The COVID-19 Crisis Is Now Over – What Is Next For Retail Real Estate?

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If you are like we are, you’ve been receiving dozens of COVID-19 emails or other messages each DAY. On the “law” side, they discuss and dissect the legal rights and remedies implicated by the current crisis – force majeure, impossibility, impracticality, material adverse changes (effects), foreclosure moratoriums, and on and on. On the “business” side, they opine on holding off the payment under mortgages or leases, or the applicability of insurance coverage, and on and on. The now 94-year old Newton Minow, when last to speak on a panel, is reported to have said something like: “By this time, everything to be said has already been said, but not everyone has had a chance to say it. Now is my turn.” That’s the feeling we are getting about the nearly 200 messages we are receiving weekly.

Some “advice” is well thought out; some is authoritative; some is important; some is trivial; some are well-meaning but dangerous. To us, the common factor is that all (that we have seen) are backward-looking. What about tomorrow? In the words of Bishop T. D. Jakes, “Never make a permanent decision based on a temporary storm. No matter how raging the billows are today, remind yourself: ‘This too shall pass!’”

Understandably, what we’ve been reading is backward-looking (such as, “what did we mean when we wrote …” or “how can we reinterpret …”), after all: “When you’re up to your neck in alligators, it’s hard to remember that your initial objective was to drain the swamp.”

Today, Ruminations would like to look at tomorrow. We’ve written before that the “producers” in our real estate world are the tenants. They are the ones that generate the revenue that pays the rent that pays the mortgage. Landlords are both consumers and producers, using what they consume in the form of rent to feed lenders and vendors, keeping a small portion for themselves. In the real estate context, lenders are pure consumers. The bottom line, however, is that everyone in the food chain lives on what tenants produce.

Where does that take us? Retail properties have been increasingly dependent on restaurant, service, and entertainment tenants. Though there are many “chains” behinds these kinds of tenants, a lot of them are the “mom and pop” ones. Many brand names are just those of franchisors. An increasing share of a property’s rent roll now relies on that coming from small business owners. Our crystal ball tells us that a lot of these tenants don’t have the resources to return to business. If we are right, that means their stores will be empty. Chasing personal guaranties will be frustrating and often futile. Even if a landlord is successful, the store space still will be empty. Also, if the stock market returns and portfolios are restored (something entirely speculative), we don’t expect that new entrants to retail tenancy will be forming lines to lease these newly emptied spaces.

“Better the devil you know than the devil you don’t.” If a tenant had a “good” business before the COVID-19 disruption, it is likely to have one after this is behind us. What has happened is similar to experiencing an uninsured fire. Good business and good business people are likely to be successful again if they can get past the “shortage of capital” crunch. That’s where landlords can be of help to those tenants and themselves. If space is going to be empty anyway, why not provide it rent-free to previously successful “old” tenants so that they can get back on their feet and start paying full rent again? Why not follow a short rent-free period with a graduated stepping-up rent schedule? How about then extending the lease term and recovering part or (even better) all of the “waived” rent down the road?

Those lenders with the power to do so can modify the terms of existing loans in a similar fashion, actually recasting loan repayment schedules without claiming a “default” or thinking “work-out.” If a landlord-borrower was “good” before this crisis, it will probably be okay “after” this crisis. Better the devil you know. Defer the reward you expected from the loan.

We have other thoughts about what might help after this cloud passes over. We might share them in future blog postings. For example, properties that will have a lot of vacancies can now be more easily repositioned. It may be time to relocate tenants and concentrate the vacant spaces in a way that allows repurposing. Healthy looking projects actually become healthier. To do this, tenants and lenders will need to cooperate. As we’ve written before, our industry rests on a three-legged stool (tenants-landlords-lenders). If one leg fails, the stool fails, taking two other two legs with it.

Ruminations has thousands of readers – smart ones. Now is the time to share your ideas for the future. What are you (or will you be) doing after “this, too, has passed”? If you had the power, how would you rebuild your business post-COVID-19? Post your ideas below or on any one of the other forums in which Ruminations is seen. After all, we are all producers and consumers.


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