Questions Nervous Landlords Should Ask Their Tenants

It almost seems too obvious a point to make that a property’s income stream is no more or less certain than that of its tenants. But Moody’s Analytics CRE disagrees because the stakes have changed.

“In the era of high capital costs, the credit quality of tenants is more important than ever,” the firm wrote. “As we saw with Bed Bath & Beyond earlier this year, major retailers are beginning to succumb to changing consumer behavior and economic conditions post-COVID. Passing 1000 stores and 32,000 employees in 2022 before declaring bankruptcy in April of this year, Bed Bath & Beyond serves as an example of why tracking tenancy in all economic conditions is vital.”

“The loss of Bed Bath & Beyond may materially impair cash flow for some properties and result in some loans defaulting,” wrote Trepp in an analysis at the time, which did note that other retailers were picking up on many of the vacancies. “Due to low levels of retail development in recent years, Bed Bath & Beyond’s bankruptcy means a greater supply of space for retailers looking for expansion opportunities.”

The company had long faced difficulties and its bankruptcy “wasn’t a shock to the market,” Moody’s said. “But it may be the first in a series of closings or bankruptcies, which will leave a wake of owners with empty storefronts and lenders with delinquent payments. When CRE is performing well, like it had in the past few years, it can be easy to slack on risk mitigation and contingency plans. However, conditions have changed drastically, and many CRE professionals are unprepared for what’s to come.”

Moody’s looked at retail, office, and industrial and the questions property owners should ask themselves.

For retail, those included what types of retail businesses were doing well in the current climate; if a tenant declares bankruptcy, are there similar types of businesses in your portfolio; changes over the last six to 12 months; what would happen to neighboring businesses if an anchor tenant went out; are office vacancies or low occupancies in a central business district potentially cutting retail traffic; and how the overall credit profile of a property is doing.

For office, the questions include whether tenants are making relocation plans; if any are showing signs of downsizing or non-renewal; if a property’s book of business is diversified without an overreliance on a given tenant industry; property locations and the prevalence of remote work; and any deterioration of credit profiles.

And for industrial, whether tenants are diversified across industries; if any tenant is large and at risk, or smaller and in an industry that is at risk (like office supplies); and if smaller tenants have strong credit profiles or subject to distress in a downturn.