Are short-term leases here to stay?
Gaining leverage due to elevated vacancy rates amid the pandemic, retailers are asking for and increasingly receiving short-term leases. The change carries short-term benefits and long-term risks for merchants.
Shorter terms provide greater flexibility to exit a lease quicker should the accelerated shift to online selling lead to dismal traffic. Longer term, a landlord may hike the rent or kick out a tenant at an outperforming location just as many consumers are discovering the business.
Many retailers had already been pushing for shorter leases in recent years given the disruption caused by online selling.
For landlords, accepting shorter terms fills vacancies at a challenging time and may help with negotiations to recoup deferred rent from 2020, according to CNBC. On the other hand, shorter-terms means scrambling to continually find renters in the years ahead.
Simon Property Group is signing more three-year leases, David Simon, CEO, said on the mall operator’s fourth-quarter investor call. “We’re OK with that, because I’d rather negotiate two or three years from now” rather than have empty spaces.
“I think actually that could be in our best interest, too, because … we don’t quite have the ability to point to sales as a way to increase rent. It’s actually a two-way street, and it’s working out fine with a vast majority of our retailers,” Mr. Simon said.
At Tanger Factory Outlets, management has recently extended a number of pop-up and short-term leases.
“We will see a lot more local and [temporary] leasing probably in the first half of the year,” CEO Stephen Yalof said on Tanger’s fourth-quarter call. “But we’re very proactive with our long-term leasing to replace that tenancy and grow our permanent leasing base.”
The greater flexibility could lead to an increase in pop-ups and concept stores on short-term leases, Luisa Janisch, associate director, research at CBRE, recently told Vogue Business.
Michael Phillips, president of real estate investment firm Jamestown, told The Wall Street Journal last year that he expects to see more short-term leases and revenue sharing arrangements as stores gradually reopen. He said, “The days of being the landlord as an overlord to collect rent are over.”
- As store owners sign more short-term leases, landlords are taking a risky bet on the future of retail – CNBC
- Simon Property Group (SPG) Q4 2020 Earnings Call Transcript – Simon Property Group/The Motley Fool
- Tanger Factory Outlet Centers Inc (SKT) Q4 2020 Earnings Call Transcript – Tanger Factory Outlet Centers/The Motley Fool
- What will city centres look like post-Covid? – Vogue Business
- Fixed Rent Payments Could Be the Latest Pandemic Victim – The Wall Street Journal
DISCUSSION QUESTIONS: Do you see shorter and more flexible leases for retailers continuing after the pandemic subsides? How might leases best be restructured to manage risks for both stores and property owners?