Retailers want rent relief. REITs, mall owners and operators want their monthly payments, and lenders of the former want their principal and interest payments.
With the retail and shopping center industries experiencing the acute pain inflicted by the coronavirus crisis, the extent to which property owners can give retailers a break depends on their inclination and how leveraged their portfolios are.
Unibail-Rodamco-Westfield on Thursday became the first REIT to offer the tenants of its 42 U.S. malls some relief from the crippling effects of COVID-19. URW eight days ago made the decision to close its doors to protect its various stakeholders, with only essential businesses such as supermarkets and restaurants offering food takeout or delivery remaining open. Since then, the majority of commerce at shopping centers, urban retail thoroughfares and suburban and exurban neighborhood centers has ground to a halt, bringing many businesses to their knees.
URW said in a letter to tenants that it recognizes that the COVID-10 pandemic is “a global health and economic crisis that impacts all of us. Westfield is committed to navigating these uncertain times together with you and with our community. To help alleviate the economic impact of COVID-19, if you need to delay payment of your April rent/recurring charges, you may do so for up to 90 days (through July 1, 2020).
“Your Westfield landlord will not assess any late fees, penalties, or interest otherwise allowable under your lease, or file any legal action, or pursue any other remedies based on such delayed payment,” the URW letter continued. “Please note that this accommodation does not alter, modify, or otherwise amend any of your obligations under your lease in any way.”
However, it’s unclear whether others will do the same, especially since Moody’s downgraded REITs. It’s also unclear whether Congress’ $2 trillion stimulus bill will address rent relief for all retailers or only small ones.
The Irvine Company took a similar tack, noting that the deferred rent will be paid back over a 12-month period with no interest until January 2021.
“The landlord community has less leverage than the tenants,” said Tom Mullaney, managing director of JLL restructuring services. “If this continues for more than a month or two, we’re going to see a new wave of bankruptcy fillings from retailers. The bankruptcy code gives tenants great flexibility to get out of leases. Some that are not leveraged will make it through. Most are leveraged, and I can’t tell you how many times I’ve heard the ‘B’ word. Bankruptcy doesn’t mean going out of business. It is going to mean some additional pain for the mall community. They’re already struggling with vacancies. I’ve had tenants say to landlords, ‘I’ll [pay a portion of their annual rent] to leave the center. As liquidity dries up, some landlords might say they’ll take the check because they need it.”
Mullaney said things will be “really interesting in the middle of April when rents are due. It’s a bit of a chess game between landlord and the tenant, and also a chess game between landlord and the lender.”
Taubman Centers Inc., in a letter to tenants dated March 25, moved the first chess piece. “As the COVID-19 pandemic has led to the closure of many stores or otherwise impacted the operations of our tenants, we have naturally had numerous inquiries from tenants regarding their ongoing obligation to pay rent and charges owing under their leases,” the letter said.
“Landlord’s obligation to pay its lenders, utility companies, insurance companies and the like, to ensure the safety and security of the building and maintain the appropriate level of operations, remains,” the letter continued. “The rental income that we receive from tenants is essential in order to meet these obligations. All tenants will be expected to meet their lease obligations. Further, tenants are encouraged to look to their business interruption insurance policies to assist in making the tenant whole.”
“We’re attempting to navigate through this situation in the best way we can, while being as flexible as we can with our tenants in light of our ongoing obligations,” a spokesman for Taubman Centers Inc. said on Sunday. “The tenant memo does not replace our willingness to talk to each tenant about their respective challenges and help them chart an appropriate course for the future. In fact, we’ve had numerous calls with our longstanding tenants and most fully understand our position as it’s a challenging time for all involved. Naturally, the environment is much harder for smaller, less-established temporary occupants that may only be operating in one center.”
Simon Property Group on Sunday did not respond to questions about its position on tenant rent relief. Simon in February entered into a definitive agreement to acquire Taubman Centers Inc., in a deal valued at $3.6 billion. The transaction is still expected to close in 2020. Macerich on Sunday could not be reached for comment.
Shane Neman of Miami-based Neman Ventures owns and operates a number of commercial properties around the country, including shopping centers with restaurants and retail stores, as well as office buildings and even parking garages, all of which have been impacted by the stay-at-home edicts.
