CoStar Highlights Several Cases of Tenants Seeking Rent Relief, Landlords' Varying Responses and Experiences of Leasing and Tenant Rep Brokers
Faced with a deepening recession and declining shopper spending, retail chains are increasingly exerting public pressure on landlords to renegotiate leases to achieve rent cuts and other concessions, warning they could be forced to join the growing list of retailers closing stores unless their contracts are amended.
For example, Pier 1 Imports, Inc. (NYSE: PIR
) on Feb. 3 announced a plan it described as designed to "meet the challenges of the current environment and to position itself for optimum performance in a post-recession economy." The furniture and home accessories retailer said it has already begun, via the services of Melville, NY-based DJM Realty, to open talks with landlords to "achieve rental reductions across the chain." The company then warned that if such rental reduction negotiations were unsuccessful, it would terminate the leases of up to 125 stores.
Seizing the opportunity, tenant representation brokers are issuing some public advice of their own.
"Companies can find a silver lining in today's volatile economy," said Doug Haynes, managing principal with tenant representation firm Cresa Partners. He labeled the era officially a "tenant's market" and advised tenants to exercise the greater control they now have "in dealing with landlords who desperately want to hold onto credit-worthy tenants" during negotiations for new lease terms, lower rental rates, expiration rights, new tenant improvements and other concessions.
Pier 1 isn’t alone. Following is just a sampling of retailers that have made their lease renegotiation efforts public, along with some commentary from retailers and their landlords -- and their property disposition, tenant rep and lease restructuing specialists -- on the degree of success they’ve have had in reducing occupancy costs.
Gap isn't just trying to reduce rent paid for its stores, it's trying to do so by reducing its store square footage by 10% to 15%, which also results in additional vacant space for landlords. In its most recent quarterly conference call with analysts, Gap Chairman and CEO Glenn Murphy, commented on the casual apparel retailer's progress in negotiating with landlords.
The company has a renegotiation team that is leveraging Gap's "good position" as a retailer with 40 million square feet of store space that is "dependable," has a "strong balance sheet" and has "never defaulted" on any of its leases, said Murphy. "Landlords are really trying to hold on to people like us … but we have to be firm on our negotiations," he added.
In a Jan. 15 management presentation, women's apparel retailer Chico's FAS announced a formal real estate strategy to "pursue occupancy cost reductions" in order to increase profitability and productivity. Management is conducting a store-by-store review of the chain’s lease portfolio, ranking opportunities based on the level of success it expects it could have in rent relief.
To back up its requests, Chico's said it will conduct CAM audits and research leases for any opportunities that exist to remedy leases based on existing co-tenancy clauses. Chico’s also plans to reduce rent at some stores simply by reducing square footage. The company has 340 store leases up for renewal through 2011. Fourteen days following this presentation, Chico's added that its ongoing evaluation of underperforming stores "may result in the eventual closing of as many as 25 stores."
In its most recent quarterly conference call with analysts in October, Office Depot commented on its level of success in backing out of signed leases for new stores. Steve Odland, the office supply retailer's chairman and CEO, said that while the company has "worked aggressively" to reduce its new store openings plans, it is "still sitting on about 40 planned openings" for 2009.
"Those are all committed leases. We have done the analysis of the financials on trying to get out of the lease versus opening it, and right now they all come back to that it’s more financially astute to open those sites," he said. However, Odland warned that Office Depot is still working to reduce that number and said it is looking at whether it makes sense to keep some stores dark, "even though they’re signed and pay the rent for some period of time until the economy picks back up."
Apparently, this public warning gave Office Depot some additional leverage with landlords. On Dec. 10, 2008, the company said it had negotiated backing out of 20 more new store leases. Additionally, the retailer announced the closing of 126 existing stores and six distribution centers.
Sports footwear and apparel retailer, The Finish Line, issued a warning in its January conference call that it is "willing to close unprofitable stores in cases where it can't mutually agree" on terms with its landlords. Like others, Finish Line has commenced negotiations with landlords to downsize some larger stores, as well as "negotiate terms that work for both us and our landlord," said Steve Schneider, president and COO. The retailer said 40% of its stores have leases that are either expiring or hitting "kick-out" provision dates in the next 12 to 15 months.
Schneider said that where kick-out clauses exist, Finish Line has even more leverage. "In those cases, we’ve been batting a pretty high percentage...of getting the landlord to come up with the minimal lease terms that make sense for both of us. In many of these cases, what may happen is that we push the kick out clause one, two or three years and go to some kind of alternative rent," -- usually percentage rent or a lower number, he said.
