March 11, 2009
Retailers Seek Rent Cuts
By Tom Ryan
Sleepy’s: the Mattress Professionals recently
sent out a letter to its 700 landlords across the East Coast requesting
a whopping 25 percent reduction in its rent payments. The request comes
as many stores across the country are also asking for and apparently getting
rent concessions from landlords to help deal with the downturn.
In the Dec. 31 letter obtained by The
New York Post, David Acker, president of the bedding chain, wrote: “To
ensure our future viability and growth, and to prevent Sleepy’s from
suffering a fate similar to that of many of its former competitors, unfortunately,
we have no choice but to reduce our base rent expense for 2009 by 25
percent.”
He noted, “Many retailers have either
filed for bankruptcy protection or simply closed their doors… the increasing
number of retail closures is forecasted to continue”
through 2009.
One “insider” told the Post that
the size of the request is typical fare for Mr. Acker. “This guy negotiates
the teeth out of any deal. This is something I would expect from him.”
Several landlords in the New York Tri-State
area that confirmed receiving the letter said they rejected the rent-reduction
proposal.
But an article in The Dallas Morning News finds
that retailers outside New York City are winning concessions as landlords
look to avoid dealing with empty space in a tough market. Tenants are getting
free rent, downsizing their space, renegotiating lease terms and receiving
more tenant improvement allowances. In some cases, leases are being renewed
earlier and for longer periods at better terms.
Dallas-based retail property manager Cencor
Realty Services meets for two days a month to scrutinize each shopping
center and retail tenants’ sales and financial statements, said chief executive
Herb Weitzman. It also will help arrange financing for some tenants and
help others sell their businesses.
“We want to help keep these tenants
alive,” Mr. Weitzman told The Dallas Morning News.
“We learned in the ’80s and ’90s what it cost – we burned up so
much money.”
Discussion Questions: Should all retailers
expect to be able to negotiate rent cuts this year? How might the pressure
for large-scale rent reductions affect shopping center operators?
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Sleepy’s course of action is one extreme; it’s a familiar negotiating tactic to raise expectations higher than what you realistically expect to gain. There is nothing wrong with retail tenants asking for concessions but they should expect to handle these on a case-by-case basis. Leases are legal agreements, after all, and shouldn’t be taken lightly unless a retail tenant is prepared to declare Chapter 11 bankruptcy.
A more reasoned approach to lower occupancy costs probably requires a case-by-case approach. What are the vacancy rates in the particular development where concessions are needed? Has the landlord lowered lease rates for other tenants? Does a cost-benefit analysis show the developer that lower lease rates provide a win-win outcome by helping the retailer stay viable? A nuanced, well-researched approach to the issue of lower rent expense may pay more benefits than the more blunt tactics of Sleepy’s.
Unfortunately many (most?) retailer-landlord relationships are adversarial which only creates lose-lose negotiation results. The forward-thinking retailers and landlords have proactively reached out to each other to discuss how to weather this storm together. Rent reductions must be considered on a case by case basis, taking into account the trends in traffic and spending.
A typical win-win result is a temporary reduction in rents tied to traffic and spending trends with key milestone dates for review. It is reasonable for the retailer to request temporary relief while traffic and spending remain tough. It is also reasonable for the landlord to see the retailer’s financials to verify the situation.
The message is to aggressively negotiate in a manner that ensures the relationship is solid for the long-term benefit of both landlord and retailer.
What’s wrong with trying and giving a discount? In a perfect world were we all look out for each other, landlords will reduce rents to ensure the tenants survive. Maybe they can provide some vehicle by which tenants can demonstrate need and qualify for discounts to their rent…that kind of pro-active marketing activity would bring out loyalty to the development group. Look, everybody is hurting today, maybe if we can share and balance the hurt, it won’t hurt so bad. We are all in this together.
Aren’t the many/most/(nearly)all of retail landlords who receive a percentage of sales (rental payment) already effectively seeing a “rent reduction”?
To build on an earlier remark about tenants opening their books, I wonder how many sides of the mouth we will see them talking out of: telling banks/investors/media “doing just fine” while telling landlords/employees/creditors “barely hanging on”!
A piece on the Retail Traffic website today discusses how shopping center tenants are teaming up to collectively renegotiate lease terms putting even more pressure on landlords.
