Changes in retail (1 Viewer)

[Binky The Doormat]

@timschochet  I've been wondering about this.  In general, how are landlords handling tenets that had to close temporarily or has otherwise been severely impacted by COVID-19?  Is the expectation that they will continue to pay rent regardless?  Are landlords forgiving rent?  And they trying to work out arrangements to get them to pay up later? I'm sure different landlords are handling things differently but I guess I'm curious what you think it most common.

I'm wondering how many of those landlords have mortgages and still owe that money to the bank.  

And how many of those mortgages go bust and how many banks then take big losses and then get bailed out by the government again.  

 

[jvdesigns2002]

@timschochet  I've been wondering about this.  In general, how are landlords handling tenets that had to close temporarily or has otherwise been severely impacted by COVID-19?  Is the expectation that they will continue to pay rent regardless?  Are landlords forgiving rent?  And they trying to work out arrangements to get them to pay up later? I'm sure different landlords are handling things differently but I guess I'm curious what you think it most common.

The landlord for the shop that I manage is the Irvine Company.  The owner Donald Bren is the wealthiest real estate developer in the United States--worth $16+ billion.   This company could have literally afforded to give it's retailers 2-3 months of free rent and it would have been literally nothing to them.  They didn't offer us a penny of rent relief after being tenants of theirs for 28 years and never late on rent.  They gave us 3 months of deferred rent to where we'll have to pay double rent for 3 months.   On the other hand (and my properties are of the residential type) I'm a landlord and I gave my tenants 3 months of rent at a 50% discount (not deferred--literally charged them half rent for 3 months).   

 

[BassNBrew]

The landlord for the shop that I manage is the Irvine Company.  The owner Donald Bren is the wealthiest real estate developer in the United States--worth $16+ billion.   This company could have literally afforded to give it's retailers 2-3 months of free rent and it would have been literally nothing to them.  They didn't offer us a penny of rent relief after being tenants of theirs for 28 years and never late on rent.  They gave us 3 months of deferred rent to where we'll have to pay double rent for 3 months.   On the other hand (and my properties are of the residential type) I'm a landlord and I gave my tenants 3 months of rent at a 50% discount (not deferred--literally charged them half rent for 3 months).   

Very nice of you to do.  Hopefully they needed it and appreciate you being a good guy. On the other hand we probably found the reason Bren is filthy rich and you’re posting at fbg with me

 

[BassNBrew]

I thought real estate was a house of cards BEFORE the pandemic.  There is absolutely no way this is sustainable.  

She recently got a better job and paid off her car, so she had been looking at properties with an agent.  I basically pleaded with her to chill out- we are in the middle of a pandemic, who knows what the job market will look like in a year or two.  To me we’re at the tail end of a bubble preceding a serious depression.

Some of these realtors make a living off filling the buyer’s head with rationalizations for buying right now.  I remember mentioning to this guy back in February how covid19 could affect the economy and he more or less shrugged it off.  Then 20 million people lost their jobs. 

She made an offer on a house that got declined.  By that point I more or less begged her to stop looking, to stop putting herself in a position to emotionally attach herself to a house.  To just please wait a year or two.  Sure enough she kept looking and made another offer on a different house, which they turned down initially.  She was in tears that she didn’t get the house, this property that didn’t exist in her brain until she went out and looked at it.  Then they turned around and accepted her offer. 

It’s probably a subject for a different thread but it really burns me that I’ve spent years saving money and investing and waiting for the right time.  It was supposed to be a decision we made together.  I don’t feel a sense of ownership with the house at all. Then I see talk of renters getting wiped out, savings rates in the trashcan, massive unemployment lines, serious talk about the dollar losing its ‘exorbitant privilege.’   Only a matter of time til this hits homeowners and real estate markets.  

There is some silver lining here- we’ve spent about 40k just renting the past few years.  At least now we’re settled into a place where we can really invest time and energy.  It is a cool property.  It just seems like a decision made for an era that is coming to an end.  I should probably just get over it.  

Sorry to sidetrack thread, but I agree, I think it’s historically bad timing to buy a house right now. 

