Plan Now to Reposition Your Retail Property.
Should You Plan Now to Give Rental Concessions to Existing Tenants Before They Even Ask
In the last few years we have seen several trends for retail properties; everything from positive outlooks, to “are we on the brink of a retail apocalypse”. The pandemic certainly didn’t help much of the brick and mortar locations either. It can be quite disarming to try to determine what to believe. One thing though will remain a truth throughout all of the changes, and that is… If a landlord does not adapt to the changes we will see then they are sure to bear the brunt of any downturn. Put another way, “By failing to prepare, you are preparing to fail". It’s definitely one of my favorite Ben Franklin quotes, but what does that mean for a retail landlord that may be locked into long term leases?
One of the tools an experienced landlord has at their disposal is the ability to reposition the lease to either create value, or assist a tenant during hard times. During a slowdown in the economy a tenant may approach a landlord and ask for rental concessions as their sales may no longer support the rents they are paying. Before agreeing, the landlord should take the necessary steps to determine what is best for their interests. The first step of course would be to determine whether or not the tenant actually needs a rental concession, or if they are just asking to increase their bottom line. A landlord should ask for not just the guaranteeing entity’s financials but also the financials specific to this location. If the tenant is unwilling to give it up, then they are likely not in dire need of the concessions they are asking for.
The next step is to determine whether or not the tenant is paying market rate rents. If the tenant is already paying less than market rate rents, then it may be more prudent to offer them the opportunity to buy out of the lease, and then renting to a new tenant that is at a higher rate. However, if the tenant is paying market rate or higher rents then a landlord needs to closely look at options they may need to consider. For instance: What is the current market vacancy for the area? How difficult will it be to lease the property at market rate? How long will it take? If you do lease the property at market rate what concessions would you have to give a new tenant? By knowing all of these factors ahead of time a landlord will know immediately what steps they should take if a tenant approaches them with a request for a lease modification.
Lastly, never give something without getting something back. If you believe it is prudent to abate or lower rent for a time, then ask for an extension of the lease, possibly with higher rental increases in a year to compensate for the abated rent. This should also help to maintain the value of the property. Another option that can help to increase value when the current rents are below market, is what is referred to as “Blend and Extend”. This is where a landlord takes a look at the current rental rate and market rate. A landlord can then approach the tenant and see if they might want to “lock in” a slightly lower than market rate rent (but higher than what they are currently paying), for an extended lease term. This is a win-win for all involved as it can give a tenant more security with the longer term length, but also may increase the income for the landlord.
If you’d like more information on different leasing strategies to either improve the bottom line of your property, or to increase its value, please reach out to info@cbicommercial.com