The realities of the coronavirus crisis are beginning to hit the commercial real estate sector hard, particularly retail centers, which have seen their restaurant and fitness club tenants shut down in recent days as local and state governments try to mitigate the spread of the disease.
National retail tenants are notifying their landlords they will no longer be able to pay rent and are asking for deferrals and abatements. The second-largest Planet Fitness franchise group in the country—which operates 102 locations, including those in Baton Rouge—sent a letter to its landlords around the country saying that because it was forced to shut down, it is “ … in the unforeseeable and untenable position of having no ability to operate and generate cash flow for an indefinite period.”
The letter, from ECP-PF Holdings Group Inc., acknowledges landlords are facing similar challenges and proposes a deal: defer rent for up to 12 months.
“It is our sincere hope we can work together on a mutually beneficial relationship that can provide us short-term relief and preserve our long-term relationship with you,” the letter reads.
Restaurant chain Captain D’s sent a similar letter Wednesday to its landlords around the country, saying it needs to cease all rent payments through at least June.
“Given its dire cash needs, management of Captain D’s already has instructed its finance department to cease all April rent payments,” the letter from the Nashville, Tenn-based company says.
The restaurant chain was never able to gain a foothold in Baton Rouge and closed its four local restaurants before the coronavirus outbreak.
The letters are examples of what commercial brokers and real estate attorneys say is happening all over the market and the country, with national tenants and small, independent local ones asking for help.
“Locals are asking landlords to give them a rent concession and they’re starting with 30 days,” says Jonathan Walker, a commercial broker with Maestri and Murrell. “Some landlords are saying they’ll do that but they want to add terms to the back of the lease, which gives the landlords a little more stability, so it just depends.”
One of the burning questions is whether landlords will recognize the disruptions as a force majeure— an unforeseen or unavoidable event that prevents a party, like a tenant, from being able to uphold a contract or obligation, like a lease. But, as has been widely discussed in recent days, force majeure clauses can vary widely from one contract to the next and it’s not clear they necessarily cover pandemics.
What’s more, a lot of local retailers don’t have such clauses in their leases, so they’ve been simply reaching out to their landlords asking for a break.
Developer Donnie Jarreau is one of those landlords, managing 2 million square feet of retail space in the region. He’s been hearing from tenants all week and says it’s difficult to know how to respond without knowing what the banks will do.
“We don’t know what to tell them,” he says. “We’re concerned. We’re sympathetic. We hope there will be a stimulus package. We just have to wait and see.”
How lenders will react is the other burning questions. Banks also have been fielding calls all week. Brokers say if lenders are willing to work with landlords, then landlords can work with their tenants.
Regions Bank Executive Vice President Danny Montelaro says while it’s too soon to know how it will all shake out, he believes many banks will not only be willing to work with landlords but will be forced to.
“They don’t want the property back and they don’t want to have to manage all that,” Montelaro says. “We’ve all got to get through this. It’s just like any other downturn. Yes, the banks will work with them. There will be winners and there will be losers and each case is a standalone. But they will have to work with them.”