Are short-term leases here to stay?

Discussion
Photo: @JJFarquitectos via Twenty20
Mar 02, 2021

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.”

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?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"As long as a landlord's financing allows for short-term leases, this is the right approach."
"More flexible leases are here to stay. Future lease contracts will consider any possible pandemic and will offer for both parties a calculable flexibility."
"I am interested what impact this trend will have on mixed-use centers who also rely on restaurants or “retail office” tenants whose fixed cost is higher up-front."

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18 Comments on "Are short-term leases here to stay?"


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Mark Ryski
BrainTrust

The power dynamic has shifted to retailers, and now the mall operators have little choice but to accept short-term/flexible leases. I expect that this will become the new normal for years to come. And while this shift in control from mall operators to tenants is jarring for mall operators, it just might ultimately improve the mall/tenant relations as the two parties work more collaboratively toward win-win arrangements.

Bob Amster
BrainTrust

Shorter, more flexible terms should happen. Whether they do or not will be up to the wisdom of the landlords. I have seen too many retail locations lay fallow because of the stubbornness of landlords.

Nikki Baird
BrainTrust

While the pandemic may have given retailers leverage and mall operators incentive to take what they can get, I don’t see the end of the pandemic changing the dynamic at all. The U.S. was over-stored before the pandemic, and the future has long pointed to a more dynamic store location strategy – changing demographics and shifting consumer preferences mean that retailers – and real estate – need to speed up to match the shifts.

DeAnn Campbell
BrainTrust

Property owners need to shift from a “landlord” mindset to a “partner” mindset to succeed going forward. The new lease accounting standard is now applicable to all business entities, significantly impacting financial statements. At the same time, the entire retail industry is at an evolutionary point, making flexible lease terms critical for helping retailers survive until they have a chance to redefine and execute new product, store design, e-commerce and fulfillment strategies. Getting creative with lease models is probably the toughest thing to ask of a landlord, and even tougher to ask of traditional banks and lenders, but those who can’t find a way to adapt won’t survive.

Evan Snively
BrainTrust

Shorter leases are going to be OK for retail merchants and their customer experience as most of them can effectively utilize a space without extensive build-outs. I am interested what impact this trend will have on mixed-use centers who also rely on restaurants or “retail office” tenants whose fixed cost is higher up-front. As long as landlords can continue to entice a few of those tenants for stability, short-term leases for other retail stores become less risky.

Shep Hyken
BrainTrust

Retail has changed in the last 10-plus years, and it will continue to change. As the buying habits shift, it is risky for a retailer to commit long-term. It’s economics – akin to supply and demand. David Simon said that he’d rather have short-term leases that generate revenue than empty spaces, holding out for longer contracts. It’s a buyer’s/tenant’s market.

Vacancies were becoming a problem before the last year. The pandemic accelerated retailers closing more locations. Will the pendulum swing back in two or three years? Perhaps. The landlords will have to partner with their tenants for a win/win if they want this to work.

Brandon Rael
BrainTrust

With so much disruption and chaos, there is nothing certain in the retail industry. This calls for creative and flexible ways for the property owners to ensure there aren’t mass vacancies. Short-term leases are one of the strategies that will be around for the foreseeable future.

There are also co-tenancy clauses that will need to be reexamined in light of so many anchor department stores closing. Now is the time for increased levels of collaboration between landlords and retailers to ensure that the malls and strip malls are vibrant and full of diverse businesses.

Christine Russo
BrainTrust

In consumer-facing real estate like retail, contrary to most opinions, shorter-term leases can work in favor of landlords. Yes, landlords love signing a long-term lease with a well qualified tenant (notice that there is a bank on every corner in NYC) with incremental increases and typically mall landlords sign long leases and leverage locations across their portfolios. But this approach has lead to stale environments and thus the mantras that the “mall is dead.” With massive migration out of cities to suburbs, the likelihood of mall traffic increasing is very high. And since there are so many different types of people migrating, a mall wants to keep their options open (using short-term leases) to respond to the changes and cater to the community as it evolves. Furthermore, short-term leasing now is based on a premise that the economy will roar back and, in two years time, when three-year leases start to get negotiated, asking rents can be much higher. As long as a landlord’s financing allows for short-term leases, this is the right approach.

Ben Ball
BrainTrust

Shorter term leases will keep mall operator cash flow positive while they make the transition from fixed retail hotels to land-lease holders for individual store sites in more attractive outdoor mixed use plazas. In the longer term, this works to the mall operator’s (who are really real estate investors, not merchants) advantage. It is much harder to walk away from bricks and mortar you own on land you lease than from a leased space in a traditional mall.

Chris Buecker
BrainTrust

More flexible leases are here to stay. Future lease contracts will consider any possible pandemic and will offer for both parties a calculable flexibility.

