Landlords and retail tenants negotiate longer leases for rent reduction

Cheaper rents allow the retailers to increase their profit margins, while the longer lease terms are attractive to landlords because banks favor them, which matters when it comes time to refinance or sell a property.

"These 'blend and extend' transactions absolutely benefit both sides of the equation," says Walter Wahlfeldt, Executive Vice President, Retail Corporate Services, JLL. "Restructuring lease terms provides an opportunity for landlords and retail tenants to work together as partners where there are benefits for both, versus an ‘I win, you lose’ type of approach."

Open for negotiation

It’s not just the hardest-hit retailers asking landlords for rent reductions.

Since the pandemic began, O’Connor Capital Partners, a private equity firm that owns multiple shopping centers across the U.S. and Mexico, has seen an increased need for restructured leases - and not just from the retailers filing for bankruptcy, says Joel Bayer, the company’s President and Chief Operating Officer.

“Many retailers need short-term assistance because they have a serious cash flow shortage right now,” Bayer says. “Operations have been disrupted. If we can supply rent reduction or deferral in exchange for a lease extension, that also benefits us as the landlord if there’s a need to refinance or sell the property down the road.”

Landlords can benefit in today’s marketplace by working in concert with their tenants to reduce rental obligation expenses in exchange for meaningful lease term, says Alex Sharrin, Managing Director, JLL Capital Markets. 

“For landlords - it can prove accretive in the investment sales cycle because buyers & lenders alike value term coupled with a commitment to location narrative,” he says.

Redeploying capital

With so many brands reinventing themselves as they look to find their place in the post-pandemic economy, some deals are being structured in creative ways to free up the cash retailers need to invest in the future.

Solid partnerships with landlords can go a long way toward helping retailers successfully adapt to long-term retail shifts, Bayer says.

"As part of the lease extensions, we are seeing deferral of rent combined with agreements between landlords and tenants to upgrade store formats," he says.

In some cases, landlords will fund the creation of more drive-through lanes at fast-casual restaurants or facilitate a retailer’s online efforts by creating dedicated curbside pick-up areas.