Redefining the Bond Between Merchants and Property Owners
The retail sector has been undergoing significant changes in its relationship with landlords, with a newfound emphasis on transparency and collaboration. Retailers are now sharing more details about their operations, fostering a sense of partnership rather than antagonism.
The COVID-19 pandemic has accelerated the growth of e-commerce, causing store fleets to be further rationalised and taking a greater share of sales. As a result, retailers like Macy's, Gap Inc., and Francesca's have been forced to permanently close hundreds of stores.
This shift has led to financial challenges for retailers, resulting in measures such as furloughs, layoffs, and increased e-commerce. Landlords, too, have felt the impact, with occupancy levels expected to decline. Occupancy levels are anticipated to bottom in the first half of 2021, and backfilling vacant spaces will take time and capital.
Amidst these challenges, some landlords have been more flexible on lease terms, offering rent abatements to retail tenants. However, disputes over rent payments have also occurred during the pandemic, with some landlords taking retail tenants to court.
The pandemic has also led to a reshaping of lease lengths, with the new normal expected to be less uniform and more tenant-specific. Furthermore, force majeure clauses may be renegotiated in future leases to include pandemics.
Interestingly, no specific chain of real estate developers filed for insolvency in 2020. However, a company related to caravan centers, Gast-Caravaning-Bausch GmbH, was formed in 2020 following a merger, but there is no indication of insolvency.
The federal government may also play a role in underwriting the risk of pandemics in future leases. Landlords may need to insure over the risk of pandemics in future leases as well.
In the wake of these changes, retailers are scrutinising their leases more closely and better understanding them. Percentage rent, where a retailer pays a base rent plus a percentage of their revenue, may be making a comeback due to the pandemic.
Two mall landlords, CBL and PREIT, filed for bankruptcy in the fall of 2020, highlighting the challenges faced by the retail sector. However, tenant retention remains key for both retailers and landlords, with ongoing rental assistance expected in the form of deferrals and abatements.
The SNL U.S. REIT Retail Shopping Center Index's return was down 26.9% and the SNL U.S. Retail REIT Enclosed Malls Index's return was down 34.7% in 2020, reflecting the overall struggles faced by the retail real estate market.
As the retail sector navigates these challenging times, it is clear that the relationship between retailers and landlords is evolving, with both parties working together to find solutions and adapt to the changing landscape.
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