“…And the dominoes continue to fall in a chain reaction….” Another bit of news for the complex economic puzzle and predicament we are in at the moment. As retail outlets continue to close their doors and others just never get off the ground, the value of the store front inventory will continue to slide.
Just as in housing, the commercial real estate market is in trouble. If I were a business owner, whether with one store or thousands, I would be at least attempting to re-negotiate the leases. At a minimum, as they expire. Because in some cases, every retailer has leases expiring in each month. I would try on each one, except for possibly stores I know I will be closing. Nothing to lose except some fixed costs.
Reduced occupancies and a tremendous downturn in all businesses will require that smart landlords decrease their rent to keep their buildings as active and vibrant as possible. A rented building, even at lower rates is better than an empty one. Occupancies will continue to decrease, BKs will increase and these will result in more vacancies unless rates drop ahead of the curve.
The first step in getting discounts is to ask for them. Smart businesses will be looking for every opportunity to, as one retail president said to me recently, “rip the *#&@ out of infrastructure costs.”
It is not as simple as Sleepy’s would like it to be. A landlord that is fully rented will not care or respond. A landlord with many dark buildings may enter into discussions. Last year, approximately 8,000 retail stores went dark. This year the projection is 10,000 stores closing. Coupling this with a reduction in expansion for most retailers sets up a tough couple of years ahead for landlords.
If a retailer is faced with going out of business or cutting costs, why wouldn’t he look for a reduction in rent? The current economic slump is rewriting many traditional business relationships. Why shouldn’t rent be one of the impacted relationships?
As my mother use to say, “It never hurts to ask.” Then again I remember her using that saying when the real answer was no.
I would agree with Richard, that these should be done on a case by case basis. I would expect the same from landlords too. I’m working with one very smart and progressive landlord and they’re looking at them on a case by case basis. Why give a break to a retailer who isn’t going to be making it or doesn’t need it?
I would also point out that landlords only raise rents when negotiating a new lease and not in the middle of one.
It’s already happening. Many long-time well-established real estate investment trusts are being pushed toward bankruptcy. Retailers are always looking to get the lowest rental rates. Now in mid-lease, the terms are changing the same way home owners are renegotiating their mortgages. I’m seeing more and more supermarket operators asking for free rent for several years before they agree to even open in distressed properties.
Landlords have never been known for being of great assistance to their tenants at the best of times. And while it could be said there’s nothing wrong with a little greed, it should be understood that occupied spaces pay better than empty ones.
With that, landlords should step up to the plate and make sure they are making it as easy as possible for tenants to remain.
If you don’t ask you will not receive. If you do not ask you have an automatic NO.
How much to ask for is a question you need to ask yourself and you need to be able to put up a good argument as to why someone who you have a contract with should change the terms of the agreement. What would you do as a tenant if the landlord came to you in the middle of the lease period and said I am going to raise your rent 25 percent because times are good?
Many landlords will work with tenants if they think there is something in it for them.
There’s an old saying that everything is negotiable. So why not commercial lease terms? If Sleepy’s feels it has leverage at this moment, it may choose to apply it and accept both the positive and negative consequences of that choice. Landlords are free to call the bluff, offer temporary promotions, or reduce base rents.
Economists may well worry that this brings undesirable deflationary pressure. And real-estate investors may feel some pain. But consumers may also see a slightly sharper price on their bedding next time out, and that may contribute (in a small way) to a rebound in spending.
I’m in Carmel–by-the-Sea, CA, a higher-end resort community. Rents here are some of the highest in the state, due to limited supply and high barriers to entry. As a result of the economy, there are many retail vacancies currently, and many retailers are going to their landlords asking for major concessions, which in many cases are being granted. I have seen “rent vacations” for new and existing tenants for up to six months, plus rent reductions of 25-40%. One tenant is currently negotiating a 60% reduction, and is expecting to get it.
It is a question of supply and demand. The best real estate will have to offer less incentives to renew leases. The marginal real estate will go vacant for some period of time. Underperforming leases have less value.
In the good times, landlords will raise rents so why not ask for rent breaks now?
I assume that retailers who seek rent relief are:
1. willing to disclose their books;
2. agree to rent increases when the economy turns around.
