Less than a third of businesses paid at least 75% of June rent, according to a study released Thursday by the National Retail Federation and investment bank PJ Solomon. By July, the number of rent payers had nearly doubled to 65%, he said. The study surveyed 48 senior executives of retailers with at least 10 stores and more than $ 100 million in sales in 2019, from July 15 to 28.
The survey also found that 73% of retailers who missed their payments plan to repay 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 kind of rent relief from their landlords, with postponing to the end of 2020 or 2021 being the most likely concession.
“If you are a retailer with a large store footprint, effectively managing these fixed costs has been key to preserving cash flow while physical sales remain under pressure, even though online sales have increased significantly,” said Jeff Derman, a managing director at PJ Solomon.
When retailers pay less or no rent, it creates a knock-on effect. Both owners and owners of shopping centers Simon Property Group and CBL & Associates feel the pain. CBL is now expected to file for bankruptcy protection by October 1, while Simon has taken some of its tenants like Gap Inc. to court. And Brookfield Properties’ retail division is laying off 20% of its employees, or about 400 people, as it seeks to get rid 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 sheet rather than a fixed expense. Homeowners, however, have resisted this type of structure in the past because it was more difficult for them to predict future income streams. While there may be some hesitation in making a deal like this, homeowners could end up capitulating to keep a space occupied.
“We’re looking to avoid a legal battle, and we’ve been able to stay out of court for the most part,” said Ami Ziff, national retail manager for Time Equities, which operates more than 120 commercial properties across the states. -United. if we gave everyone free rent, I would go bankrupt. ”
Associate Cos., Owner of Hudson Yards as well as The Shops at Columbus Circle in the Time Warner Center building in New York City, told CNBC at the end of August that he collected just over 50% of the rents from its shopping centers in Manhattan. . He expected that percentage to increase with the reopening of its malls, which they finally did earlier this month. The numbers paint a picture of the pain felt in the industry, even in the fall.
One of the most high-profile legal battles during the pandemic has been Miami owner Bal Harbor Shops, who filed a lawsuit to evict upscale department store chain Saks Fifth Avenue, alleging that the retailer failed had not paid more than $ 1.8 million in rent. Saks has since counter-attacked Bal Harbor Shops, alleging defamation, breach of contract and breach of fiduciary duty.
In another case, the Austin, Texas-based Alamo Drafthouse Cinema theater chain stopped paying rent at a San Antonio location after dark in mid-March. Its owner sued. And then Alamo hit back, seeking court relief to allow the theater not to pay its rent until its business was back up and running. Alamo said its supply chain has been disrupted as fewer new films are expected to come out, court documents show.
America’s biggest mall owner Simon Property sued Gap in June for rent of $ 66 million. Gap followed up with his own lawsuit for rent relief. Simon then filed a second lawsuit against the retailer, alleging that Gap was “opportunistically taking advantage” of the pandemic to avoid paying $ 107 million in overdue rents, even as Gap stores began to reopen.
“I think we’ll see more litigation,” said David Marmins, who co-leads the retail team at law firm Arnall Golden Gregory, who represents Alamo. “There will be no general agreement. There are tenants who have leverage and are fighting for more leverage. There are still more negotiations to be done. ”
“I think we’re getting to the bigger issues now,” Marmins added. “Many agreements have been made, but now we are in particularly difficult situations which are reaching a critical point. ”
Another part of the problem: Analysts say rents have to come down further in some markets because they have become too high for many companies to justify paying. And the supply of retail space and the demand for retail space are no longer aligned, with more online sales.
Around New York, a descent has already started. In the second quarter ended June 30, average asking rents along 16 major retail corridors in Manhattan fell for the 11th consecutive quarter, falling to $ 688 per square foot, according to a report from the service company CBRE commercial real estate. The drop marked the first time since 2011 that prices have fallen below $ 700, the company said, which is an 11.3% drop from a year earlier.
And the number of ground-floor leases available in the 16 Manhattan retail lanes tracked by CBRE hit a record 235, surpassing the previous high of 230 in 2013.