Is Pandemic Pricing the New Norm for Retail Space?
The coronavirus pandemic just keeps hanging around, although enough people have been vaccinated that daily life has been returning to what has become one of the catchphrases of this particular plague: a new normal. One of those new normals has been owners and managers of commercial real estate (CRE) finding themselves giving concessions and incentives to businesses willing and able to stay put or move into space that would otherwise sit empty. COVID-19 restrictions exacerbated what already was a tough situation for brick-and-mortar retailers competing with e-commerce, and one way to help them get by has been modifying leases to tie the rent to sales. While major brands can be expected to have more sway with the landlords, especially those saddled with keeping malls alive, the practice has spread. "More brands are demanding it," said Philippe Lanier, principal at EastBanc, a manager, developer, and owner with a portfolio of dozens of properties in the Georgetown neighborhood of Washington, D.C., told The Wall Street Journal. Whats good for the goose  for the gander, not so much  Those EastBanc properties are open-air sites, but indoor and outdoor shopping centers alike are competing for tenants. Tying the size of the rent to the take in the till appeals both to established businesses and to startups that can really use the lower rent while they absorb the losses that typically go with a business just getting its legs. The WSJ piece, in fact, says that typically that arrangement is only for the first "year or years of a lease, which would then revert to a fixed-rent model." Landlords are already attempting to ameliorate the effect by trying to reduce the amount of sales needed to trigger reductions, the article said. "Tenants love it. Landlords hate it," Michael Rielly of retail and hospitality real estate consultants Rielly Retail Solutions told the newspaper. There are also some inherent difficulties in such an arrangement, such as getting the retailer to reliably turn over the proof about how sales are rising and falling, and even what actually constitutes a sale, especially at businesses that sell online and in the store. Plus, theres a reason triple net leases, for instance, which require the tenant to pay its share of insurance, maintenance, and the like are so popular, including among real estate investment trusts (REITs). They provide stability and predictability. Doing something like changing the size of the rent each month takes away from that, but then again, so do empty storefronts. Most dont pay rent at all. The Millionacres bottom line  Besides the obvious tragedy of loss of life, economic disruptions have been inherent to pandemics throughout history. As society recovers, its participants find new ways to deal with each other and their changed circumstances. This one is no exception. Just ask restaurants or any business trying to find and keep staff. Average pay is rising, and businesses are going to need to respond, each in their own way. Then theres office space. Hybrid work-from-home models may become the norm as office REITs and other property owners are relegated to watching fretfully as that massive workforce returns to the office. Or not. And retail has proven itself to be the opposite of the residential market. Were in an epic sellers market it seems, if you got a house to sell. If you have a storefront, or a mall full of them, youre in a very different position. Whether that pandemic pricing -- in whatever form it takes -- continues will be one of the big stories in the CRE space as we continue to emerge from under COVID-19.