Landlords cannot have it each way, in good times they charge to get into spaces, in bad times they need to offer incentives to keep paying tenants. Stop with the poor mouth already, landlords are already negotiating with their lenders for reduced payments on their loans, why shouldn’t tenants with landlords?
Sleepy’s idea of a blanket letter is good, all he has to show to some stubborn landlords is an agreement from one or two landlords to his request and the rest will follow.
Although mall lease contracts are supposed to be confidential, sometimes details filter out through indiscretions. That’s how I found out that, while I was paying full rent for a 740 sq.ft. store in a side wing, a major retailer paid only common area cost for occupying 6,200 sq. ft. on the main drag, over several years. My application for rent reduction was rejected even though mall traffic declined by 65% during my tenancy and more than 50% of all spaces were empty at last count, with many of the remaining spots rented on a month-to-month basis.
Needless to say, I converted my jewelry store to a destination type and moved to a street location without the hassles of long opening hours, of school kids killing time, of percentage rents and high overhead.
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Sleepy’s course of action is one extreme; it’s a familiar negotiating tactic to raise expectations higher than what you realistically expect to gain. There is nothing wrong with retail tenants asking for concessions but they should expect to handle these on a case-by-case basis. Leases are legal agreements, after all, and shouldn’t be taken lightly unless a retail tenant is prepared to declare Chapter 11 bankruptcy.
A more reasoned approach to lower occupancy costs probably requires a case-by-case approach. What are the vacancy rates in the particular development where concessions are needed? Has the landlord lowered lease rates for other tenants? Does a cost-benefit analysis show the developer that lower lease rates provide a win-win outcome by helping the retailer stay viable? A nuanced, well-researched approach to the issue of lower rent expense may pay more benefits than the more blunt tactics of Sleepy’s.
Unfortunately many (most?) retailer-landlord relationships are adversarial which only creates lose-lose negotiation results. The forward-thinking retailers and landlords have proactively reached out to each other to discuss how to weather this storm together. Rent reductions must be considered on a case by case basis, taking into account the trends in traffic and spending.
A typical win-win result is a temporary reduction in rents tied to traffic and spending trends with key milestone dates for review. It is reasonable for the retailer to request temporary relief while traffic and spending remain tough. It is also reasonable for the landlord to see the retailer’s financials to verify the situation.
The message is to aggressively negotiate in a manner that ensures the relationship is solid for the long-term benefit of both landlord and retailer.
What’s wrong with trying and giving a discount? In a perfect world were we all look out for each other, landlords will reduce rents to ensure the tenants survive. Maybe they can provide some vehicle by which tenants can demonstrate need and qualify for discounts to their rent…that kind of pro-active marketing activity would bring out loyalty to the development group. Look, everybody is hurting today, maybe if we can share and balance the hurt, it won’t hurt so bad. We are all in this together.
Aren’t the many/most/(nearly)all of retail landlords who receive a percentage of sales (rental payment) already effectively seeing a “rent reduction”?
To build on an earlier remark about tenants opening their books, I wonder how many sides of the mouth we will see them talking out of: telling banks/investors/media “doing just fine” while telling landlords/employees/creditors “barely hanging on”!
A piece on the Retail Traffic website today discusses how shopping center tenants are teaming up to collectively renegotiate lease terms putting even more pressure on landlords.
“…And the dominoes continue to fall in a chain reaction….” Another bit of news for the complex economic puzzle and predicament we are in at the moment. As retail outlets continue to close their doors and others just never get off the ground, the value of the store front inventory will continue to slide.
Just as in housing, the commercial real estate market is in trouble. If I were a business owner, whether with one store or thousands, I would be at least attempting to re-negotiate the leases. At a minimum, as they expire. Because in some cases, every retailer has leases expiring in each month. I would try on each one, except for possibly stores I know I will be closing. Nothing to lose except some fixed costs.
Reduced occupancies and a tremendous downturn in all businesses will require that smart landlords decrease their rent to keep their buildings as active and vibrant as possible. A rented building, even at lower rates is better than an empty one. Occupancies will continue to decrease, BKs will increase and these will result in more vacancies unless rates drop ahead of the curve.
The first step in getting discounts is to ask for them. Smart businesses will be looking for every opportunity to, as one retail president said to me recently, “rip the *#&@ out of infrastructure costs.”
