Retailers sign more short-term leases in a risky gamble for mall owners

American skate shoe company brand Vans store seen in Hong Kong.

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Retailers and their owners are in a high-stakes game right now. And it will be a few years until we find out which party is on the winning side.

As thousands of retail leases are renewed, their lengths get shorter and shorter, as companies face an unpredictable future, look for ways to cut costs, stay flexible, and maintain leverage on their owners, even after that the health crisis subsides. However, risk is a two-way street. Because, on the one hand, in two to three years, mall and shopping center owners could have the opportunity to turn the tables in their favor, raising rents or kicking out retailers in exchange for another tenant. But more short-term deals could also leave homeowners with even bigger vacancies down the road.

Best Buy CEO Corie Barry said Thursday that the big-box retailer’s average lease term is definitely on the decline.

She said the company has about 450 leases to renew in the next three years, or an average of 150 annually. The electronics retailer has closed about 20 of its larger-format locations each of the past two years, but expects to close even more in 2021, he said.

“If we look at the short term, there will be higher thresholds for renewing leases as we assess the role each store plays in its market, the investments required to meet the needs of our customers, and the expected return based on a new retail landscape. “Barry said during a conference call with analysts.

The trend is spreading across the retail landscape and into shopping malls. Clothing companies are increasingly rethinking whether it makes sense to be in a closed mall anchored by department stores struggling to attract shoppers and increase sales.

VF Corp., which owns Vans and Timberland, said its store leases have been shorter for years. But they will be even shorter coming out of the pandemic, according to the company’s chief financial officer, thanks to recent and ongoing negotiations. VF Corp. is making the switch to allow you the freedom to close stores more quickly.

“The way we structure our leases now allows us to be quite agile, quite agile and … we can pivot as consumer behavior changes,” CFO Scott Roe said in a recent telephone interview.

The retailer’s average lease term is about four years, Roe said, and it will soon be even shorter as new deals are signed.

“The owners have cooperated and worked with us,” added VF Corp. CEO Steven Rendle. “We both have the same goal, which is to be viable and productive.”

Vacant space abounds

While it has traditionally been in the best interest of the landlord to sign a long-term lease, lasting 10 or 20 years, to limit risk and keep a space occupied for as long as possible, many are succumbing to the pressures of the past 12 years. months.

With vacant space abounding in many markets across the country, tenants, such as retailers and restaurateurs, are in a position of greater power. It’s a trend that many real estate experts hope will only proliferate and become the norm from here on.

About 1.5 billion square feet of rented commercial space in the United States is due this year, according to a tracking by real estate services firm CoStar Group. That’s roughly 14% of the retail market. So those leases will not be renewed and more retail stores will be closed, or those contracts will be renegotiated.

‘We are fine with that’

Sure, while short-term leases can pose a greater risk to landlords, who then have to deal with unpredictable waves of tenants coming and going, it’s both ways. Retailers could sign a short-term lease and rents could trend upward in the future if the market strengthens. Mall owner Simon Property Group sees it this way.

Simon Property CEO David Simon told analysts during a conference call in early February that there has been an interest, among tenants, to go “a little shorter term.” Simon is signing more three-year leases these days, he said.

“We agree with that, because I prefer to negotiate within two or three years,” than not having a full store, he explained. “I think that actually might be the best thing for us too, because … we don’t have the ability to point to sales as a way to increase rent,” he said.

“It’s actually a two-way street and it’s working well with the vast majority of our retailers,” Simon said.

Beth Azor, CEO of retail real estate development and management firm Azor Advisory Services, said she has worked on a number of short-term deals during the pandemic. Azor, often referred to as the “Queen of Scrutiny” on social media by her peers, helps leasing agents fill vacant slots across the country, working with various publicly traded real estate investment trusts.

He recently brought his service to the up-and-coming social network Clubhouse, where he has been hosting rooms for entrepreneurs to present their businesses, and owners can listen to see if they have free space available. Leases are for three months to a year and sometimes they don’t pay rent. She calls it “Space Tank,” a game on ABC’s “Shark Tank.”

Occupation pays

According to Azor, owners should not view short-term leases as a negative, especially given the state of the retail industry. Having a tenant, period, increases occupancy, he said, which can come in handy when other companies knock on the door asking for rent relief.

Companies at the national and local level have turned to the owners of shopping centers and shopping centers during the health crisis to try to renegotiate their rents, Azor explained. And if a property is fuller, albeit with some short-term leases, it is more difficult for a business to argue that its rent should go down. So the occupation can literally pay off.

The store’s owner, Tanger Factory Outlets, has also been making more short-term deals. Currently, about 7% of its tenants’ leases are classified as temporary, when it has typically been between 4.5% and 5.5%, CEO Stephen Yalof told analysts during a conference call earlier in the year. this month.

“A series of deals that actually started as short-term or emergent leases … we have expanded the terms of those leases,” he explained. “So that seems to be a trend.”

He went on to explain that the REIT has favored the maintenance of a high occupancy, with more short-term agreements, on the collection of rents in 2020.

“We will see much more local and [temporary] leasing probably in the first half of the year, “he said.” But we are very proactive with our long-term lease to replace that lease and grow our permanent lease base. “

However, not all real estate seems to be the best for pop-ups.

New York City’s glitzy Fifth Avenue district, for example, is still largely populated by tenants on long-term leases, according to Fifth Avenue Association president Jerome Barth.

“These will be premium leases, whatever happens … because this is still the world’s number one market,” Barth said. “I think leasing will evolve and that will be a constant. But people know that Avenue will be an exciting place for years to come.”

Disclosure: CNBC owns exclusive off-network cable rights to “Shark Tank.”

—CNBC’s Melissa repko contributed to this report.


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