Business is Back for Retailers, and Landlords Are Saying No More Rent Discounts

Business is Back for Retailers, and Landlords Are Saying No More Rent Discounts

Retail property owners are withdrawing discounts and other incentives they offered to struggling tenants in the depths of the pandemic, the latest sign that competition for retail real estate is intensifying.

Retail property owners are withdrawing discounts and other incentives they offered to struggling tenants in the depths of the pandemic, the latest sign that competition for retail real estate is intensifying.

Many landlords slashed rents in the first year of the pandemic as they struggled to fill empty storefronts. Some have been forced to accept a portion of monthly sales instead of a fixed rent from tenants whose businesses have collapsed due to government-enforced shutdowns and social distancing.

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Many landlords slashed rents in the first year of the pandemic as they struggled to fill empty storefronts. Some have been forced to accept a portion of monthly sales instead of a fixed rent from tenants whose businesses have collapsed due to government-enforced shutdowns and social distancing.

These regulations helped retailers stay afloat and prevented landlords from losing valuable tenants.

Landlords now have an easier time filling prime retail space and are less likely to agree to concessions, said Ed Coury, senior managing director of retail brokerage firm RCS Real Estate Advisors.

“They’ll just say, ‘Covid is over; Those days are over,'” he said.

The increasing leverage of landlords is another sign of the ultimate strength of retail real estate. Store openings outpaced closings for the second time in 2023 after years of net closings, according to research firm Coresight Research.

Consumer spending held steady last year despite high inflation and recession worries, and Americans’ outlook for the economy is improving in early 2024. This, combined with a lack of new retail real estate construction, makes landlords optimistic that retailers will compete for limited prices. available space for the foreseeable future.

U.S. mall vacancies fell to 5.3% in the fourth quarter, the lowest level since real estate firm Cushman & Wakefield began tracking the metric in 2007. Average rents rose to $23.70 per square foot and are now nearly 17% above 2019 levels. .

“We’re seeing our highest occupancy in the 17 years I’ve been at Time Equities,” said Ami Ziff, managing director of national retail for the private real estate investment firm, which has since opened and has retail locations in 29 states. -“Massive, massive rent increase” from air malls to indoor malls.

Retail’s strong position stands in contrast to the office sector, where owners are struggling with oversupply and reduced demand due to remote working. In order to sign leases, office owners extend perks like free monthly rent and cash gifts to tenants.

It’s a fairly recent turn of events for retail real estate, which has struggled for years with retail bankruptcy, changing shopping habits and the rise of e-commerce. The pandemic hit briefly but hard, and retailers renewing their leases or opening new stores during that time were often able to secure favorable lease terms.

Percentage-of-sales contracts proliferated in 2020 as landlords tried to keep restaurants and other retailers out of business. Indoor malls that have been closed for extended periods during the pandemic have seen revenue from percentage-of-sale leases increase in 2021, according to data firm Green Street. At one point, it looked like these adjustments would last longer than the dog days of the pandemic.

Nearly four years later, in-person dining and shopping are booming, and landlords are reluctant to sign leases subject to the unpredictable ebbs and flows of their tenants’ monthly sales.

Co-founder Jim Dillavou of Paragon Retail Group, which owns mostly grocery-stocked retail properties on the West Coast, agreed to accept a sales percentage of less than 5% of its tenants at the start of the pandemic. But those arrangements required retailers to pay back the full rent for one to five years. All of Paragon’s tenants survived and paid their bills, he said.

“Our strong preference for a long-term tenant is a stable base lease structure,” said Dillavou, who has since partnered with Dallas-based Lincoln Property Company to manage retail properties on the West Coast.

That’s in part because if the landlord doesn’t believe the tenant is doing everything possible to increase sales and therefore rent payments, adjusting the percentage of sales can lead to “uncomfortable conversations,” Dillavou said.

More importantly, lenders dislike these rental structures, making it difficult for landlords to finance or refinance loans on retail properties at sales interest rates.

The bargaining power of retail landlords is not absolute. Older, tired properties still have to offer concessions and accept lower rents to attract tenants, Coury said. Most landlords are still spending money to renovate or build retail spaces for new tenants, and those costs have risen along with construction prices.

Percentage of sales arrangements are more common now than in the past, although they often take the form of tenants paying their base rent and then a percentage of their sales after hitting a certain threshold. So when a restaurant or other retailer has a strong year, the landlord collects this so-called excess rent.

These arrangements open another window into the current power of retail. Vince Tibone, Green Street’s head of U.S. retail and industry research, said that even owners of indoor malls, which have historically been more open to percentage-of-sales agreements, are trying to convert leases into fixed-tenancy structures with exorbitant rents.

Kite Realty Group Trust, which owns outdoor shopping malls, saw excess rental income rise 44% last year compared to 2022.

“Our retail businesses are doing quite well,” said Chief Executive John Kite. “We’re getting some of that.”

Email Kate King at [email protected]

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