Georganne Bender
BrainTrust

I was at the one of the major malls in the Chicago suburbs yesterday, the one that pre-COVID-19 was always crazy busy. I was surprised at the number of stores that had closed after the holidays.

The good news is that most of these spaces were leased to local retailers. These may be short-term leases, but as a consumer you wouldn’t know it. Rather than the slapped together versions seen in some malls, each of these stores was nicely signed and well merchandised. It’s good to see that mall operators are flexible. “Space for Rent” signs are disheartening even in the best of malls.

Gene Detroyer
BrainTrust

Under normal conditions, both the retailer and the landlord want longer leases. Business likes certainty.

That being said, for the more sophisticated retailers and landlords the new leases are likely to have various clauses for the uncertainly a pandemic or other unforeseen events might bring.

Rich Kizer
BrainTrust

Shorter AND more flexible. There is much space available. For landlords, it is important to show spaces are rented, even if it is percentage of sales leases, with escalations of higher percentages as the store builds. Perhaps we will see percentage leases of cash sales with a slightly lower percentage for credit sales. I don’t think many longer-term leases will be written early, as landlords will look for in an uptick in retail sales, thus offering them the opportunity to gain a stronger and longer term with more substantial merchants. However we are going to see a lot of “For Rent” signs.

Ricardo Belmar
BrainTrust
“‘…I’d rather negotiate two or three years from now’ rather than have empty spaces.” That just about sums up the situation for retail landlords. Retailers and landlords alike need to shift their mentality from an often adversarial one to one of partnership. Each one needs the other and that means there is room for negotiations and therefore shorter-term leases. This will continue after the pandemic is behind us because it breathes healthy competition into the commercial real estate market and causes retailers to better think about their location strategy. In the end, this will be a win for shoppers who will see more reasons for visiting the mall to see what might be new and undiscovered. There will always be risks, but holding out for long-term only leases will only result in higher vacancies for real estate owners. Both parties need to move beyond a “pay the rent” mentality to one where each party realizes what they can offer the other to make both businesses successful. Malls need customer traffic. Retailers need sales. Mall owners… Read more »
Trevor Sumner
BrainTrust

New models can and will emerge, including short-term rentals, hosted easy-to-set-up shop in shops, and physical-digital explorations. As long as landlords see a return to previous highs, they will offer short-term leases so as not to negotiate at market lows. And some of these new models will flourish and provide surprising results and secondary effects, like creating newness at malls and a reason to return more frequently.

James Tenser
BrainTrust

I have long suspected that long-term retail leases actually lock retailers into suboptimal business strategies.

Large chains too frequently keep poor-performing stores open because it is less costly to operate them at a loss than to close them outright. When they elect not to invest in those locations, their brands, their landlords (mall owners) and their fellow tenants suffer too.

Longer lease terms mitigate risk in other ways, of course, but the pace of change in our overstored retail marketplace demands flexibility over the illusion of security.

Property owners, of course, are stuck with their long-term investments in real-estate. It may be up to them to innovate by creating tenancy options that enable retailers to operate pop-up locations and on-trend store concepts and other attractions with intentional expiration dates. The payoffs could come in the form of higher short-term rates and a more exciting and dynamic retail environment that attracts more frequent shopper visits.

Craig Sundstrom
Guest

I foresee a struggle between realism and the traditional optimism … no, make that “boosterism,” of real estate, with lessor’s trying to look tough — at least in public — while having 911 on speed dial in private.

But eventually all but the most elite properties (and who knows how many there are now or even what they look like) will cave; they’ll have to because there’s too much property for conditions … and it’s not going to get better until equilibrium is reached.

Rachelle King
BrainTrust

The days of signing a 30-year lease are over. The pandemic may not be directly responsible for this change but it is an accelerating factor. Retailers most affected by the shift to digital commerce will be cautious about how they ease back into brick and mortar. This alone will dictate a refreshed looked at standard leasing terms.

Still, in the ever progressive world of start-ups and seemingly infinite assortment of everything online, real estate firms need to be open to bringing in new and innovative merchants to keep consumers engaged. While pop-ups might work well for start ups, short-term leases might work well for DTC testing the brick/mortar waters. These options bring fresh and exciting options to retail that drive traffic. The world has changed. Leasing options must change with it in order to stay relevant to both merchants and consumers.

wpDiscuz
Braintrust
"As long as a landlord's financing allows for short-term leases, this is the right approach."
"More flexible leases are here to stay. Future lease contracts will consider any possible pandemic and will offer for both parties a calculable flexibility."
"I am interested what impact this trend will have on mixed-use centers who also rely on restaurants or “retail office” tenants whose fixed cost is higher up-front."

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