Are Rent Reductions Really Happening?

Every day we see more and large chains releasing reports that they are seeking rent reductions with their landlords.

Recently we’ve heard from chains as diverse as Williams-Sonoma, Quiznos, Charming Shoppes and others. Macy’s is one of the few stores to come out and say it isn’t engaging in this practice, but don’t they pay way less than in-line tenants in the first place?

We know that a lot of retailers intend to get rent reductions, but are their strategies working? It doesn’t seem like it worked for Quiznos at this Weingarten center.

Do retailers deserve these kinds of breaks or are there other ways they can cut costs without changing a lease?

23 Responses to “Are Rent Reductions Really Happening?”

  1. 1 smiley1 March 25, 2009 at 7:46 am

    As we all know, SUSTAINABLE rents are simply a percentage of the retailers’ sales, varying depending on the store size and products sold.

    Sales volumes at centers I’ve been working on, for locals, regionals and nationals, are down anywhere from 10% to 30%.

    Where do you think rents need to go in order for retailers to be able to stay in business?

  2. 2 Alan Barocas March 25, 2009 at 7:49 am

    The short answer to that question is Yes. Most are of a short term nature not exceeding 24 months. However it is not a one way street. In the majority of the cases Landlords are gaining concessions as a trade off for rent reductions and aversions ( the elimination of pre negotiated rent increases). These concessions include among others are elimination or extensions of sales termination rights ( kick out clauses ), co tenancy requirements,relocation rights. Those retailers who do not have contractual opportunities to renegotiate – lease expiration, option renewal,sales termination right, co tenancy failure – and who are not willing to give LL’s meaningful concessions have for the most part not been successful.

  3. 3 Phil K March 25, 2009 at 8:17 am

    In response to Smiley 1 – sustainable rents are really a function of three items – Sales, Margin and Investment. It is not just a simple calculation based on a tenant’s sales. Of course the initial investment has already been made in stores where rent reductions are sought so Sales and Margin are the keys for survival.

  4. 4 Lexx March 25, 2009 at 8:21 am

    We have been dealing with these on a case by case basis. It really depends on the retailer that is asking for the concession, their use and their value to the cotenancy of the shopping center. We are also requesting that the retailer send proof of his need by way of sales decline, a plan to increase their revenue etc. Basically, the retailer needs to do all of the work to state their case.

  5. 5 Alex March 25, 2009 at 8:25 am

    MACY’s?! are you joking!? if anything they pay a CAM contribution but the majority of stores pay nothing since they own their own buildings and land, so dont listen to them. Rent should always be between 15%-25% of sales – so if the retailer can prove lower sales for x months, then the LL should cut the retailer a break in rent, BUT ONLY if they get something in return – thats how business works.

  6. 6 Stuart T March 25, 2009 at 8:54 am

    I think it needs to be a case by case basis as others have said. When a break in rent is necessary, I only deal with on an annual basis rather than restructure an entire lease (unless I can get a longer term) because as we all know on the LL side, when things get better, LL’s can’t go to Tenants ask for more rent because things are better. The Tenants also need to document what they are doing to reduce costs other than rent.

    There are pro’s and con’s for percentage rents which have seemed to wane over the past few years with smaller tenants. But in this economy maybe it is time for a return for smaller tenants.

  7. 7 Jonathan Levy March 25, 2009 at 2:25 pm

    Alex, here’s an interesting article on Occupancy Costs and their effect on retailers. Paying rent at 15%-25% of sales is most definitely not the norm.

  8. 8 Alex March 25, 2009 at 3:26 pm

    Levy – i agree with that chart – if you have tenants making over $350 psf then they should be paying 15% starting out (with annual bumps of course)

  9. 9 Chris Rodriguez March 25, 2009 at 4:24 pm

    I have recently dealt with a few tenants asking for rent reductions in clients centers and Quizno’s was one of them. We gave Quizno’s a break for 9 months but they need to start paying back the concession beginning in the 10th month. Landlords can’t just give away rental income and the tenants need to understand that they need to pay it back – like a loan.

  10. 10 D Scott March 25, 2009 at 10:17 pm

    Yes, Alex, careful with the word “always”…and, 15% to 25% might be ok for luxury goods and jewelry stores, but I don’t think you can find many sit down restaurants or general retailers willing to go into a lease where occupancy cost (e.g., gross rents) will exceed 8 – 9% of their expected sales.

  11. 11 To Levy March 25, 2009 at 10:21 pm

    Reply to Jonathan Levy: This article is dated 2003 and refers to “Moody” rating method. Isnt companies like Moody and their “rating methods” that got us into this problem?

  12. 12 beth azor March 25, 2009 at 10:34 pm

    It makes me crazy when Franchisors ask their Franchisee’s Landlords for rent reductions, when the Franchisors themselves(their partners!) don’t help with discounted royalties, etc. Why is it ok for the Landlord to break a contract (the lease), but not ok for the Franchisor????

    I will only help a Franchisee (if proven to have merit), if the Franchisor MATCHES the discount! If the Franchisor says they can’t help, the I, the LL can’t help!!!!

