Retail’s New Normal Delivers New Wrinkles In Lease Terms, Negotiations

Retail’s e-commerce and pandemic-charged shakedown has changed the tenant-landlord relationship.

Deals have gotten more complicated amid constricted cash flow and rising interest rates, while the scars of rent forbearance and payment disputes have landlords pushing for more stability in their leases, retail industry leaders said Tuesday at Bisnow's National Retail Conference at 1540 Broadway in Manhattan.

“It’s not just about great real estate, it's about great landlords,” said Taryn Brandes, the founder of retail brokerage and advisory firm Brand Urban. “Security and guarantee has been negotiated in a way that I've never, never seen before."

Retail tenants hoping to sign new leases will increasingly find themselves on the receiving end of changing deal terms, with more frequent rent increases and expectations for more payments being made upfront, landlords and retailers said onstage.

“The norm was, you lease it, you make it flat for about a year, add a bump, make it flat for another five years,” said Jack Devilliers, a senior vice president at national shopping center developer Regency Centers. “I think the norm is starting to have a little bit more that it’s going to be annual increases to keep up with inflation.”

Landlords are looking to tie annual rent increases to inflation, asking for roughly 2.5% a year over the course of 10- to 15-year leases, rather than traditional deals that included a 5% to 10% price jump partway through, Devilliers said.

Good guy clauses are off the table in a lot of cases, Brandes said, and more landlords are pushing for as much as three years of notice prior to tenants vacating — three times as much as the maximum 12-month notice period previously in place, she added.

Tenants are also being asked to put up more cash upfront to guarantee their locations, said Guss Firestein, the chief development officer of French bakery chain Maman. 

“We actually have locked up millions of dollars, not only in security deposit but also in prepaid rent,” he told the audience. “With the amount of deal flow that we have, that’s a lot of capital tied up.”

Maman is trying to restructure its deals for space as a result, proposing a guarantee for the first couple of years of a lease and working a rolling guarantee into deals following that period. Without that flexibility, tenants don’t have the capital they need to make the improvements to spaces that will bring in customers, Firestein said.

Landlord-tenant agreements are also moving more toward flexibility to take into account the uncertainty that has become the norm in recent years. Both parties are seeking out compromises on when tenants should start paying rent, with landlords as hamstrung by pandemic-era supply chain delays for new HVAC systems while tenants endure long wait times for fit-out items like kitchen equipment.

“Tenants are asking for certain protections on contingencies — permitting or getting a liquor license — are nonnegotiable,” Brandes said, adding that tenants won’t sign retail leases in busy areas where their only option for distinguishing their storefront is a decal rather than being able to furnish the exterior of the property.

But landlords are increasingly gaining an upper hand during negotiations. After a prolonged period of shrinking retail construction as e-commerce ate into revenues, retailers looking for space are finding fierce competition and shrinking availability. In addition to creating upward pressure on rents, the competition is also proving prohibitive for tenants looking for pop-up spaces to test locations or markets.

“The pool of space that's available on a short-term basis is shrinking,” Brandes said. “Some of these clicks-to-bricks companies or just other fashion brands are testing out markets by saying, ‘We only want to do a six-month to 24-month lease with a long-term extension.’ And the pool of space available for those brands is little to none.”

Retailers outside of fast fashion and clicks-to-bricks companies, who are more sure of their market, are increasingly seeking lease terms as long as 20 years, she said.

But even as the pandemic subsides, giving way to a busier in-person retail experience than experts predicted in the wake of e-commerce’s effect on the sector, experts on Bisnow’s stage said landlords are still facing difficulties.

Tight capital markets are making it more difficult for all sorts of businesses to build out new spaces, experts said, adding to competition for second-generation space, but landlords are also seeking higher rents because lenders are demanding more equity be put into improvements.

Location remains as important as ever, but pandemic-spurred changes to how and where people interact in person has changed which retail locations may be most sought after.

Ben Van Leeuwen, CEO and co-founder of Van Leeuwen Ice Cream, found that side-street stores worked best for his brand because they capitalize on consumer feelings of spontaneity and provide spaces where customers want to linger. By contrast, Lori Pellegrino, Chipotle’s lead real estate manager, found that the convenience of a corner spot worked well for the brand because it fit with the on-the-go rhythms that fast-casual diners are moving to.

But that shake-up means some landlords are sitting on empty retail spaces in the hopes of a high rent that may never come, said Jeff Mooallem, chief operating officer at Urban Edge Properties.

“Landlords have to get realistic about their values and about what the rents are. A lot of times, the landlord’s hands are tied on that because of their financing,” he said, adding that it’s hard for owners of retail spaces modeled on charging $300 per SF to go to their lenders when the space is now worth half that in the current market. “When you do see a lot of vacant space, sometimes it is simply because the bid and the ask haven't met up yet.”

The era of cheap suburban rents may also be over for some retail tenants, panelists said, with rents in some of the most in-demand suburbs reaching the same price as urban centers. The pandemic-era migration to Sun Belt cities and the suburbs led to increased demand for well-known brands in strip malls and suburban shopping destinations. But now some of that demand is shifting back to the cities as tenants seek the security of a higher volume of footfall to offset the rent prices they’re paying.

“In 2022, I would say that 60% of our business was happening outside of New York City,” Brandes said. “In 2023, 75 to 80% is back in New York City. People are aware of the strength of these dense urban markets. They’re not going away.”