Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
According to UBS, 100,000 retail stores are expected to close by 2025…which means mall and shopping enter owners will face this legal hurdle next.
Retail tenants are likely to pull out of leases with co-tenancy clauses as department stores and other anchor tenants go dark for good.
Government lock downs will accelerate the rate of permanent retail store closures as sales shrink to close to nothing. Liquidity also is drying up and finances are being squeezed.
In the meantime, online sales as a percentage of total retail sales in the U.S. are expected to grow to 25% from 15% over that same timeframe, UBS said.
With another wave of department store closures inevitably looming, and some chains potentially filing for bankruptcy, landlords’ phones will likely be ringing…with retailers on the other line demanding rent reductions or outright saying, “I’m leaving your property.”
Here’s how co-tenancy clauses work, on a basic level:
They are typically built into the leases of the specialty tenants, like a Gap or an AT&T store, in the middle of a mall. Or the shops situated in grocery-anchored shopping centers, like a Big Lots or a TJ Maxx.
The clauses will say something along the lines of…If less than 80% of space is occupied at this property at any given time, or if a major, anchor tenant like a department store or a grocery store goes dark here, the tenant is allowed a break in rent. Or the tenant is given the ability to terminate a lease early. The clauses are meant to protect tenants from circumstances outside of their control.
Retailers are said to be watching their co-tenancy clauses “like hawks.” It’s an excuse to get out of unprofitable locations. Remember, the whole purpose of a mall or shopping center is to generate large amounts of foot traffic. If you lose an anchor or two, the purpose is lost, and retailers will have an opportunity to pay less or leave altogether.
A wave of retailers demanding rent reductions, or leaving malls and shopping centers entirely, will likely deal another blow to an industry that has already been struggling to fill excess space.
Store closures are nothing new. A record was set in 2019. But the rate of closures is only going to accelerate due to the Covid-19 related government lock downs. This could put some properties entirely out of business. Already, some retail landlords are defaulting on their mortgage payments to lenders, CNBC reported.
Many analysts believe America is still over-retailed. Currently, there are nine malls per 1 million households in the U.S., according to UBS. That is up from eight malls per million in 1980 when retailers didn’t even have websites. Ironically, the number has grown as e-commerce has proliferated.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@soldbybeachwood.com