Schneider said that Finish Line planned to close 20 to 30 stores over the next five quarters, but warned, "If the landlords get really difficult then that number could go up some."
CHRISTOPHER & BANKS
In a Jan. 7 quarterly conference call, Christopher & Banks' SVP of planning & allocation, Monica Dahl, said the company's VP of real estate, "has worked diligently and aggressively throughout the year to reduce occupancy costs," and has been "able to impact about 16% of our store base by working to renegotiate lease terms more favorably." In part, rent reduction has been achieved through the company invoking existing co-tenancy clauses.
COMMENTARY ON TENANTS' LEASE RENEGOTIATION EFFORTS
REAL ESTATE DISPOSITION / LEASE RESTRUCTURING FIRMS
EXCESS SPACE RETAIL SERVICES
Excess Space Retail Services (ESRS) specializes in real estate disposition and lease restructuring for retailers. Michael Burden, a principal with the firm, said, "most retailers are taking an approach to do whatever is necessary to be able to survive to fight another day. In particular, controlling and/or reducing occupancy costs becomes a crucial element for survival. With the increasing vacancy rates and decreasing market rents, retailers want to be sure they are not overpaying for their leases."
With the caveat that landlords are by no means "in the charity business," Burden said that landlords are considering their tenants’ lease renegotiation requests," especially if keeping the tenant is in the landlord's own long-term best interest.
Neither party has the "upper hand," in negotiations right now, said Burden. "The landlord will typically require something of perceived value in return for a rent reduction. For instance, the tenant may exercise an option or extend term early, in return for immediate rent relief. Similarly, if a store is significantly underperforming, the retailer may be forced to go dark. The landlord, by offering rent relief, will in return, receive a commitment from the retailer to continue to operate for a period of time."
Burden warned that retailers must tread carefully in these matters, "In order for a retailer to be successful in these negotiations, they must put together a very structured program, giving forethought to each and every lease they want to renegotiate. Landlords do not look kindly upon broad stroke attempts by retailers to reduce rent across their entire portfolio, simply to take advantage of the current state of the economy."
"We have seen a significant increase in retail tenants looking to lower their occupancy costs through lease renegotiations, as rapid changes in the economy have challenged retailers to change their business operations and reflect on ways to cut costs," said Andy Graiser, Co-President of retail real estate disposition and advisory firm, DJM Realty. "In 16 years, I've never seen anything like this and I don't see it ending anytime soon," he noted.
"Landlords will generally work with the retailer and allow the tenant to pay reduced rent in order to avoid a vacancy, but it requires a mutual trust between both parties," said Graiser, stressing that in order for a landlord to determine if a retailer is viable, tenants must be transparent and relationships are important. "Landlords asses the situation, and in certain cases, work with the tenant; but because landlords are being burdened with requests from tenants, coupled with their own cash flow and lender issues, the negotiations are never easy," Graiser concluded.
HILCO REAL ESTATE
Nina Kampler, EVP of strategic retail and corporate solutions for Hilco Real Estate said tenants seeking to renegotiate leases has "become much more common. It’s the hot button for all retailers today and everyone is jumping to capitalize on this trend. The market is being reset. It’s a tenant's market. Landlords are working harder to retain their tenants. Tenants are struggling, so they're looking to shave their occupancy costs, which is a huge part of the expense structure of vertical retailers."
Kampler added that landlords' responses to retailers' rent reduction requests are varying widely, depending on the specific facts surrounding a tenant. To make the decision, landlords evaluate if the tenant is a "retailer with a viable future that the landlord wants to reinvest in," essentially deciding whether the retailer "is a temporary victim of the deteriorating economy that will emerge as the category survivor" that it wants to keep in its portfolio. Or, on the opposite side, the landlord may reject a request if it sees the retailer as company that has "been through several prior reincarnations and has already used up its nine lives," said Kampler.
"A retailer who can play to its strengths, leverage its renewals and extension opportunities, its co-tenancy clauses, its renovation and reimaging needs, will be more successful than the retailer who is merely begging the landlord to, in effect, become his bank," warned Kampler.
RCS REAL ESTATE
Mitchel S. Friedman, senior vice president at RCS Real Estate Advisors, which provides lease restructuring services to retailers, said, "We are being inundated with requests from retailers to seek rent relief. We expect this trend to continue and increase for the foreseeable future. Landlords are viewing every situation on a case by case basis, but relief is available for the right situations. Since each negotiation is situation specific, it is hard to say who has the leverage."