I think you’re wrong and will be pleasantly surprised. We came into this with a housing shortage and historically low ownership rate. Still hadn’t recovered from years of single family starts being well below population growth. Commercial real estate on the other hand, look out below 

 

[snogger]

I'm wondering how many of those landlords have mortgages and still owe that money to the bank.  

And how many of those mortgages go bust and how many banks then take big losses and then get bailed out by the government again.  

Mall of America misses it's 3rd payment

Minnesota’s Mall of America, one of the nation’s largest shopping centers, missed its third payment on its $1.4 billion mortgage, Bloomberg reported.

That puts its owner, Triple Five Group, more than 60 days delinquent. The Canadian-based company failed to make its $7 million debt payment for June, the news service reported, citing unnamed sources.

 

 

[snogger]

ugggghhh.. then there is this:

A scary number of retail companies are facing bankruptcy amid the coronavirus pandemic

:(  

 

[DallasDMac]

The landlord for the shop that I manage is the Irvine Company.  The owner Donald Bren is the wealthiest real estate developer in the United States--worth $16+ billion.   This company could have literally afforded to give it's retailers 2-3 months of free rent and it would have been literally nothing to them.  They didn't offer us a penny of rent relief after being tenants of theirs for 28 years and never late on rent.  They gave us 3 months of deferred rent to where we'll have to pay double rent for 3 months.   On the other hand (and my properties are of the residential type) I'm a landlord and I gave my tenants 3 months of rent at a 50% discount (not deferred--literally charged them half rent for 3 months).   

Aren't most people that rent retail space on a razor thin margin line? How will they ever afford double? Isn't this guy basically guaranteeing himself a lot of empty space when he tries to collect that? Given the state of businesses, I don't see people exactly flocking to look for retail space between meetings with their bankruptcy lawyers.

 

[jvdesigns2002]

Aren't most people that rent retail space on a razor thin margin line? How will they ever afford double? Isn't this guy basically guaranteeing himself a lot of empty space when he tries to collect that? Given the state of businesses, I don't see people exactly flocking to look for retail space between meetings with their bankruptcy lawyers.

For sure--and the best part is that the Irvine Company basically builds in a "percentage rental" dynamic in pretty much all of their commercial leases. They literally get a portion of every sale that their tenants make.   So they are partners when we are open--but during the lockdown when we are closed--they suffer NONE of the downside--we are to eat that ourselves.   They are truly a company that doesn't care about vacancies because they have a monopoly in one of the wealthier demographics around (they own the vast majority of the shopping centers in Newport Beach and Irvine).   They pretty much know that they can get some corporations to take over their spots.  We've been here for 28 years--and since then--virtually every small business has been replaced with companies like Starbucks, Total Wine...etc.   It's really sad that some landlords-especially the ones that can afford it--are just actively doing nothing to prevent small businesses from going extinct. 

 

[Ministry of Pain]

24 Hour Fitness just declared Chapter 11. They’re going to close 132 stores. 
ATT announced today they will close 250 stores. 
 

I have been a commercial shopping center real estate agent and property manager in Southern California for 30 years. Here are my thoughts (for what they’re worth): 

1. There’s not going to be any quick economic recovery. We’ve got a lot of bad times ahead. A lot of retail jobs are going to be gone forever. COVID has accelerated a process that was already slowly taking over retail as online purchasing grew. 
 

2. There’s going to be a ton of vacancies. I mean more than we’ve seen in our lifetimes. Landlords haven’t quite felt the sting yet but they will. They’re going to have to lower rents to stay competitive. 
 

3. ANY square footage over 10,000 feet is suspect. That includes fitness, supermarkets, Department stores, electronics, etc. Tenants formerly thought of as “anchor” tenants are going to disappear. Instead of a 50,000 square foot furniture store, you’re going to end up shopping at a 2000 sf store and if what you want isn’t there, you’ll be presented with an online catalogue. Or else you can drive out of your way to an outlet. 
 

4. Customer service will be key to everything. In the past consumers chose between low prices and excellent customer service. Now the businesses that want to survive will have to provide both. 

It will be a great time to be a consumer- if you still have money to spend that is. A lot of folks won’t. 

        

You're a Commercial RE Agent? 

