Say Good-Bye to the Old Standard of Retail Tenants

Landlords are once again rethinking retail tenant strategy. Following the pandemic, daily needs tenants are not as in-demand as they once were. Instead, landlords are focused more on signing leases with experiential retailers.

“Before the pandemic, landlords wanted a grocery store or another store with a large lease that would drive foot traffic. Now, to the extent that people are doing more deliveries, that is changing the fundamental underwriting for landlords and their lenders,” Jason Grinnell, a partner at Thompson Coburn, tells GlobeSt.com.

Now, landlords want to partner with retailers that are going to create a unique experience in the center. “There is a push for retailers that are more experiential and open areas where people can gather,” says Grinnell. “I think that these things were starting off, but you need to have a reason to draw people to your center. More shopping centers are devoting square footage for fulfillment purposes where customers pick up packages rather than having it delivered to their homes. The question is: how do you get people to stick around.”

The change could also have implications for retail lease structure, and it could mean the end of co-tenancy requirements. Traditionally, landlords curate a mix of tenants that share a similar customer base. “Now that there is an unhinging of tenant behavior, tenants may no longer require co-tenancy requirements or they will loosen up on those demands,” says Grinnell.

It isn’t only landlords. Grinnell says that capital providers are also looking at tenant mix more critically than it has in the past. How that will affect capital availability is still unknown. “I think that is being worked through. Everyone has to work through financial calculations for loan requirements,” says Grinnell. “Lenders that are out there are underwriting loans based on security of the leases that are in place.”

While adapting quickly is Grinnell official advice, he also says that it is important not to overcorrect. “Smart owners are looking to adapt as quickly as possible but also in a way where they are not overreacting. There is probably a fine line between the two,” he says.

However, retail owners should react to the change in market dynamics. “I think that real estate tends to be a super tanker: it gets there, but when you have long-term real estate tied up in long-term leases and rents are baked it, it can be hard to be super flexible,” says Grinnell. “With that being said, the pandemic has been a massive pivot point.”