Keen Consultants, KPMG Corporate Finance's real estate division, represents companies in lease renegotiations and dispositions. Matthew Bordwin, managing director and national group head of the real estate services team said, "In my 13 years of handling these types of projects, I have never seen a market like we are facing today. During my conversations with landlords on behalf of my clients, they express their concern about the high number of retailers that are asking them for rent reductions."
"Retailers need to present their situation in a truthful and credible way. Our experience is that landlords are typically willing to work with us and the retailer towards a solution, but today, because so many retailers are seeking rent relief, it has become a more challenging environment in which to negotiate." However, landlords face the very real prospect of losing a tenant and getting back "unprecedented" amounts of space, as well as contributing to a retailer folding, if a manageable solution is not met during renegotiation, warned Bordwin. He conclduded, "How has the landlord helped himself in that way?"
RETAIL REIT LANDLORDS
SIMON PROPERTY GROUP
In its Jan. 30 year-end conference call with analysts, Simon Property Group revealed how it's dealing with tenants working to renegotiate leases. CEO David Simon said the mall REIT's occupancy has been negatively impacted by "negotiated early store closings" as well as "temporary occupancy reductions" at several properties.
Simon said that "dealing with tenants" is a primary focus for the company right now. "where we have a tenant that we believe is in extreme financial distress, we’re trying to work with them to come up with a mutually acceptable basis for maintaining their occupancy in the portfolio." In terms of tenants working to negotiate square footage reductions, Simon said he is seeing "very little of that" in the company's best malls.
"In some instances we are doing short-term one year renewals because frankly we want to keep a tenant in occupancy," said president and COO, Rick Sokolov, adding that it's in the landlords favor to deal with renewals in another year because, "we believe we’re going to have a better pricing market in 2010 than in 2009. We do not want to tie in for longer term rent that we believe is not optimal for that space."
Simon said that, being the country's largest mall REIT, Simon is in a position to "carve a win-win" with tenants when it comes to re-negotiation. "It's more important for their results then it is for ours. We produce a lot more sales and we’re a lot more important to their success then they are to ours. The best way to describe it is that generally the small shop retailer does about 20% of their sales in our portfolio," but the biggest tenant in Simon's portfolio only counts for 2% of it's total rental revenue, explained Simon.
CBL & ASSOCIATES
During CBL & Associates' Feb. 5th quarterly conference call, president Stephen Lebovitz said the company hasn't seen tenants that signed leases before the holiday season looking to renegotiate leases now. "We're talking to tenants when the leases come up for renewal, but if something is signed, it's signed. Everyone lives with that," he stated.
John Foy, vice chairman and CFO, said that tenants' re-negotiation moves are understandable in this environment, but explained that any relief granted to tenants has a trickle down effect. "Every tenant basically is trying to pressure and squeeze everything out of it so that they can hold their margins. Likewise, we in turn are doing the same thing with our vendors and our ability to cut back in those areas, not only with utility companies, but insurance premiums etcetera. So, I think everyone is on the table in this environment and everyone understands and everyone is cooperating and working together to try to make the best of a difficult situation. I do not think it is just the retailers pressing down on the landlords, I think it is the landlords pressing down on all of their vendors as well," Foy said.
Lebovitz also addressed issues arising from tenants invoking co-tenancy clauses. "The malls typically have cushion in terms of any anchor closings, and we are not facing anything there that concerns us at this point. In a couple of the associated centers we have, between Linens-N-Things and Circuit City, we have a couple of centers with bare anchors...we are dealing with co-tenancy issues there." Lebovitz explained that typically, if a mall has three anchors and two go dark "then that's a problem, but if it has five, and two go dark, then we are okay."
Mary Lou Fiala, president and COO of Regency Centers, said in the company's Feb. 5th quarterly conference call, "Regency is receiving requests for rental assistance from a great number of tenants. There is a few people that we've made exceptions for." The decision is made tenant-by-tenant, explained Fiala, adding that Regency requests three years of sales information, income statements, and credit applications from tenants, as well as a recovery plan.
In the case that rent reduction is granted, Fiala said, "any reduced rent is deferred and not forgiven." She said that only 37 of Regency's 9,000 tenants had been granted such reductions in the last month, "and in 28 of these cases, we were able to extend term of the lease."
