Retail Landlords And Tenants Want Creative Lease Deals, But Lenders Aren’t So Sure
Through the worst of the pandemic, creative thinking for retailers and their landlords became the key to survival. But on flexible deals and lease terms, some lenders will still need convincing.
“We thought at the outset of Covid that we were going to be doing all kinds of creative percentage-rent deals and landlords were going to do whatever it took to get these spaces leased,” Lee & Associates NYC co-founder Peter Braus said Tuesday at Bisnow’s National Retail Summit.
“Everyone found that was not the case because their lenders really pushed back and said, ‘You know, I just, I can't figure that one out. I need you to go to another base, right, even if it's a weaker base rent.”
The pandemic, along with mandated store closures and travel bans, wreaked havoc on retail operations of all stripes, in many cases creating major acrimony between retailers and landlords. In places like New York City, a troubled retail environment was accelerated, with vacancies soaring and rents plummeting in some of the toniest shopping districts in the city. The disruption provided opportunities: In some cases, retailers were able to pounce on falling values to buy retail assets of their own, and new retailers began taking space again in a cheaper leasing environment.
Now, as cities try to work their way back to normality, property owners are trying to find ways to bring fresh retail concepts to fill spaces and inject excitement into their projects. But often those tenants are digital-native brands, operations that don't want to commit to long-term leases, don’t have high credit or aren’t yet proven concepts. And the banks that hold debt on buildings are still calling the shots.
“This really comes back to the lenders; how flexible are they willing to be in allowing their property owners to cut deals that are nontraditional?” Eric Menkes, the co-chair of the leasing practice at Duval & Stachenfeld, told the audience.
Landlords and their lenders have typically favored tenants with strong credit that were willing to sign on for a long-term deal. But the pandemic upended assumptions about which tenants are a safe bet.
Equinox co-President and Chief Development Officer Jeff Weinhaus said the pandemic brought unprecedented challenges for the high-end fitness club operator.
“We have been doing this for 20 years, with 300-plus landlords and prided ourselves on developing really strong relationships, paying rent on time, being a very important anchor amenity for projects," Weinhaus said. "And then we went to be completely shut down for six months in New York City, 12 months in Los Angeles, with the inability to honor our obligations in full."
He added that 80% of Equinox's landlords were understanding, while 20% were not.
“20% of 300 is a lot, way too much, and created a tremendous amount of chaos and confusion," Weinhaus said.
Last month, landlord Savanna sued Equinox Group for nearly $5.3M, alleging unpaid rent at two separate locations in New York City. Multiple other landlords have sued the company for missing rent payments, and in October a New York appeals court judge ordered the firm to pay back some $450K in back rent owed at its 670 Broadway location.
It wasn’t the only legal dispute between big-name retailers and landlords. Victoria’s Secret sued in an attempt to get out of one of its leases in New York, for example, though it was not successful. Valentino took its landlord to court in an attempt to leave its Fifth Avenue store in 2020 — a matter that settled this week and resulted in the luxury designer terminating its lease at 693 Fifth Ave.
“I feel like we will be able to repair this relationship over time, but it's been the most challenging part of my job for the last few years; negotiating, restructuring and concessions and abatements," Weinhaus said. "It’s disgusting stuff that you talk about when you've had such a great run of success, profitability and relationship building."
Landlords' focus and commitment to strong credit tenants have dulled the retail makeup in the city, Lee & Associates' Braus said. This phenomenon has also occurred in other major East Coast markets such as D.C.
“New York has become much more bland over time, I think that has a lot to do with this pursuit of credit and a lot of landlords overleveraging their properties,” Braus said.
He said his office is doing more cannabis business deals, but it is only owners with no debt on their building that can take them on.
“If you have a landlord who has any kind of significant debt, any kind of institutional debt, credits can be a much bigger issue for them,” Braus said. “And unfortunately, that's really strained the creativity, I think, of this city.”
Jay Norris, the co-founder of Guesst, said that digitally native brands can't afford to do advertising like they used to, so they have come to see physical stores as another channel for revenue.
Norris' company provides sales data by plugging into tenants’ point of sale systems. The performance data allows property owners greater insight into merchants’ sales performance in order to all tenants and landlords to effectively reach flexible lease terms and arrangements.
“Our first question [to property owners] was, ‘How are you getting sales?’ — They said, ‘Well, a napkin?’” He added. “So that's one reason why we figured we Okay, guys, we need to lean in here … And create more sales intelligence so that this data can be more meaningful. And you guys can make better qualified decisions.”
For Lori McGhee-Curtis — the vice president of specialty leasing at Taubman who focuses on temporary spaces, pop-ups and direct-to-consumer brands – there is extra work in the negotiating of leases to try and help retailers thrive and survive. She is also involved in a new brand called Emerge aimed at startup companies and local entrepreneurs, and she said she is seeing a shift in the deals that are being struck.
“I don't think you see as many 10-year leases as you do five-to-seven. I think you see more with the [direct-to-consumer] brands, we're seeing more in two-to-three year,” she said. “Maybe it's not even a lease, maybe it's a license agreement, where there's a little bit more flexibility, than with the lease, and you also see different rental terms as well.”
Jamestown Chief Operating Officer David Himmel said that coming out of the pandemic the deals that are getting done are health and wellness tenants, small local businesses and digital-first brands.
“I think percentage-rent deals are continuing to be more common,” he said, adding that shifting retail environments may well reshape how retail assets are financed.
“You can envision a world in the future where you have a different finance model that looks a little closer to how multifamily is financed. If you're looking to more modular build-outs and shorter-term leases, you should be able to finance shorter-term leases.”
Update, APRIL. 7 2:30 P.M. ET: This story was updated to add comments from Jay Norris.