We, The Real Estate Professionals, Are Fighting The Last War(s)

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We’re thinking of renaming the Ruminations blog: Incoherencies. Not really, but today’s non-technical posting would sure support such a name change. [We also rejected a change to Ramblings, but only because that would give fuel to all of those who have tried to pin that moniker on us.] Here we go. Fortunately for readers, today’s blog posting will be short (for Ruminations).

The Times They Are A Changin’ – by Robert Zimmerman – has these lyrics:

Come writers and critics

Who prophesize with your pen

And keep your eyes wide

The chance won’t come again

The line it is drawn

The curse it is cast

The slow one now

Will later be fast

As the present now

Will later be past

The order is rapidly fadin’

And the first one now

Will later be last

For the times they are a-changin’

Ruminations and many, many others have written about the changin’ face of “retail.” Some have written about its imminent death; others (believe it or not) claim nothing is really “wrong,” and that it really is growing. Internet, changing tastes, climate change, autonomous vehicles, aging population, etc. – poison or elixir? We don’t know, but we believe retail will be around for a very, very long time. We also believe it won’t look like it used to look. The times they are a changin’.

So, thus far, we’ve presented nothing new. The forces on retail and the changes taking place have become like air: they are there, but we can’t see them. It’s normal – no cause for action. So, why are we wasting your time with words from a Nobel Prize-winning poet?

A few days ago, we came across a 2017 piece by Marc Bain on the Quartz website. Here is some data from that article. In the United States, there were 23.6 square feet of retail space per person (in 2015); for Australia: 11.1; and for the United Kingdom: 4.6. Yes, there were over five times the floor area per person in the United States than in the United Kingdom. “So what,” you say – the US economy is much stronger than the UK’s. So, here is a quote from that article: “Retail square feet per capita in the United States is more than six times that of Europe or Japan.” [You can read the article yourself by clicking: HERE]

“Something is rotten in the state of” [you name it], a line from the play Hamlet, by William Shakespeare. [Yes, we know he never won a Nobel Prize!] These are big disparities and one might argue are unsustainable. But, will other countries be adding more retail floor space, or will we in the United States be cutting down? We are placing our bet on the latter.

Only “Retail Change Deniers” fail to see that the sands are shifting. The rest of us see that changes are taking place, though we are focusing only on what has already happened. Like the generals, almost all of us – yes, almost all of us – are fighting the last war. Here’s how one source explains that aphorism. It “is a strategic term used to refer to the situation where one focuses on what happened rather than what is likely to happen.”

Here’s today’s “punch line.” Who among us has ripped into our favorite lease forms and completely adapted it to what the future may bring? We haven’t. Have you? Yes, it is difficult to do so. After all, it requires deep thinking. But, 20 years today go by much, much faster than it did in the 1970s, a decade when the parent lease to today’s leases was giving birth. What we’ve seen is landlords and tenants making piecemeal, incremental changes based on what “just happened.” Well, what “just happened” wasn’t a reset for the next 20 years; it was another clue that something else will happen.

Does Ruminations have any suggestions? Right now, we have only one global principle: we need to write flexibility into our leases – flexibility for both landlords and tenants. Think about it, aren’t we just “updating” our leases to match the status quo at the time we are making those changes? We’re not just referring to the periodic “adjustments” we make to our forms but, more so, we are thinking about the negotiated changes. For example, a tenant will want a change made because it is doing something the proposed lease would impair. So, a change is made. But, just for the same reason such a change was needed (and acceptable to the landlord): things will evolve over the course of the lease and, had they been known at the time of signing, the lease would have accommodated them as well. That’s why “flexibility” is needed. Let’s stop acting as if landlords and tenants are adversaries; they are partners. They both face uncertainty. They both have to navigate the future and they need to row in unison. Market forces affect each. Can Ruminations translate that to black and white lease provisions? No, not right now. Difficult and impossible are not synonymous.

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Comments

  1. Randall GUNN says:

    Flexibility is not only needed in the lease document but also in the local government land use, zoning, and development regulations. If the regulations are too restrictive, it is impossible to have any level of flexibility, regardless of how prescient and brilliant the drafters of the lease might be. If the surrounding community is NIMBY central, the government and activists will kill the real estate quicker than any retail apocalypse.

  2. I have been pushing the idea that landlords and tenants are business partners for a long time, and have even argued the idea that landlords are uniquely situated to provide tenants with leasehold improvement financing. (If you are really interested, you can read about that here: https://cressblue.com/commercial-landlord-tenant-loans-yes-or-no/).

    There is always the opportunity to amend a lease agreement in the future. This is usually easier with smaller landlords as they can typically be more flexible with vertically integrated management structures. I have done rent abatement for 6 months while a long term tenant worked on closing a major deal, Tenant financing, early terminations, relocations, down-sizing, and others. Almost every case was successful, and all were amicable. Even those that were financially break even resulted in a significant increase in the respectability of the firm in the community.

    No landlord has ever been successful if their tenants were not. Happy tenants pay and stay.

  3. Greg Parsons says:

    Landlords and retailers are partners. Especially when working with small and independent businesses. Neither party will be successful without the support of the other party.
    In today’s environment, more so than any other time in history, you need to have a deeper pipeline of prospective retailers. Build the stronger relationships with prospects so they know you have their best interests at heart. By doing this, you can merchandise better with stronger retailers.

    I suggest some leasing reps get some experience with a retail business to fully understand the needs of the retailer. Sharing empathy can go a long way in building relationships to create the best tenant mix for the property serving the community.

  4. William Serwer says:

    I am a long-time reader and always appreciate the Ruminations topics and discussion. Loved the Robert Zimmerman reference and lyric of course. So while there is a case for LL and T to attain some realization that they are “partners”, the mortgage lender that underwrote the loan against a pro-forma rent roll and may have the developer on a Guaranty hook or on the brink of BK isn’t worrying about the retailers’ issues-that’s the LL’s problem, even thought that point of view is short-sighted of course, but once the payments aren’t being made, any semblance of cooperation between lender and borrower evaporates.

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