KIMCO REALTY CORPORATION
David Lukes, EVP at Kimco Realty Corp., said in the company's Feb. 5th quarterly conference call, "We are preparing for a continued difficult time for our tenants and are forecasting continued weakness and uncertainty. The ability of a tenant to prosper is partly due to their cost of occupying their real estate."
"We have a detailed concession request package that we've developed that's required…and are using occupancy costs, financial help and sales history to separate the tenants that truly need help from those that are merely following the saying, 'you don't get it if you don't ask," explained Lukes. To date, the number of requests Kimco has granted are "minimal" compared to the number of requests it has received, said Lukes.
In a poll of leasing/management and tenant representation agents that are CoStar Retail Roundup subscribers, CoStar asked if there has been a marked uptick in retailers’ requesting to renegotiate leases with rent reduction the goal; and in addition, asked how landlords are responding to such requests. Responses were on both sides of the spectrum.
Would you like to share your thoughts? Email the editor, Sasha Pardy at email@example.com. Pertinent comments will be posted below.
Jacqueline Hayes, President of Jacqueline Hayes & Associates in Chicago said she has seen a significant uptick in tenants seeking to renegotiate leases and expects to see such requests flow in at an even quicker pace over the next six months.
She added that landlords have become more receptive to such requests and a common outcome she's seeing is that "landlords are willing to consider a rent reduction for a four-month period of between 10 -20%, with an understanding that there will be further discussion at the end of four months to analyze the market."
Tenants don't have the upper hand in negotiations with landlords right now, said Hayes, "however, it is apparent that landlords are willing to negotiate to still receive some rent rather than a vacated store."
Rob Tomlinson, a retail leasing and tenant representation broker with Picor Commercial Real Estate in Tucson, AZ said he has seen a significant uptick in tenants seeking to renegotiate leases and expects to see such requests flow in at an even quicker pace for the next six months, tapering off in the third and fourth quarters.
Tomlinson pointed out that while landlords are more receptive to these tenant requests, many landlords are in similar predicaments, "many are too highly leverage to accommodate these requests. In many cases, the amount of relief that the tenant needs is too large for the landlord to afford," said Tomlinson.
Tenants have the upper hand in negotiations with landlords "for the short term," said Tomlinson. "No one is giving long term rate reductions. Most new deals are cheap in the first two years and then find market level thereafter," he explained.
Nick Goddard, a retail leasing associate with Colliers Parrish in San Jose, CA said he has "not seen at all with any seriousness" any uptick in tenants seeking to renegotiate leases to lower rents; but to a "small extent", he expects to see more of it in the next six months. Goddard added that there are few tenants out there willing to "pull the trigger" but said the ones that have "are demanding extremely aggressive terms."
A director of leasing for a management company in Maryland, who requested to remain anonymous, said there's been "little to no" uptick in tenants seeking to renegotiate leases, but added the company is unsure what to expect in the next six months. "Our strip centers are located in good locations, anchored for the most part by grocery stores. Some smaller tenants are beginning to call us, but some of them are consistently paying their rent late and it is hard to tell how they are really being impacted."
"So far, the outcome has been that when we receive a legitimate request for reduction, in some cases, we have lowered rent and tenants have signed renewals. In other cases, without lowering the rents, tenants have continued with their leases."
Justin Mann of Blue Rock Property Management said he has seen "little to none" of an uptick in tenants seeking to renegotiate leases, but said he does expect to see more of it in the next six months and added that landlords are becoming more receptive to such requests. "I would only consider a reduction after seeing the tenant's books for the past two years. If they have seen a serious decline in business, to the point of struggling to meet their lease requirements, I would help them out on an 'as needed' basis," said Mann.
“I’m not advising my tenant clients to seek a rent reduction unless their occupancy costs are well above 10% of gross sales, they can show a plan for future success (increased marketing or a new business plan) and have something to offer by way of lease extension, enhanced credit (e.g. an additional guarantor) or some other trade-off lease modification. Landlords should only grant rental relief after sufficient specific information is provided by the tenant to evidence how bad things are at that store and what efforts will be undertaken to try and increase revenues - to increase the likelihood of survival beyond the relief period without further assistance. The “across the board” approach that some of these big national tenants are taking is a “fishing expedition” that puts many landlords on the defensive and feeling the tenant is just taking advantage of a bad situation. On the retail side, landlords and tenants have to work together now or they both lose.” -- Scott Silver of Los Angeles is both a real estate attorney (Silver Law Group) and landlord (Eagle Group, LLC).
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