Many tenants at Neman Ventures properties have called to ask for rent deferment, said Neman, queries that he views in a positive light because when tenants tell him, “‘We’ll pay, we just need time,'” he thinks it means the retailers expect to be able to reopen.
“This isn’t only a financially challenging situation, it’s also a morally challenging situation,” said Neman, who approached the banks holding the mortgages for his properties about delaying payments, and found that small community banks were more willing to cooperate, while national lenders were more difficult. “No one wants to be a winner because someone else is a loser. We all have to cooperate.”
It’s easy to see how things escalate in the big city. “Tenants are basically saying, ‘We can’t pay you. We don’t have any sales coming in. Give us a rent moratorium,'” said a retail broker in Manhattan, adding that he’s advising tenants that even if they get to open their stores in the foreseeable future, they should push to get a percentage rent deal until sales stabilize.”
In addition, the broker said, “Let’s say you’re a tenant in a shopping center and you’re coming out of the coronavirus and reopening your store. Now, 50 percent of the tenants that you listed in your cotenancy requirements haven’t reopened. You could have all these issues with cotenancy clauses. Most leases executed in recent years would contain cotenancy clauses, if deals were done a long time ago, no.”
“Of course, no one knows how long this will last, and the longer it lasts, it will only magnify the challenges,” said Stephen Stephanou a principle at Crown Realty Services. “It seems logical that it’s in the best interest of the landlord to work hand-in-glove with tenants that have the potential to be viable after this crisis.”
“We’re coping as well as anybody could under these circumstances,” said Rick Caruso, founder and chief executive officer of The Grove, The Americana at Brand and Palisades Village. “We’re focused on supporting our employees and community and our retailers. We have a bunch of different businesses on our properties — office and retail, and we have a resort.”
Caruso’s portfolio includes “credit, or credit-worthy tenants. We also have retailers that are entrepreneurs with one or two stores or one or two restaurants,” he said. “We’ve had a number of retailers calling in and asking what our plan is. We’ll sit down with each of the smaller ones. National credit tenants is a very different conversation than an [independent retailer]. Clearly, what we do to support them is going to be different than what we do for a large retailer.
“I know what it’s like to be an entrepreneur and support a payroll,” Caruso added. “We want to make sure [the independent retailers] have ongoing businesses on our properties. It gives properties a soul and makes them part of a community. We want them to survive. That’s been part of our secret sauce.”
Caruso said retailers that had problems before the crisis will have the same problems when it’s over. “They need to be relevant and have interesting stores and what they do within them has to be interesting. One of the things we’ve learned is that isolation is not a great way to live. We want to be out, but we’re going to choose places that enrich us, because we’ve just had weeks or months of being inside. We’re going to be very picky and choosy with our time. That’s going to force more success on the better retailers.”
American Dream, the 3.3 million-square-foot entertainment and retail center in East Rutherford, N.J., has been opening in stages, with Nickelodeon Universe Theme Park bowing in October. The DreamWorks Animation Water Park had been scheduled to open on March 19, along with the first wave of retailers — fast-fashion chains such as H&M and Zara, and other stores with large footprints such as Uniqlo, Primark, Old Navy and Sephora — when the property’s owner decided to close it.
“It’s a very, very tough time, everybody’s struggling,” said Don Ghermezian, co-ceo of American Dream. “We pushed off the opening of the center. We spent a lot money on it. Having more construction going on in the center and all the delays it’s going to cause is uncomfortable. We’ve gotten a lot of letters from tenants. There’s not a lot of appetite to pay rent. Some tenants out there are taking the high road, but they’re few and far between.”
Ghermezian is battling COVID-19 on two fronts. “Fifty percent of my family has the virus. In terms of the business side, that’s a whole other battle. It’s been a very, very painful time for us. We’re basically shut down in all three of our centers,” he said, referring to the Mall of America in Bloomington, Minn. and the West Edmonton Mall in Alberta, Canada. “The way the family looks at it, we made a decision not to hold the retail opening and close the parks before there was a mandate to close anything.
“At the very beginning we tried to keep as many people as we can employed for as long as we can,” Ghermezian said. “The situation still has quite a bit of time and will get substantially worse before it gets better. Look at what’s happened in Italy, and we were a little late to the game.”
