The Shops at Hudson Yards

Frustration is rising among retail tenants and landlords, which have both been crippled by the ongoing coronavirus.

Retail tenants are finding it more difficult to negotiate rent reductions or other revised terms that might help them stay in business, saying landlords are becoming increasingly reluctant to grant concessions as their own financial positions continue to deteriorate and their obligations mount. 

Responses to requests for rent relief in many cases depends on the landlord being petitioned, and debt load and operating expenses. A legacy owner who inherited the property decades ago might be more flexible than one that purchased a retail co-op in Manhattan at the height of the real estate market. Regional shopping centers and local mall owners and operators have been more willing to negotiate with tenants than some REITs, whose amount of and cost of debt and operating expenses of their shopping centers and malls may prevent them from making concessions.

REITs have publicly said they’re helping tenants, but are reportedly taking a hard line behind the scenes. Small to mid-size mall owners are said to be showing more understanding.

A retail broker said a tenant he’s worked with reached out to The Shops and Restaurants at Hudson Yards before April 1 rent was due to propose a percentage rent agreement for the next year, surmising that with his store closed and no sales coming in, he’d pay nothing in terms of rent, until the center reopened.

“Percent rent is a good thing because everybody [retailers] won’t get going at same time and there will be some tenants that fall out,” the broker said. “It seemed like a good point to start the discussion. The only thing he got was a form letter. The reality of it is, they’re taking a much more hard-nosed position. A lot of tenants are finding they’re being somewhat stonewalled.”

“Thank you for your letter concerning the impact on your tenancy from the ongoing COVID-19 crisis,” said an April 7 e-mail from Hudson Yards to the retailer concerned. The letter noted that while shopping centers are closed, “this does not modify tenant’s obligations to continue to pay all amounts due under the lease (including rent and any penalties relating to any late payments thereof).

“We, of course, understand the difficulties you are facing…we are working through our own challenges as well,” the letter continued, adding that the company is monitoring the situation, including the role of government relief. “In the meantime, we anticipate that all parties will continue to abide by the terms of the lease and we respectfully reserve all of our rights and remedies for any failure to do so.”

Hudson Yards could not be reached for further comment.

“There are many landlords that are taking a hard line,” said Jared Epstein, a principal of Aurora Capital. “A tenant recently told me that a large REIT was not only unwilling to provide rent relief, they actually threatened that they would leak the tenant’s nonpayment of rent to the press, which could severely impact the company’s stock and financial wherewithal.”

Aurora has received requests for rent relief from tenants throughout its portfolio who’ve expressed “unprecedented concern about the future of their businesses due to the self-quarantine and shutdown measures. Aurora made the decision early on to provide relief to our tenants in need, to the extent we are able to, through rent deferrals. The majority of landlords who determine that they can provide relief are doing so for the tenants in need that have built a strong track record of running a quality operation and being timely with rent payments.”

Out of the Box Ventures LLC, a subsidiary of Miami-based Lionheart Capital, a global real estate investment and development company with more than $4 billion in assets and 6 million-plus square feet of retail space across the U.S., is offering retail tenants of its regional malls and community shopping centers the opportunity to pay only their share of CAM [common area charges] and property tax, a 60 percent to 70 percent discount off their full monthly rent. There could even be more savings if Out of the Box gets tax relief from the government and the company has pledged to pass those directly on to tenants.

“We’re fortunate that our portfolio has been acquired fairly recently, so we have very little debt on the portfolio, which allows us to be much more flexible on rents,” said founder and chief executive officer Ophir Sternberg. “We do have a lot of carrying costs, including employees, and some mortgage payments. We’re going to take a hit. We’re offering it right now, and it will extend for April and May rent. If things go on from there, we’ll talk again. We have hundreds and hundreds of tenants, some national, some mom and pops, and some local tenants. We offered it to everyone from the largest tenants to the smallest mom and pops.” 

“Transparency is the key, and both sides need to think about how do they want to come out of this,” said Trever Gallina, a broker at Isaacs & Company. “The challenge to transparency is just economies of scale. A retailer with 500 mall stores can’t pay attention to its one store in New York City. For the fashion brand with one store in Manhattan, it’s real easy.”

“A lot of things are happening on both sides,” said a retail broker who works with national tenants. “Some landlords can’t get through to their national tenants, and can’t even get through to their own lenders. They may not have the cash reserve to hang around for 60 to 90 days with no cash flow. I don’t know many landlords who could hang around for that period of time without any cash flow.”

A retailer with several stores at shopping centers owned and operated by Simon Property Group, said the REIT reached out to tenants with the message, “We expect you to pay your April rent.” When the retailer asked for rent relief, he got a mixed message from Simon, with one rep indicating that some relief might be coming in May or June, while another “Simon rep in a conversation that ostensibly was supposed to be about rent relief, brought up our letter of credit and threatened to draw down on the security deposit,” said the retailer, who requested anonymity.

Simon couldn’t be reached for comment.

Not all retailers are deserving of landlord’s compassion. “Unfortunately, in every situation there are bad actors,” Aurora’s Epstein said. “There are certainly tenants that are attempting to take advantage of this situation by not making rent payments to their landlords, in some cases without even making attempts to discuss the situation. The true strength of any relationship is measured in difficult times. This certainly applies to the relationships between landlords and tenants.”

There are reports of retailers ghosting their landlords, not paying rent or answering phone calls. “A luxury global cosmetics brand with 3,000 stores worldwide, but only one unit in Manhattan, is suffering a downturn in sales and struggling to stay afloat. The brand’s broker said it hasn’t paid April rent, nor does it plan to, in light of more pressing concerns.

“One of the companies I work with is based in Italy, and the last thing on their mind is their store on Greene Street in SoHo,” he said.

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The Real Estate Board of New York on Thursday issued its first-quarter 2020 real estate broker confidence report, with a Coronavirus Special Report. The overall Commercial Broker Confidence Index, which focuses only on the commercial brokerage member responses, was 3.23, a 56 percent decrease from the fourth quarter of 2019.

Broker comments included, “COVID-19 has crushed commercial real estate. The retail market was slow before coronavirus, and this enhances and expedites the upcoming recession,” and, “with low to zero occupancy of retail and office spaces, it is very hard to have any confidence in the market.” Others included, “A large majority of retail tenants will be behind rent or forced to vacate. The retail vacancies will significantly impact the value of buildings. The amount of vacancies will bring down asking rents and projected rents, lowering investors’ projections.”

While it’s hard to say which camp is hurting more, retailers or landlords, it seems to behoove both parties to get along. Landlords should work with their existing tenants because finding replacements will be difficult given the hit the U.S., and global, economy has taken.

“New entrepreneurs and new concepts are going to have to get investments, which will be difficult,” said a broker. “If anybody’s got a viable tenant, it seems they should work with them as much as they can. If they haven’t been highly leveraged, they can afford the taxes. For the bigger owners, the quality properties may be of a higher grade, and they’re going to be tougher.”

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