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Retail tenants leverage pandemic stress for rent cuts

  • Some retailers, restaurants, gyms and other businesses are experiencing improved lease terms as they gain the upper hand over landlords looking to retain tenants

U.S. commercial landlords have granted billions of dollars of rent relief to struggling storefronts as property owners strive to keep falling occupancy rates from triggering more severe financial consequences.

With many commercial property tenants in dire financial straits due to the economic fallout from the coronavirus pandemic, landlords are reluctantly granting concessions on lease payments, lengthening payment terms, extending or shortening leases, lowering rents permanently and even forgiving past-due payments, according to real-estate advisers, property managers and lawyers.

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By providing the breaks following negotiations, landlords are hoping to avoid pandemic-induced tenant departures, keep properties occupied and rent payments flowing, while avoiding the larger losses that can come from evictions and increased vacancies in their shopping centers and malls. They are fearful of triggering lease provisions that kick in when key anchor retailers or a certain number of tenants leave a certain property, cutting rents for those that remain.

“In light of the pandemic, people are worried about empty stores and worried about traffic in their malls," said Saul Burian, managing director at investment bank Houlihan Lokey Inc. “Some are even worried about hitting thresholds of vacancies that could have other consequences either with respect to other tenants, or with respect to their debt."

Landlords who feel that they won’t be able to quickly replace tenants have the least leverage in negotiations, said Beth Azor, founder and owner of commercial real-estate advisory and investment firm Azor Advisory Services Inc., which owns and manages six shopping centers in South Florida.

Real-estate advisory firm A&G Real Estate Partners said it saved its clients about $1.7 billion through lease negotiations in the first nine months of 2020, lowering rents on 9,550 leases and securing terminations on 950 leases for 58 retailers, restaurants, educational users, office tenants and fitness and entertainment operators.

A&G won concessions from 77% of landlords of those negotiated leases, compared with its typical average of 50% in previous years, according to the firm, which advised several retailers that went bankrupt in 2020 including former Ann Taylor owner Ascena Retail Group Inc., and Men’s Wearhouse and Jos. A. Bank parent Tailored Brands Inc.

When Francesca’s Holdings Corp., another A&G client, filed for bankruptcy protection in December, the boutique chain, which sells apparel, jewelry, accessories and gifts, had deferred nearly $37 million in rent obligations after striking deals with certain landlords, according to court papers.

“Landlords have become more realistic. Their lenders have become more realistic. Therefore, we’re able to get rent concessions," said Andy Graiser, A&G’s co-president.

Retail vacancies have been steadily on the rise and are expected to significantly increase. The average retail vacancy rate was around 4.5% going into the pandemic and estimated to end 2020 at 5.3% to 5.5% but is projected to increase to between 5.8% and 6.2% by the end of 2021, according to data from real-estate analytics company CoStar Group Inc.

Before the pandemic, average retail rents were growing at more than 2% annually, according to CoStar.

CoStar now expects rents to decline by anywhere from 1% to 3% year-over-year in 2021.

“Landlords will do what is in the landlord’s best interest," said Mohsin Meghji, managing partner of corporate advisory firm M-III Partners LP. “But landlords have never been and are not going to sort of give away rent reductions out of the goodness of their hearts."

In April, as Covid-19 lockdowns took hold, the number of retail tenants current on their rent crashed to 54% from 91% in March, according to data from real-estate business-intelligence company Datex Property Solutions. The proportion of retailers paying their rent rebounded over the summer and ended at more than 85% in November.

A record-breaking number of major retailers—more than 60—filed for bankruptcy in the U.S. in 2020. Major retailers announced plans to close more than 12,200 stores last year, according to CoStar. These closures will empty an estimated total of 159 million square feet of retail space, out of roughly 11 billion square feet available nationally, CoStar said.

“What’s happening in the market is most definitely going to cause an overall devaluation of real estate across the country," said Matthew Bordwin, principal and managing director at real-estate brokerage Keen-Summit Capital Partners LLC.

Keen-Summit picked up dozens of new clients since March and represented dine-in theater chain Studio Movie Grill, burger chain Krystal and Italian restaurant chain Il Mulino in their bankruptcies filed last year, Mr. Bordwin said. About 60% of the firm’s work was rent reductions and the other 40% was lease terminations, yielding a success rate of about 80%, he said.

“There is so much pain in the marketplace," Mr. Bordwin said. “Every business that I speak to is now looking at their real-estate footprint to see how they can reduce costs. The landlords…are getting calls from so many people that they can’t help everyone."

Katharine Battaia Clark, a Dallas-based partner at law firm Thompson Coburn LLP, said at an American Bankruptcy Institute panel last month she has seen “really aggressive negotiating tactics" being used by consultants hired on behalf of bankrupt tenants. ABI is a nonpartisan organization focused on research and education related to insolvency issues.

The tenants’ position has been to “accept our terms or take a hike, we’ll reject your lease and then you’ll be an unsecured creditor and good luck to you, and you’ll have an empty space," she said.

Rent deferrals, abatements, unpaid bills and vacancies can spell trouble for the finances of landlords, the landlords’ lenders and investors. Midsize publicly listed mall owners CBL & Associates Properties Inc. and Pennsylvania Real Estate Investment Trustfiled for bankruptcy in November after a rash of tenant failures.

Mall owner Simon Property Group Inc. reported its lease income decreased nearly 16% to $3.27 billion for the first nine months of 2020 due to rent abatements, higher provisions for uncollectible rents and lower sales-based rents.

“After all, the landlord still has to pay its lender and maintain its overhead," said Mark Sigal, chief executive officer of Datex. “Everyone has a check to write."

Yet despite securing rent breaks last year, some tenants are finding themselves unable to stay current as the pandemic drags on and Covid-19 vaccination efforts encounter difficulties. Some are now requesting that their landlords revisit their previously made deal.

Winning a second round of concessions is harder to do, Keen-Summit’s Mr. Bordwin said.

“Outside of a bankruptcy situation, the landlords are working as hard as they can to hold the line. In some cases, I think to their detriment. They’re going to force tenants into bankruptcy," he said.

This story has been published from a wire agency feed without modifications to the text.

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