Shelter-in-place orders, designed to stem the spread of COVID-19, also mean uncertainty and disruption, including widespread closures of shopping centers. SCT contributing editor Joe Gose spoke with Todd Caruso, a senior managing director with CBRE; Naveen Jaggi, president of retail advisory services for JLL; Fred Meno, president and CEO of asset services for The Woodmont Co.; and Jami Wadkins, president and CFO of Bayer Properties about:
- What landlords should do
- What retailers can do
- Landlord liquidity — short term and long term
- How the CARES Act stacks up
What should landlords be doing to help retailers weather the storm?
Jaggi: There needs to be a transparent partnership between landlords and tenants, more so today more than ever. Many tenants that have been forced to close are asking for rent relief, and I think landlords understandably feel that it’s not quite as simple as just asking for rent relief. A landlord may want to ask the retailer if it is paying payroll, paying its office lease, paying to maintaining its distribution network or seeking some kind of federal assistance. The landlords don’t want retailers to assume that rent is the least priority, and, likewise, tenants want landlords to understand that it takes shoppers walking through their doors to pay all of these expenses. Everyone needs to understand that there is no short-term remedy to what is now feeling like a long-term problem.
Caruso: We are encouraging our landlord clients to engage with tenants, in a respectful and empathetic way, to learn as much as they possibly can about their tenants’ financial wherewithal and performance to prepare for a rent-relief conversation. I’ve talked to private developers, publicly held REITs, pension fund advisors and other institutional investors, and I think there is a hesitation among landlords in that they don’t want to offer too much too early. But it’s very difficult to predict what is too much or too little at this juncture; we have no barometer. I would strongly recommend against a cavalier sentiment in which landlords expect rent when it’s due and refuse to engage in conversation with their retailers.
Wadkins: It’s important to listen to tenant concerns and requests, and some will need more help than others. Local tenants typically don’t have the same resources as national credit tenants to weather this, so you may have to strategically respond to those tenants on a case-by-case basis. More broadly, I believe that right now we need a coordinated effort among tenants, vendors, landlords and lenders to strike an appropriate balance of the burden that needs to be carried so that we can all be standing when this crisis ends.
Meno: At the properties we manage, we’re trying to allay the concerns and fears of local mom-and-pop retailers, in particular, by giving them short-term rent deferrals without making a long-term commitment. We will deal with how that rent deferral will be repaid. And if more deferrals are needed in subsequent months, we will treat them in a similar fashion. We also are cutting back on nonessential services based on what we feel is best and prudent for any given property. There’s no need to cut grass as often or sweep the parking lot as frequently with stores closed. Those types of expenses also have a financial impact on tenants.
What actions can retailers themselves take?
Meno: We’re encouraging our tenants to communicate with their insurance companies to discuss whether there are some avenues to tap into business-disruption coverage. Even though this type of event isn’t specifically covered, tenants nonetheless need to push the issue. I think the potential for litigating various insurance policies as they relate to business disruption is in its infancy and bears watching.
Wadkins: At Bayer, we’re making sure that our tenants have the information from the stimulus package that just passed regarding small business loans. Retailers need to take advantage of the short-term liquidity. They also need to stay engaged with their customer base by providing a high level of service over the phone or internet and by using social media to keep their brand name out front as much as possible. They want to make sure their customer base is there when we come out of this.
Jaggi: Tenants need to be transparent with their landlord and avoid being opportunistic in trying to gain rent concessions when they may not necessarily warrant them. Certain sectors have been quite visible and successful in this environment, grocery stores being the most obvious. And if they sought rent relief, it would not be well received. Tenants also need to understand that the landlord has a mortgage to pay and should offer something in return for some rent forgiveness or forbearance, such as paying back a three-month rent holiday over a three, six or nine-month period. I think that’s the most important step they can take to create a genuine partnership with the landlord.
“We need a coordinated effort among tenants, vendors, landlords and lenders to strike an appropriate balance of the burden that needs to be carried so that we can all be standing when this crisis ends”
Speaking of shopping center mortgages, what can be done to ensure landlord liquidity?
Caruso: One of our clients that owns retail assets across the U.S. became very proactive with its lender, with whom it has a longstanding and deep relationship. The client wanted to provide rent deferrals to its tenants, but it needed some flexibility from the lender because doing so could breach some covenants. This approach was warmly received by the lender. It’s a good example of what’s needed today: a relationship, respect, communication and getting in front of the situation. Similarly, I think for lenders like life insurance companies and banks, now is the time to show a willingness to work with owners and take advantage of in-place relationships. CMBS lenders are a little less personal, however, and negotiations will be more challenging.
