Though offices and retailers are planning a phased reopening in the days and weeks to come, many are reeling from weeks of lost revenue that is expected to remain at least somewhat depressed into the summer.
As they search for relief, one place they’re looking to are their landlords, specifically, seeking not only rent concessions but entirely new lease arrangements.
According to The Wall Street Journal, a growing number of companies want to switch from long-term leases with fixed monthly or annual payments to more flexible arrangements that include revenue sharing of their rent in return for a share of future revenues.
Some property owners in larger markets are open to the idea. As the coronavirus started spreading, the real estate investment firm Jamestown set up a task force to help its tenants handle the fallout and later set aside $50 million for loans and other aid.
Jamestown officials expect to see more short-term leases and revenue-sharing arrangements as stores gradually reopen.
Ross Stores Inc. said last month that it would pay a rent equivalent to 2% of sales when its stores reopen. Guesst, a New York-based technology company, recently launched software to help retailers and landlords manage revenue-sharing arrangements.
Closer to home, commercial real estate brokers say they’re not aware of any specific changes to lease arrangements yet, but they’re hearing from tenants looking to strike a deal and all sorts of potential options are on the table.
“I think everything is thrown out the window,” veteran broker Mark Hebert of Kurz and Hebert Commercial Real Estate says. “It’s a new front on everything.”
Hebert believes landlords will be open to at least talking about different lease structures because the hit from the pandemic shutdown will be so hard on the real estate sector, which he predicts will revert to 1990s-era lease rates on the office side.
“From a retail, office, industrial, and vacant land perspective, we’ve regressed 30 years,” he says. “We’re about where we were in 1991, when we came out of the 1986 recession. So some landlords are going to be willing to play ball. Some won’t or can’t.”
Donnie Jarreau, who manages 3 million square feet of retail space in the Capital Region, says a lot of tenants and landlords are looking ahead to June and July, by which time bank deferment periods will have ended. In April and May most lenders were giving property owners a break on their mortgages, which enabled landlords to go easy on tenants. When that ends, Jarreau predicts “everybody is going to be looking for relief one way or the other.”
But Charlie Colvin, a broker with Momentum Real Estate, says while he wouldn’t be surprised to see some temporary changes to commercial lease structures, he doesn’t think the long-term lease is a thing of the past in the Baton Rouge market.
“It does incentivize the landlord and tenant to align their interests,” he says. “But it adds a lot of risk for the landlord so they’re typically hesitant to go for that kind of lease structure.”