Commercial real estate landlords have recently had no choice but to agree to billions of dollars in rent relief to struggling tenants to keep occupancy rates from decreasing during the COVID-19 pandemic, The Wall Street Journal reports. Landlord concessions have included lengthening payment terms, extending or shortening leases, permanent rent decreases and forgiving past-due payments.
Making such concessions is not ideal for landlords, but it’s a better alternative to tenants leaving altogether. Keeping a tenant, even if it is paying less rent keeps the property occupied and offers some semblance of cash flow. A vacancy is more punitive financially, especially during a pandemic when there’s no telling how long it would take to replace the tenant.
“In light of the pandemic, people are worried about empty stores and worried about traffic in their malls,” Saul Burian, managing director at investment bank Houlihan Lokey Inc told The Wall Street Journal. “Some are even worried about hitting thresholds of vacancies that could have other consequences either with respect to other tenants, or with respect to their debt.”
Keeping tenants happy and in place is the key to success during the Pandemic
Landlords who don’t have a replacement tenant on hand may find themselves at a disadvantage if a current tenant needs rent relief. Real Estate advisor firm A&G Real Estate Partners said it’s saved its clients approximately $1.7 billion through lease negotiations during the first nine months of 2020. These negotiations included decreased rents on more than 9,000 leases and 950 terminated leases for almost 60 restaurants, retailers, office tenants, fitness and entertainment operators and more. The firm secured concessions from 77% of the landlords it negotiated with, compared to 50% in prior years.
“Landlords have become more realistic. Their lenders have become more realistic. Therefore, we’re able to get rent concessions,” Andy Graiser, A&G’s co-president told The Wall Street Journal.
“Landlords will do what is in the landlord’s best interest,” added corporate advisory firm M-III Partners LP Managing Partner Mohsin Meghji. “But landlords have never been and are not going to sort of give away rent reductions out of the goodness of their hearts.”
CRE vacancies, unpaid rent figures continue to rise
Almost 91% of retail tenants were current on their rent in March, just as COVID-19 lockdowns were starting to occur—that figure fell to 54% in April, according real-estate business-intelligence company Datex Property Solutions. Retailers began to get back on track with rent payments during the summer and the number got back to 85% in November.
CRE statistics still look bleak despite the rent payment rebound, however. Industry analysts expect vacancies to continue to increase—the rate was between 5.3% and 5.5% at the end of 2020, but could reach up to 6.2% by end of this year. Meanwhile, average retail rents were increasing at more than 2% per year, pre-pandemic, but could fall between 1% and 3% year over year in 2021. Additionally, more than 60 major retailers filed for bankruptcy in the United States last year and announced plans to close more than 12,000 stores, which would leave approximately 159 million square feet of retail space vacant.
“What’s happening in the market is most definitely going to cause an overall devaluation of real estate across the country,” Matthew Bordwin, principal and managing director at real-estate brokerage Keen-Summit Capital Partners LLC told The Wall Street Journal. “There is so much pain in the marketplace. Every business that I speak to is now looking at their real-estate footprint to see how they can reduce costs. The landlords are getting calls from so many people that they can’t help everyone.”
Landlords feel the pinch—to varying degrees
Tenants’ struggles to pay rent can quickly become landlords’ struggles. While Simon Property Group saw its lease income fall 16%, the company’s income was still $3.27 billion. Smaller mall owners like CBL & Associates Properties and Pennsylvania Real Estate Investment Trust weren’t as fortunate—they were forced to file for bankruptcy when their tenants couldn’t meet their obligations.
“After all, the landlord still has to pay its lender and maintain its overhead,” Datex CEO Mark Sigal said. “Everyone has a check to write.”
Joe Dyton can be reached at firstname.lastname@example.org.