  13. 13 gary March 26, 2009 at 10:19 am

    It’s about time the landlords started communicating among themselves and sharing experiences -like our tenants have been doing for so long. Great dialog. Like many others, we are receiving the cram down requests and our response is: 1) show us ALL your numbers, 2) any current-pay concessions have to be matched by lease term modifications that benefit the Landlord (i.e. minimum sales kick-outs, co-tenancies, percentage rent break points, renewal rates….)

    We’re “in this together”, so its a two-way street. We grant relief now, we get whole later.

  14. 14 Weed Removal March 27, 2009 at 7:15 am

    Beth: Please understand – franchise law is highly regulated and does not accomodate easily for royaly changes up – or down – and certainly not in a one-off format. Goes to precedent. Smart franchisors may also cut budgets, but not support folks during these times, which are actually bolstered. I understand your thoughts, but franchisees do axe other expenses to match your (LL) reductions (like open hours, employees and advertising) which are lose-lose scenarios for sales and customers. As well – royalties are 5 – 8%/revenue, rent minimum of 25%. As a franchisor – we do thank the LLs for their business-partner attitude in these times. We do have long a long memory.

  15. 15 L Biggie March 27, 2009 at 11:23 am

    We are helping “mom and pop” tenants out but have turned down every national retail request to date. Our philosophy is we can’t save the chain and have no assurances other Landlords are granting similar requests, a pre-requisite for the theory to work. I would trade for relocation, a termination right or something else I really needed on a case by case basis however. Long term value should always be evaluated. Other than the above, what good is rent relief if the tenant files Ch. 11 anyway? Lastly, this is and will always be a one way street because the tenants aren’t going to come to you in 3 years and say “I’m doing really well, here’s more rent”.

  16. 16 Peter D. Morris SCSM, SCMD, CLS March 27, 2009 at 11:42 am

    I agree with Alan and others. However, no one has addressed the definition of success. Success will mean different things to different landlords and tenants. We advocate a complete due diligence and a comprehensive tenant strategy before entering into any rent relief program – and budget accordingly. This includes determining each tenant’s rent to sales ratio and understanding how the relief will help each tenant. In other words, a tenant’s business plan including what other suppliers are doing to assist and how the tenant will use the funds.

    Landlords also need to look at their own business, and increasingly that means understanding what the lenders require.

    Finally some tenants will be beyond help. Their requests should be turned down and the natural laws of attrition will take effect. Harsh action, and the tenant may feel the attempt was unsuccessful, but what does the landlord gain in the exercise?

  17. 17 a retailer's view March 27, 2009 at 1:37 pm

    From the retailers’ perspective, pegging rents to a percentage of sales is now considered obsolete. The retail landscape has changed and we are back to a market economy, so to speak, supply and demand. The essential questions retailers are asking is “Is there a market for my space if I close”? The answer to this is most likely no, with virtually all retailers expansion plans on hold. The only variable is how low the rent can go. Anyone with any clout will have to give very few concessions or provide P&L’s as has been stated.

    It’s become a game of chicken and unfortunately with the combination of maintaining loan covenants, mixed with retailers not being held to store counts anymore, landlords are blinking first.

  18. 18 Brave New World March 27, 2009 at 2:48 pm

    Landlords, prepare for your vacant shopping centers. The retail BK’s will come en masse, and hit like a mack truck. It will be much too late to back peddle from your hard line positions.

  19. 19 CMBSLooksDead March 30, 2009 at 7:31 pm

    Even if the banks begin lending, what really matters for landlords renewing all of their loans maturing in the next three (3) years is the Collateralized Mortgage Backed Securities Market which funded their loans to begin with…. I don’t see the banks having the collateral to replace this. Then What?????

  20. 20 OldHat March 31, 2009 at 12:53 pm

    Even the 45+ employees have never seen a market like this, their experience from the early 2000’s, the mid-1990’s, the early 90’s and the 80’s is nothing comparable to what is coming down the pike. The massive property revaluations will turn development millionaires into paupers, overnight. Advice to the wise: Get out of this industry, but fast!

  21. 21 John Fox April 6, 2009 at 8:12 am

    Retailers absolutely deserve short term breaks where the sales justify it. As Alan pointed out 24 months is a popular term right now and that makes sense because it is short term. If proportionate reduction of sales of 10% is in order to keep occupancy for example, it makes sense for both parties.

    Some segments of the retail real estate market are in fact losing their relationship to performance. Clearly in the junior box arena, the few prospective takers of the 1,000+ vacancies (i.e. Circuit City, Linens, Office Depot, etc.) are trying to dictate rents well below the previous level — makes a 10% reduction look good.

  22. 22 FeedingFrenzy April 13, 2009 at 4:57 pm

    When a nation’s economy has 66% of GDP (gross domestic product) based on retail sales, and stock valuations of retailers are highly subject to sales growth, too much reliance is placed on the upward pressure on retail sales. Additionally, Landlord’s portfolio valuations are also highly subject to retail sales per square foot in their shopping centers. Unfortunately, contract law seems to be thrown out the window when retailers turn their “renewal specialists” into mercernaries in seek of a rent reduction frenzy. When is someone going to realize the flaws of this model?

  1. 1 NAI REOC Partners | San Antonio Commercial Real Estate Blog » Are (Retail) Rent Reductions Really Happening? Trackback on April 21, 2009 at 1:00 am

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