Jaggi: One of the smartest things that the federal government could do is step in and invoke a 30-, 60- or 90-day rent or debt obligation holiday for all parties. It would take the pressure off of every tenant and every landlord, giving everybody a chance to pause, breathe and look at the landscape. As of now, rent is due on the 5th of April. How many tenants will pay that? By the 15th, they’re in default, and on the 30th, it’s time to start looking for demand letters. This situation is creating undue stress, and there is no nearby horizon of clarity.
Meno: There has to be some forbearance on the part of mortgage companies that allows landlords to provide forbearance to their tenants. Off to the side, here again I think you’re going to see a good deal of litigation against insurance companies, with landlords making different arguments as to why there should be proceeds paid out. But at the end of the day, everybody is going to have to give a little bit – lenders, insurance companies, landlords and tenants. Whether that can be done without government intervention remains to be seen.
“Tenants need to be transparent with their landlord and avoid being opportunistic in trying to gain rent concessions when they may not necessarily warrant them”
Congress passed the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act in late March. It includes $250 billion in unemployment benefits; $300 billion in direct payments to adults, about $1,200 to each depending on their income; and $500 billion for large businesses like airlines. It also will provide loans to small businesses for payroll, rent and utilities, and it corrected bonus-depreciation rules that will reduce tax liability for some property owners. What did the CARES Act get right, and where did it fall short?
Jaggi: I think that creating an avenue for retailers to borrow interest-free dollars for payroll is a very good step, but I think the $1,200 being sent to every consumer today is a misstep because if stores aren’t open, you can’t broadly spend the money at restaurants, at department stores, on entertainment or at other places. All of that money is going to the grocery store and to pay off bills, so it really doesn’t stimulate or spike the economy.
Wadkins: The bill is helping small businesses, and some retailers will be incentivized to retain employees. For larger retailers that are closed due to government mandates, there just aren’t a lot of options outside of their lines of credit. And quite honestly, the bill doesn’t do a lot for real estate owners in the short term. It provides tax relief through payroll credits and other tax credits, but it just doesn’t fill the gap of everyday revenue loss. What every landlord needs right now is liquidity in the system to prevent an extended economic crisis. All landlords are facing a significant income reduction starting on April 1, and if the rental revenue doesn’t flow in, then the expenses can’t get paid and mortgages can’t get paid, so we need the government to provide a backstop to the mortgages.
Meno: I think this may be the first of several bills to address this crisis. We’re still in the early stages, and maybe congress wants to keep some dry powder in stock, whether monetary or regulatory, so that it has the ability to come out with another bill that’s a little more targeted to whatever the situation may be in the future. Whether that means putting the burden on insurance companies to honor a redefinition of what business interruption really covers or on mortgage companies to forbear mortgage payments for a certain period of time, I think you’ll see more coming from the government to help stabilize the real estate part of this crisis.
“What every landlord needs right now is liquidity in the system to prevent an extended economic crisis”
Retail real estate has been out of favor among some lenders, given the headwinds the industry has faced in recent years. Once the industry emerges from this crisis, what will liquidity look like?
Meno: A lot depends on the duration of home confinement and social distancing. If it continues through the summer, you could see a paradigm shift in terms of people getting used to the convenience of online shopping versus going to the store. In terms of the trends we’ve seen in the last eight or nine years, that could have a profound negative impact on brick-and-mortar retail. Capitalization rates and liquidity available for investors will be some things to watch. The debt markets for retail were already tight, and I can’t help but think they’re going to be tighter.
Jaggi: It’s hard to predict in the short term, but we’re likely to see pricing pull back significantly. We have zero leasing and tenants not paying rent, and tenants in general are looking for shorter terms. All of those will impact valuations, but it’s hard to predict because we just don’t know how long this will last and no one wants to buy when there’s an unknown on the value side of the business.
Caruso: This pandemic will force us, as an industry, to reset. Assets that have been languishing may change hands in an accelerated fashion and then be poised for whatever their highest and best uses are. On performing assets, there are a lot of owners that have maintained occupancy rates north of 90 percent during the e-commerce disruption. But this period will stimulate and encourage people to rethink deal structures and the type of tenants and categories in a shopping center – so again, a reset. We’re a resilient bunch, and I think the lending community will recognize the stalwarts that continue to perform and the opportunities for yield in the future.
