Lease Restructuring: A Message To Retail Landlords

In today’s current economic climate, landlords are being inundated with lease restructuring requests from retailers. The landlords are gearing up for battle. Many of the landlords don’t recognize certain factors that might make them more cooperative and interpret these potential negotiations as something that is in their best interest instead of adversarial.

First, industry experts were forecasting a Tsunami of store closings in 2009 that in many cases were anticipated at over 14,000. In particular, many articles anticipated huge numbers of closings for the beginning of 2009. Why haven’t we seen these huge numbers of closures? Retailers are undertaking the lease restructuring effort first and foremost in order to try and stave off store closings. This is a positive for the landlords. Less stores will close due to many successful lease restructurings. Although many stores will still close due to underperformance or from bankruptcy, the numbers will likely be significantly less than initially anticipated. When these closures do occur, landlords will be even more vulnerable, as tenants that want to renew early now may not want to renew when they observe additional vacancies.

Retailers focused efforts now on lease restructuring, store closures, store transfer sales and other important decisions will not only reshape their real estate portfolio, but will also be a catalyst to expedite the recovery of the industry as a whole. If the retailers are calling to renew two or even three years ahead of the lease expiration and are willing to give extended term, then the landlords ought to listen and perhaps consider granting reasonable requests for reductions. Why, you ask? We are really in the early stages of commercial real estate devaluation. If the landlords tell the retailers to call back in a year, the market rents are likely to be lower and vacancies higher. This result doesn’t increase a landlord’s leverage. The best leverage they have is to work something out now. The retailers will be looking to obtain market rents when they call back and those most certainly will be lower than the market rents today.