 

[DallasDMac]

For sure--and the best part is that the Irvine Company basically builds in a "percentage rental" dynamic in pretty much all of their commercial leases. They literally get a portion of every sale that their tenants make.   So they are partners when we are open--but during the lockdown when we are closed--they suffer NONE of the downside--we are to eat that ourselves.   They are truly a company that doesn't care about vacancies because they have a monopoly in one of the wealthier demographics around (they own the vast majority of the shopping centers in Newport Beach and Irvine).   They pretty much know that they can get some corporations to take over their spots.  We've been here for 28 years--and since then--virtually every small business has been replaced with companies like Starbucks, Total Wine...etc.   It's really sad that some landlords-especially the ones that can afford it--are just actively doing nothing to prevent small businesses from going extinct. 

It seems possible that this may be exactly what they want. Chase out the smaller businesses so they can get the big boys in there and make more money. Or do you think that's unlikely?

 

[timschochet]

@timschochet  I've been wondering about this.  In general, how are landlords handling tenets that had to close temporarily or has otherwise been severely impacted by COVID-19?  Is the expectation that they will continue to pay rent regardless?  Are landlords forgiving rent?  And they trying to work out arrangements to get them to pay up later? I'm sure different landlords are handling things differently but I guess I'm curious what you think it most common.

Sorry about the delay in answering this. 
I manage property for my family and at this point after my dads death I’m the decision maker (though certainly not the sole owner.) I convinced my family to allow me to give free rent or half rent, depending on the circumstances, and not ask for it back. My philosophy is that if you’re shut down you shouldn’t have to pay. If your business is hurting you should only have to pay in part. We also have partners on another property and they don’t agree with this. And I know several landlords who have behaved like the Irvine Company. I don’t approve of that, especially from them. My partners in Bakersfield are small fry and have a mortgage and expenses to pay. I have tried to help small businesses where I can; I am much more reluctant to help corporations (and they’re typically much more aggressive about asking for help lol.) 
 

My family went along with what I wanted because I explained to them my feeling that we need to protect these tenants. If they are forced to shut down it will take a long time to replace them. So this isn’t generosity on my part; it’s good business IMO. 
 

I also think this is another thing that Trump and Congress (both parties) blew. They should have gotten a bank holiday the way FDR did: a 30 or 60 day moratorium on all mortgages. That would have been far better than the checks they sent to everyone. Trump could have done it and then gone on television and demanded that Landlords suspend all rent charges on both business and residential for 2 months, April and May. Had he taken this one step I believe the economy would be booming right now and he would still be the favorite for re-election. 

 

[nirad3]

The landlord for the shop that I manage is the Irvine Company.  The owner Donald Bren is the wealthiest real estate developer in the United States--worth $16+ billion.   This company could have literally afforded to give it's retailers 2-3 months of free rent and it would have been literally nothing to them.  They didn't offer us a penny of rent relief after being tenants of theirs for 28 years and never late on rent.  They gave us 3 months of deferred rent to where we'll have to pay double rent for 3 months.   On the other hand (and my properties are of the residential type) I'm a landlord and I gave my tenants 3 months of rent at a 50% discount (not deferred--literally charged them half rent for 3 months).   

Photo of the Irvine Company's headquarters....

 

[jvdesigns2002]

It seems possible that this may be exactly what they want. Chase out the smaller businesses so they can get the big boys in there and make more money. Or do you think that's unlikely?

Historically speaking--replacing the small independents with giant multi-billion dollar corporations that they know are good for long term leases is exactly what they want.  It seems no different now.  However---I wonder if things are different this time.   Just seems as even the billion dollar corporations are shying away from brick and mortar--but the Irvine company doesn't seem to care too much--at least not at the moment.   If an actual tsunami of vacancies hit--and they stay vacant for a while..perhaps they sucker some independents to take over spots at temporarily discounted rates--but they'll build in triggers/ladders into their leases to where 2-3 years in--the new businesses will be paying insanely high rates.   One downside to this entire thing is that the gap between the super wealthy and the rest of us just grew a ton.  The reality is that most of the super wealthy only care about preserving or increasing their wealth and are not willing to make any concessions to do it.   

