How Retail Can Redefine the Tenant-Landlord Relationship After COVID19

The real estate sector has an opportunity to strategize for a more resilient future. Even before the Covid-19 pandemic, there was widespread scepticism about the future of brick-and-mortar retail. It didn’t help that many retailers, from international chains to local shops, were investing in experiences to drive foot traffic and revenue. Now, consumers are looking to minimize their time indoors around other people. Empty storefronts are bad for neighborhoods and, of course, don’t bring in revenue for owners, as well as can hurt property values. While some landlords have provided forbearance or revised lease terms to help their tenants survive, this isn’t a long-term strategy.

• - Retail’s Pre-COVID Cracks

While the pandemic brought unprecedented challenges to the real estate world, it has also exacerbated cracks that were already present. Retail is the starkest example of this. Before Covid-19, New York City retail was already marked by vacancies and availability. “In Brooklyn, you could walk down major retail corridors, such as Smith and Court Streets, Metropolitan Avenue, Fifth Avenue, Vanderbilt Avenue or Fulton Street and see the ‘For Rent’ signs for yourself,” says Sean Kelly, senior director of investment sales for Ariel Property Advisors, my company. “Retail in New York was already trying to figure out what the next five years was going to look like, and then COVID happened.” High retail rent pricing, particularly along major corridors, didn’t mean that leases weren’t getting signed, necessarily, as the vacancy rates belied the rising stock of retail square footage across the city, but the rising rents have made it difficult for local small businesses to survive once the ink is dry on the leases.

These investors were having trouble leasing space pre-COVID and had to explain to the capital partners that they were not going to hit the projected rents. Now, COVID puts them in an even worse position.” On the other hand, many long-term owners with low leverage, especially ones collecting residential rent on the upper floors, could afford to be more selective about their tenancy and were capitalized well enough to wait for the right tenant.

But is this good for neighborhoods? Many local politicians don’t believe so and, on the heels of the Rent Stabilization and Tenant Protection Act, commercial rent reform is currently being proposed to create a dedicated rent guidelines board that determines annual rental increase rates for retail and office occupiers at less than 10,000 square feet and industrial occupiers at less than 25,000 square feet. It remains to be seen how Covid-19 will affect this proposed bill. To avoid more legislation though, more owners may need to cooperate with tenants to promote greater occupancy.

Topics: Real Estate Investment, New York, Landlord-Tenants

Work cited: Shimon Shkury, Forbes, July 13, 2020

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