Ghermezian sees reasons to be optimistic about the aftermath. “People have been locked up for so long. Online will continue to hurt all the traditional centers, and even when they reopen, it’s going to take time. We’re well-positioned, because after people have been pent-up, they’re going to want to go out and have experiences,” he said. “We’ve always said that we’re in the hospitality and entertainment business, but 50 percent of the center is retail. I see this is as an opportunity for us to continue to expand our entertainment uses at all of our centers.”
Manhattan landlords were especially disappointed because they’d started to see an uptick in rental interest prior to the lockdown. “It really felt like 2019 and the first couple months of 2020 were better than we’d seen in recent years,” said a property owner who asked not to be identified. “Interest was strong, and it’s funny, a month ago, things were so strong, that we not only had offers, we had back-up offers, which we hadn’t seen in a few years.”
“Any landlord who doesn’t have compassion for the entrepreneurs, and even the large corporations, doesn’t understand the gravity of the situation and the toll it’s taking emotionally and financially,” said Jared Epstein, principal of Aurora Capital Associates, one of the largest landlords in Manhattan’s Meatpacking District, and with properties in Miami and Chicago.
Epstein said he has been fielding countless e-mails and phone calls from tenants asking for rent relief. He said small, independent banks are more willing to work with landlords to find a solution. It’s difficult to do that when mortgages are held by large consortiums such as commercial mortgage-based securities, and payments are automated. It’s so impersonal, there’s no one to speak to about offering rent relief.
“There’s no possibility for a landlord to forego mortgage payments,” he said, adding that the only way some landlords can offer rent relief is if they go back to their partners and ask for extended credit. “That may not be possible. But we are hoping to provide relief whenever we can.” Causing him angst is a fledgling consortium of restaurateurs, spearheaded by hospitality consultant Steven Kamali and including celebrity chefs Bobby Flay and David Burke, who created The Restaurant Network with some 250 restaurant owners that is preparing a plan to ask eateries to be relieved from paying any rent for three months, followed by half rent for nine months after reopening, then 75 percent of current rents for the duration of the lease. Although Epstein said he hasn’t heard of other industries, including apparel, asking for similar concessions, but the thought is sobering to landlords if it does spread.
Rick Friedland, whose family has owned retail property on Madison Avenue for decades, said, “This is still a period of uncertainty where we’re still trying to digest this stimulus bill. Some tenants have already paid April’s rent, which is positive. Some sectors like CVS and Walgreen’s should still be strong. The financial institutions understand what’s going on here, too. I think sort of everyone in the real estate food chain realizes we need to work together to get through this, from the government to lenders to landlords to tenants. But it’s still early to figure out what the impact of this is going to be both in the short term and beyond.”
Stenn Parton, chief retail officer for DJM Capital, an owner-operator of more than 4 million square feet of retail space representing more than $2.3 billion in assets around the country, said getting through this will require unprecedented cooperation between landlords and tenants.
About 85 percent of DJM’s portfolio is in California, mainly Southern California, and includes the 463,000-square-foot Hollywood & Highland complex, which changed hands last year. The company also has properties in Huntington Beach and Newport Beach, Calif., and Plano, Tex.
Parton said of the 600 tenants in DJM’s stable, 30 percent are small businesses, which will be devastated by any prolonged closure of their stores. “I’ve been on hundreds of calls and there’s a tremendous amount of uncertainty, which breeds anxiety,” he said, adding that he’s helping tenants apply for small business loans, business interruption insurance and bridge financing, among other things, to tide them over until their stores can reopen. He’s making sure they understand that landlords have financial responsibilities to their lenders and risk defaults and foreclosures if their payments are delayed. “There are obligations in our loan documents that require our lenders to be involved in any major decisions,” he said. “Landlords don’t have the unilateral right to grant rent relief. We want to find solutions.”
Deborah Weinswig, ceo of Coresight Research, said, “We absolutely see rent reductions, rent abatement and getting out of leases. I don’t think anything is off the table right now. All they’re doing now is cutting expenses.
“I think REITs are giving in to the concessions,” she said. “Maybe this is the time when we see retailers and brands truly come together with the REITs. We’ve had a lot of friction between tenants and landlords historically. For a period of time we’ll see a dearth of traffic, but who knows, maybe holiday 2020 will be the best ever.”
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