at individual properties,” says Sherman.
To that end, landlords are likely to view essential businesses differently in the future because they are able to operate — and some even thrive — during a global pandemic. Walmart and most grocery stores are in mass hiring mode, and the pandemic has even revived Earth Fare, a grocer that declared bankruptcy and shuttered its doors in February.
Additionally Wingstop, a buffalo wing restaurant chain based in Dallas, reports its same-store sales are up about 33 percent in April as the business was already heavily modeled toward delivery and takeout.
Dallas-based Wingstop is one of the few restaurants that has thrived since the shift to takeout and delivery only in the wake of the pandemic. In the last two weeks of March, the company saw same-store sales growth of nearly 9 percent.
Michael Pratt, principal of Mid-Atlantic brokerage firm KLNB, says that the identifier as an essential business will likely be another consideration in a tenant’s creditworthiness.
“When you look at a tenant’s credit, if they’re able to pay rent and operate during a pandemic, their stock as a ‘credit tenant’ should increase based on this fact alone,” says Pratt. “If a tenant reacts unreasonably or uncooperatively during this crisis, landlords will remember that. Some tenants are handling the pandemic with much better transparency than others, bringing them future value as real estate partners.”
All stakeholders in the retail real estate industry anxiously await the end of the pandemic and a return to normalcy. Kelly Pulignano, leasing advisor at TSCG, says that in addition to the duration of the pandemic, the other critical unknown is the lasting impact the past few months will have on consumer behavior.
“It is critical for us to understand how consumer behavior will shift due to the pandemic as that will directly affect the type of retail that is active and successful,” says Pulignano.
Adds TSCG’s McCullough, “We haven’t even started to recover yet.”
— By John Nelson. This article originally appeared in the May 2020 issue of Shopping Center Business.