Retail Rent Negotiations Get Messy With $20 Billion Due

(Bloomberg) -- Retailers and landlords are locked in an awkward dance as April rent comes due.

Major chains including Mattress Firm and Subway have told landlords they will postpone or slash payments in coming months. Mall operators say they expect to be paid. Best Buy, meanwhile, plans to pay rent, with the possible exception of locations it was forced to close.

The situation is messy, in large part because no one knows when it will end. Cash-strapped retailers are stuck with lease obligations, while landlords have to pay their lenders, who in turn are looking to the federal government for help. A lot’s at stake: U.S. retail landlords collect more than $20 billion in rent in a typical month, according to data from CoStar Group Inc.

“It’s three-dimensional chess,” said Tom Mullaney, a managing director in restructuring at Jones Lang LaSalle Inc., said. “The battlefield is foggy.”

With stores shuttered around the U.S., struggling retail chains and small businesses are laying off tens of thousands of workers and trying to figure out if they can make rent as the coronavirus outbreak batters the economy. Landlords are expecting missed payments, while also trying to assess whether their tenants are actually in trouble or just using the crisis to get a deal on rent.

The federal stimulus bill is expected to provide some relief, both for tenants and owners, but it will take time to get the program up and running. Even then, it’s not clear the money will be enough to keep retailers afloat with their stores dark.

“All the money coming into the system from the stimulus will be good, but it won’t be enough,” said Eric Anton, an associated broker at Marcus & Millichap. “There’s going to be real losers and pain. There’s already been a lot of pain and it’s only been two weeks. Six more weeks will only bring more pain, lots of hard negotiations.”

‘Buying Time’

Anne Mahlum, founder and chief executive officer of the Washington-based fitness chain Solidcore, recently shut down 72 studios and laid off most of her staff. She sent letters to her landlords asking for rent abatement. So far, only a few have agreed. She owes more than $600,000 in rent for April.

“The majority of them are at least offering deferment, but some have said rent is still due, which is ludicrous,” Mahlum said. “Even deferment doesn’t help. We’re just kicking the financial can down the road.”

Landlords are getting flooded with requests from frantic tenants looking for rent relief. Many are trying to work out deals in private on a case-by-case basis, to avoid getting inundated with demands for similar concessions.

“If everybody asks and everybody gets, it’ll just bankrupt the landlord,” said Chris Smith, a lawyer at DLA Piper. “Everyone’s hoping to buy some time to respond intelligently as the facts start coming out.”

Taubman Centers Inc. and Federal Realty Investment Trust, which operate retail space, have told tenants they expect rent to be paid according to lease obligations, citing their own expenses. In statements to Bloomberg, both said they are talking to individual tenants about their specific situations.

“We are attempting to navigate through this situation in the best way we can, while being as flexible as we can with our tenants in light of our ongoing obligations,” Taubman, one of the largest U.S. mall operators, said in a statement. “The tenant memo does not replace our willingness to talk to each tenant about their respective challenges.”

Federal Realty has seen its shares dip more than 30% this month, while Taubman is down about 17%. Both companies have performed worse than the S&P 500.

Defaults Expected

Many retail tenants plan to withhold rent payments for April.

“You can’t work through expenses and continue to pay operating ones when you have zero money,” Mahlum said. “We’re not making any April payments.”

Those who can afford rent on some locations will likely be strategic, paying for their best-performing stores while withholding payment on the ones that were hurting before the crisis, JLL’s Mullaney said.

Same goes for landlords, who were already struggling to fill their space before the coronavirus shut down the economy. Many are likely to work out deals with credit-worthy tenants who will take on a longer lease.

That partly depends on how much flexibility they can get from their lenders.

“Some are taking the high road,” Mullaney said. “But the more leveraged you are, the more liquidity is an issue, and it’s not so easy to take the high road.”

©2020 Bloomberg L.P.