 

[snogger]

Not just retail.. Our company has two large office buildings right next to each other. With as well as working from home is doing, they are looking to close/sell one of the buildings to reduce costs. I think a lot of companies are going to start questioning whether the cost of office space is worth it.  

And there it is.. But "worse" then a condense to one..

Received an email this morning that they have sold Both buildings. Rumors are going wild on what location they are negotiating to buy. Rumors are CEO wants a more visible location closer to the hub of the Twin cities( St. Paul or Minneapolis). Uggghh.. :(  

Hate the idea of driving downtown again and paying $200 a month just to park... Only way for mass transit for me would be to drive 20 minutes to get on a bus for 30 to 40 minutes and repeat at night.. 

Was already planning that, whenever we go back to the office, of working 2 days a week from home.. A move to downtown might make me ask for 3 days a week. 

 

[huthut]

When we last rented it was through Irvine Company, nice apartment, but they increased the price the maximum allowable year after year. Not that that is unique to them.

 

[Harris]

24 Hour Fitness just declared Chapter 11. They’re going to close 132 stores. 
ATT announced today they will close 250 stores. 
 

I have been a commercial shopping center real estate agent and property manager in Southern California for 30 years. Here are my thoughts (for what they’re worth): 

1. There’s not going to be any quick economic recovery. We’ve got a lot of bad times ahead. A lot of retail jobs are going to be gone forever. COVID has accelerated a process that was already slowly taking over retail as online purchasing grew. 
 

2. There’s going to be a ton of vacancies. I mean more than we’ve seen in our lifetimes. Landlords haven’t quite felt the sting yet but they will. They’re going to have to lower rents to stay competitive. 
 

3. ANY square footage over 10,000 feet is suspect. That includes fitness, supermarkets, Department stores, electronics, etc. Tenants formerly thought of as “anchor” tenants are going to disappear. Instead of a 50,000 square foot furniture store, you’re going to end up shopping at a 2000 sf store and if what you want isn’t there, you’ll be presented with an online catalogue. Or else you can drive out of your way to an outlet. 
 

4. Customer service will be key to everything. In the past consumers chose between low prices and excellent customer service. Now the businesses that want to survive will have to provide both. 

It will be a great time to be a consumer- if you still have money to spend that is. A lot of folks won’t. 

Agree with most of this except the bolded. While not much brick and mortar retail is in season (and hasn't been for a while TBH), people need to eat and I just don't see the online disruption coming to grocery just quite yet. It's certainly started but nowhere near Amazon levels yet. I will say, however, that what you said in #2 will drastically affect all sectors and tenant types, including grocery. The number of tenants asking for discounts, deferred rent or free rent has blown and once those leases expire the renewals (if they happen) will be at much lower rates. 

Right now a  lot of the effect of tenants downsizing hasn't been felt but as you say, it will happen in the future as tenants realize that they can do the same or more with less space. It's just going to take a cycle through the lease expirations for the movement of space to occur.

Source: I'm in fund management (i.e. landlord) for a large, open-end CRE fund.

 

[Harris]

@timschochet  I've been wondering about this.  In general, how are landlords handling tenets that had to close temporarily or has otherwise been severely impacted by COVID-19?  Is the expectation that they will continue to pay rent regardless?  Are landlords forgiving rent?  And they trying to work out arrangements to get them to pay up later? I'm sure different landlords are handling things differently but I guess I'm curious what you think it most common.

What we've seen on the landlord side is a variety of things. We've granted free rent to some tenants, reduced rent to some, negotiated deferrals with others (i.e. skip 4 months to be paid over two years),  and some have simply not paid. It's certainly different with each landlord but our stance is to negotiate and try to work out with the tenants to each particular situation. A Fortune 500 tenant is going to have a different situation than a mom and pop retailer. Although even the F500 tenants do still seem to ask for free rent to see what they can get away with. At this point in the downturn, one of the only large tenants that we do not think will be able to pay us a substantial portion of its rent is a logistics tenant that specializes in putting on events. The business has just been decimated and as a landlord there's not much we can do besides take the hit on the income stream and the valuation of our building.