Retailers have started paying rent again but are still fighting with their landlords

September 24, 2020

Month by month, retailers are starting to pay more rent as states lift shutdown orders and consumers become more comfortable venturing out to shop during the coronavirus pandemic. But negotiations, sometimes heated, continue between tenants and landlords.

In some cities and popular shopping districts, commercial rents are still sky high. Tensions keep brewing, as mall and shopping center owners grapple with retailers looking to close stores permanently, downsize or try to rewrite contracts in their favor. And the pressures are likely to roll into 2021, with the start of the year typically drawing a fresh wave of retail store closures as companies reevaluate their brick-and-mortar footprints after the holidays.

Less than a third of companies paid at least 75% of June rent, according to a study released Thursday by the National Retail Federation and the investment bank PJ Solomon. By July, the number of rent payers had almost doubled to 65%, it said. The study polled 48 C-level executives at retailers with at least 10 stores and more than $100 million in sales in 2019, from July 15 to July 28.

The survey also found that 73% of retailers that missed payments are planning to pay back at least half of the rent owed since a nationwide shutdown began in March. More than half of respondents said they were able to get some sort of rent relief from their landlords, with deferrals into late 2020 or 2021 being the most likely concession.

"If you're a retailer with an extensive store footprint, effectively managing these fixed costs has been critical to preserving cash while brick-and-mortar sales remain under pressure, even as online sales surged for many," said Jeff Derman, a managing director at PJ Solomon.

When retailers pay less or no rent, it creates a ripple effect of consequences. Landlords like the mall owners Simon Property Group and CBL & Associates are feeling the pain. CBL is now expected to file for bankruptcy protection by Oct. 1, while Simon has taken some of its tenants like Gap Inc. to court. And Brookfield Properties' retail arm is laying off 20% of its employees, or about 400 people, as it looks to dispose of some of its malls.

Real estate experts say retailers are increasingly looking to pay rent as a percentage of sales, making it a variable expense on their balance sheets rather than a fixed one. Landlords, however, have resisted this type of structure in the past, as it makes it more difficult for them to predict future revenue streams. While there could be some hesitation to strike a deal like this, landlords could end up capitulating to keep a space occupied.

"We're looking to avoid a legal fight, and we were able to stay out of court for the most part," said Ami Ziff, director of national retail for Time Equities, which operates more than 120 retail properties across the U.S. "But if we gave everyone free rent, I would go out of business."

Related Cos., owner of Hudson Yards mall as well as The Shops at Columbus Circle in the Time Warner Center building in New York, told CNBC at the end of August that it was collecting just over 50% of retail rents for its malls in Manhattan. It expected that percentage to pick up as its malls reopened, which they finally did earlier this month. The numbers paint a picture of the pain being felt across the industry, even into the fall season.

One of the most publicized legal battles during the pandemic has been Miami landlord Bal Harbour Shops suing to evict the high-end department store chain Saks Fifth Avenue, alleging the retailer failed to pay more than $1.8 million in rent. Saks has since countersued Bal Harbour Shops, alleging defamation, breach of contract and breach of fiduciary duty.

In another instance, the Austin, Texas-based theater chain Alamo Drafthouse Cinema stopped paying rent at a location in San Antonio, after it went dark in mid-March. Its landlord sued. And then Alamo countersued, looking for relief from the court to allow the theater to skip its rent payments until its business was operating again. Alamo said its supply chain had been disrupted since fewer new movies are slated to be released, according to court documents.

The biggest U.S. mall owner Simon Property sued Gap in June for owing $66 million in rent. Gap followed with its own suit seeking rent relief. Simon then filed a second suit against the retailer, alleging Gap was "taking opportunistic advantage" of the pandemic to avoid paying $107 million in overdue rent, even as Gap's stores started reopening.

"I think we will see more litigation," said David Marmins, who co-leads the retail team at the law firm Arnall Golden Gregory, which is representing Alamo. "There is not going to be an agreement across the board. There are tenants that have leverage and are fighting for more leverage. There is still more negotiating to be done."

"I think we are just now getting to the biggest problems," Marmins added. "There have been a lot of agreements worked out, but now we are at the particularly hard situations that are coming to a head."

Another part of the problem: Analysts say rents still need to fall in some markets because they have become too high for many businesses to justify paying. And supply of retail space and demand of retail space are no longer aligned, with more sales moving online.

Around New York, a descent has already begun. During the second quarter ended June 30, average asking rents along 16 major retail corridors in Manhattan declined for the 11th consecutive quarter, falling to $688 per square foot, according to a report from the commercial real estate services firm CBRE. The drop marked the first time since 2011 that prices dropped below $700, the firm said, representing an 11.3% decline from a year earlier.

And the number of ground-floor leases available in Manhattan's 16 retail corridors tracked by CBRE hit a record of 235, surpassing a previous high of 230 in 2013.

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