We retail real estate veterans have navigated our ways through many crises: The end of retail overbuilding in 1990, Hurricane Katrina in my hometown of New Orleans, 9/11, and the Great Recession of 2008-2009. As a result, we (mostly) gave up speculative building, made our properties safer, planned for disasters better and created an industry focused on efficiency.
COVID-19 now joins that list and challenges us to rethink our relationships and decide how we conduct our business for decades to come. The Lamy Group has helped many retail real estate owners and managers assess tenant viability and resolve lease issues during times of hardship, including processing requests for rent deferrals, abatements and forgiveness. Here are 10 things we learned from COVID-19 that should make us and everyone else stronger:
1. Landlords and tenants must forge viable partnerships. Landlords need stores and associated rents to meet their obligations and, right now, many retailers need financial accommodation to survive. Even so, the tenant has a contractual obligation to pay rent. Once adversarial, the landlord/tenant relationship is becoming more symbiotic.
2. Consider short-, intermediate- and long-term challenges. The big questions that will develop as the economy restarts is what happens during the 90 to 120 days after reopening (the short term), when restaurants and retailers are operating at 25% to 50% of capacity. Different questions will emerge throughout 2020 (the intermediate term) and perhaps through the second half of 2021 (the long term). Capturing and leveraging available retail data allow landlord and tenant to make informed decisions.
3. Share more retail data. Landlords need retail rental income to meet financial obligations. Many retail tenants with diminished revenue stopped paying rents during the second quarter or requested relief. Landlords who received applications should have obtained from the tenant at least two years of financial statements and monthly sales reports, including the first part of 2020 to understand the pandemic’s impact. Tenants and landlords must continue to educate each other if each are to survive and prosper.
4. Open communication builds trust. During the shutdowns, landlords found they could gauge trends more accurately from weekly sales reports than they could from monthly ones. You can bet they will be more likely to want weekly data from tenants after the pandemic subsides. Conversations about business conditions, from seasonal sales to general observations about the local economy, can benefit all.
5. Common ground is the starting point. Some landlords have launched programs such as curbside pickup to help struggling but promising retailers re-start. Tenants are expanding their services and goods. (Restaurants selling grocery items, for instance.) New services and collaboration can draw consumers to brick-and-mortar locations.
6. Lease covenants will evolve. Tenants operating at fractions of capacity can’t support traditional lease obligations. Gross and percentage-only rents are being discussed for six or even up to 18 months. All need a clearer definition of force majeure to understand its impact on monetary provisions of the lease. Likewise, a tenant’s business interruption and a landlord’s rent guarantee insurance coverage provisions without pandemic exclusion should hold the insurance industry accountable, perhaps with federal government assistance. In addition, the industry needs to assess, agree and make standard the lease clauses that helped landlords determine rent assistance. Co-tenancy, exclusives and restrictive covenant clauses are being revisited and addressed.
7. Smart restaurateurs will be back. Restaurant managers who educate their staffs on safe practices—as well as point them out to customers--will regain their trust and keep them for the long term. Landlords’ relaxed restrictions over the common area are creating makeshift dining seating areas in open-air centers’ sidewalks and the parking field to ensure physical distancing.
8. Plan for the market that is and will be, not what it was. Both retail tenant and landlord must review current business models and market conditions. Tenants must be evaluated in terms of current performance metrics, not just history. Could some previously reliable retailers struggle? Might others adapt to new needs? Are there new voids? Constant communication, frequent financial reporting, and innovative thinking and negotiating will be critical.
9. A win-win framework unites, builds trust and delivers success. There is no “us” or “them.” There is only “we.” A win-win situation enabled through mutual trust, joint grit and perseverance will break from the broken status quo and lead to new thinking and greater success. We have the potential to reinforce and reinvent the relationship between landlords and tenants for the better, creating a new foundation for mutual success.
10. Integrity, attitude, and commitment remain the pillars of business. Sometimes in a crisis, it’s hard to envision survival. Nor should we be overly optimistic. But let’s continue to communicate honestly, work hard, and commit to working together.
Kenneth S. Lamy, CEO of The Lamy Group in New Orleans, is an expert on retail leases and retail sales analysis. He can be reached at [email protected].