It is not as simple as Sleepy’s would like it to be. A landlord that is fully rented will not care or respond. A landlord with many dark buildings may enter into discussions. Last year, approximately 8,000 retail stores went dark. This year the projection is 10,000 stores closing. Coupling this with a reduction in expansion for most retailers sets up a tough couple of years ahead for landlords.
If a retailer is faced with going out of business or cutting costs, why wouldn’t he look for a reduction in rent? The current economic slump is rewriting many traditional business relationships. Why shouldn’t rent be one of the impacted relationships?
As my mother use to say, “It never hurts to ask.” Then again I remember her using that saying when the real answer was no.
I would agree with Richard, that these should be done on a case by case basis. I would expect the same from landlords too. I’m working with one very smart and progressive landlord and they’re looking at them on a case by case basis. Why give a break to a retailer who isn’t going to be making it or doesn’t need it?
I would also point out that landlords only raise rents when negotiating a new lease and not in the middle of one.
It’s already happening. Many long-time well-established real estate investment trusts are being pushed toward bankruptcy. Retailers are always looking to get the lowest rental rates. Now in mid-lease, the terms are changing the same way home owners are renegotiating their mortgages. I’m seeing more and more supermarket operators asking for free rent for several years before they agree to even open in distressed properties.
Landlords have never been known for being of great assistance to their tenants at the best of times. And while it could be said there’s nothing wrong with a little greed, it should be understood that occupied spaces pay better than empty ones.
With that, landlords should step up to the plate and make sure they are making it as easy as possible for tenants to remain.
If you don’t ask you will not receive. If you do not ask you have an automatic NO.
How much to ask for is a question you need to ask yourself and you need to be able to put up a good argument as to why someone who you have a contract with should change the terms of the agreement. What would you do as a tenant if the landlord came to you in the middle of the lease period and said I am going to raise your rent 25 percent because times are good?
Many landlords will work with tenants if they think there is something in it for them.
There’s an old saying that everything is negotiable. So why not commercial lease terms? If Sleepy’s feels it has leverage at this moment, it may choose to apply it and accept both the positive and negative consequences of that choice. Landlords are free to call the bluff, offer temporary promotions, or reduce base rents.
Economists may well worry that this brings undesirable deflationary pressure. And real-estate investors may feel some pain. But consumers may also see a slightly sharper price on their bedding next time out, and that may contribute (in a small way) to a rebound in spending.
I’m in Carmel–by-the-Sea, CA, a higher-end resort community. Rents here are some of the highest in the state, due to limited supply and high barriers to entry. As a result of the economy, there are many retail vacancies currently, and many retailers are going to their landlords asking for major concessions, which in many cases are being granted. I have seen “rent vacations” for new and existing tenants for up to six months, plus rent reductions of 25-40%. One tenant is currently negotiating a 60% reduction, and is expecting to get it.
It is a question of supply and demand. The best real estate will have to offer less incentives to renew leases. The marginal real estate will go vacant for some period of time. Underperforming leases have less value.
In the good times, landlords will raise rents so why not ask for rent breaks now?
I assume that retailers who seek rent relief are:
1. willing to disclose their books;
2. agree to rent increases when the economy turns around.
Landlords cannot have it each way, in good times they charge to get into spaces, in bad times they need to offer incentives to keep paying tenants. Stop with the poor mouth already, landlords are already negotiating with their lenders for reduced payments on their loans, why shouldn’t tenants with landlords?
Sleepy’s idea of a blanket letter is good, all he has to show to some stubborn landlords is an agreement from one or two landlords to his request and the rest will follow.
Although mall lease contracts are supposed to be confidential, sometimes details filter out through indiscretions. That’s how I found out that, while I was paying full rent for a 740 sq.ft. store in a side wing, a major retailer paid only common area cost for occupying 6,200 sq. ft. on the main drag, over several years. My application for rent reduction was rejected even though mall traffic declined by 65% during my tenancy and more than 50% of all spaces were empty at last count, with many of the remaining spots rented on a month-to-month basis.
Needless to say, I converted my jewelry store to a destination type and moved to a street location without the hassles of long opening hours, of school kids killing time, of percentage rents and high overhead.