Don't Expect a Retail Rent Break — Unless You're a Struggling Chain
It may seem unfair, but big names like Macy's have more bargaining power than chains with smaller footprints.
February 28, 2020 at 03:16 PM
4 minute read
Struggling retailers like Macy's, Pier 1 Imports and Forever 21 are said to be asking for lower rents — and getting their way — as store owners and their landlords respond to swift shifts in the brick-and-mortar retail world.
"This is how the game is played. When this starts happening, they all just start asking for rent reductions. That's what they do," retail landlord representative Katy Welsh said. So far it's "maybe rumblings and it is not a common conversation but it's coming. You can feel it coming."
The retailers won't say if they are pursuing rent breaks. Macy's declined to say, while Pier 1, Sears and Forever 21 didn't return requests for comment. Simon Property Group, the biggest name in shopping malls with some of the financially ailing retailers as tenants, also didn't say.
But Welsh, a Colliers International senior director for retail services in Boca Raton, noted the same thing happened during the Great Recession.
Another retail expert and a bankruptcy attorney agreed it makes sense for stores to ask for rent breaks and for landlords to grant them.
"I would do it," said Ben Mandell, who heads a retail investment company with none of the bankrupt store chains in his properties.
Sears, Pier 1 and Forever 21 sought bankruptcy protection. Macy's, the largest department store chain by market share, isn't in Bankruptcy Court but announced plans in February to close 125 stores.
Mandell noted landlords can face other losses if mall anchors go dark. Some smaller tenants "have a co-tenancy provision. If the anchor goes dark and is no longer open and operational, the co-tenants can terminate their lease."
Mandell, who is co-founder and managing director of Miami's Tricera Capital, said the opportunity to renegotiate a lease gives a landlord more pull. They could smooth a clause they weren't comfortable with in exchange for rent relief.
"I would start getting the total gross sales for the last three years, and then go through the lease document and see what item I could use as a trade," he said.
Welsh said a common trade is adding a provision to allow landlords to end leases early and on short notice.
"Now the landlord controls the box. They already control the dirt, and they can start repositioning the asset as the industry continues to evolve. It's really just a win-win situation," she said. "The tenant gets to stay open, they get to reduce their operating expenses, which hopefully will help them."
Requests for rent cuts aren't coming just from the big-box stores. At Vero Beach's Indian River Mall, tenants other than Macy's want a reprieve, said Welsh, who does the mall's leasing. She declined to say how many and which tenants have asked for the breaks at the mall where Macy's is closing.
Welsh cautioned mom-and-pop businesses against asking for rent breaks. They might end up losing prime retail space to the landlord.
"Macy's knows what they are getting into," she said. "They are big players in the market, and they are aware that the landlords are trying to reposition, shopping the box."
Finally, lease renegotiations now save landlords, said attorney Aleida Martinez Molina.
Once a tenant files for bankruptcy protection, landlords could end up with hefty bills.
"The landlords/malls understand that these concessions in the long run are less costly to them than a Chapter 11 reorganization of such significant tenants," said Martinez Molina, partner at Weiss Serota Helfman Cole & Bierman in Coral Gables. "Once a Chapter 11 bankruptcy reorganization case is filed, a landlord's rights pursuant to a lease are subject to complex U.S. Bankruptcy Code sections, which ultimately allow the tenant to reject or essentially renegotiate a lease. Landlords not only stand to lose the pre-bankruptcy control they exert but inevitably incur substantial fees, expenses and opportunity costs."
Of the many struggling retailers, Pier 1 is the latest retailer seeking reorganization in February. It's closing store at Pompano Citi Centre in Pompano Beach, 3470 S. University Drive in Davie and six other Florida stores.
Forever 21 filed last September and announced closures at Miami Beach's Lincoln Road, Palm Beach Gardens' The Gardens Mall and Pembroke Pines' Pembroke Lakes Mall. Five other Florida locations have closed or will close.
Macy's Inc., the parent company of Macy's and Bloomingdale's, closed the Bloomingdale's at The Falls near Pinecrest. Next on the chopping block are the Macy's at Pompano Beach's Pompano Citi Centre, Indian River Mall and Sanford's Seminole Towne Center.
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