Opportunists Eye Prime Real Estate As Retailers Face An Uncertain Second Half Of The Year

Retailers have felt the brunt of the coronavirus pandemic, closing their doors for several weeks on end and reopening cautiously as government orders have lifted. Unable to survive the economic impact, some have filed for bankruptcy, offering retailers the chance to reorganize and shed stores that were not performing well.

The stores facing permanent closure present other retailers a rare opportunity to secure well-located real estate that seldom comes on the market.

Fidelis Realty Partners Vice President of Leasing Carson Wilson told Bisnow that Pier 1 Imports, which is going through Chapter 7 bankruptcy proceedings, has very attractive real estate that will be a target for many opportunistic retailers in the market.

“One thing about Pier 1: They've traditionally had pretty good real estate, and so they have pretty desirable boxes,” Wilson said.

Fidelis has four Pier 1 stores in its portfolio, and three have already been spoken for by other users. Ulta Beauty, Five Below and an undisclosed retailer have signed on for those three stores, which each have about 10K SF of retail space.

“Those have actually been quickly snatched up,” Wilson said.

Not many new leases have been signed in the last few months, as most businesses have been in mitigation and survival mode. But now, many negotiations that were in play prior to the shutdown have restarted, in addition to the appearance of opportunistic new deals.

Evergreen Commercial Realty President Lilly Golden said that on the tenant representation side of her business, she is trying to secure quality locations occupied by retailers going through either Chapter 7 or Chapter 11 bankruptcy, such as Pier 1, JCPenney and Neiman Marcus.

In the wake of the coronavirus and retail fallout, landlords are now much more willing to consider tenants that would not have been considered for a retail center in the past, Golden said.

“Landlords that were previously holding out for higher prices and only the high-end, best uses are now getting much more creative, and are willing to consider users that they weren't willing to consider previously,” she said.

Tenant mix has traditionally been an important part of crafting a successful retail center. But with retailers facing an uncertain future and seeking financial assistance, landlords are becoming less fussy, and at the end of the day, good credit is key, Golden added.

Streetwise Managing Partner Ed James said every time there is an economic downturn, opportunistic retailers move in on quality real estate.

“The strong will take advantage of their balance sheet to jump on opportunities,” he said.

According to James, larger discount retailers like Ross, TJ Maxx and HomeGoods are all on the prowl, looking for big-box locations coming onto the market. One of James’ tenant clients, Cycle Gear, has also been active in taking over some Pier 1 retail boxes.

“There's very strategic people who have already raised the money to take advantage of real estate that's coming available in a lot of markets,” James said.

Not many retail tenants have been forced to close permanently yet in Houston. Wilson said 1% or less of the tenants in Fidelis’ 12M SF retail portfolio have shuttered their doors for good.

“The only closures we have seen have been related to bankruptcies, and there really hasn't been a lot yet,” he said. “I think that's still to come.”

James said that of Streetwise’s 1.5M SF portfolio, the exposure to tenants going through Chapter 7 or Chapter 11 bankruptcy is currently small, but will rise as more retailers file. He anticipates that women’s clothing and soft goods retailers will be particularly vulnerable in the current economic environment.

“We may not see bankruptcies, but you're going to see an amount of stores that they decide to close,” James said.

The coronavirus pandemic has exposed many retailers that were already facing difficulty, accelerating the bankruptcies of some that may have been able to last a few years before filing.

“I think that this is just going to be one big reset and that this pandemic has just accelerated a lot of trends that were happening previous to the pandemic,” Golden said. “This has just accelerated all these changes in consumer shopping patterns, and therefore it's accelerated a lot of bankruptcies that were going to happen anyway.”

In James’ 35 years of experience, there are retailers that go under during every retail cycle, either because the concept is stale, or the trend changes. Instead of a lingering death, struggling retailers are being forced to act more quickly.

“Things like Sears, JCPenney, things that people have been talking about for the last five years, they're dinosaurs — this is going to exacerbate that and speed up the process,” James said.

Fitness centers have also been affected: Both 24 Hour Fitness and Gold’s Gym have filed for Chapter 11 bankruptcy, which will have a significant impact on Houston’s retail center landscape.

After the Great Recession, many landlords viewed gyms as fail-safe tenants that would not be affected by usual retail swings. But the coronavirus has hit those businesses particularly hard.

“We all kind of estimate that 24 [Hour Fitness] will reorganize and open the ones that they still have, and there will be some other, probably fitness users who might pick off a few of the good locations that are there,” James said.

“It's a special purpose building, a lot of times with a pool, and gyms, and basketball courts. So there's a lot of money already in it that will allow somebody to get in really cheap, if there's demand and if there's capital for it.”

When the coronavirus pandemic began to force businesses to close in March, retail landlords offered tenants a variety of options, including rent deferrals, abatements, lease extensions and security deposit withdrawals. Those options, in addition to Paycheck Protection Program loans from the federal government, have helped keep retailers afloat.

But as PPP funding comes to an end and three-month deferral agreements also expire, landlords are looking to end rent deferrals as an option.

“We've gotten through the vast majority of our deferral deals, and we've tried to communicate with all of our people that we're offering deferrals right now, but we would like to be done with all of our deferrals by the end of the month,” Wilson said.

Golden noted that Evergreen’s landlord clients are also interested in getting back to regular rent payments and ceasing rent deferrals.

“We're hoping that July is the end for that,” Golden said.

In the short to medium term, retail rent payments could take the form of percentage rent — a trend that has been on the decline in recent years but will likely see a resurgence until retailers can pull in healthy sales volumes.

“We've seen percentage rent, to some extent, disappear a little bit, and I think what we're going to see [is] a lot of deals, are going to be, pay your triple net charges, give us a percent of what you're taking in, until a time when everything is fully open and then go back to real rent,” Golden said. “I think we're going to have to go to something like that until we're 100% open or until people can [pay].”

Percentage rent is often a feature of co-tenancy clauses, which allow tenants to reduce their rent if other key tenants leave the same retail space. According to Wilson, it’s usually anchor tenants who have co-tenancy clauses in their lease agreements, and some have been using those clauses to claim rent relief.

However, Fidelis has not seen a big impact from co-tenancy claims, as most retailers were forced to close at the same time, and reopened concurrently.

“Typically, in order to get the benefit of a co-tenancy clause, the retailer has to be open for business,” Wilson said. “If they're not open, it disqualifies them.”

James said not many retailers have been focused on triggering co-tenancy failures because government mandates, not the landlord, were the reason for the closures.

Streetwise’s recent deferral agreements with retailers have included provisions that prohibit those tenants from acting on any co-tenancy issues.

“That doesn't mean that people won't still try to do it, but I think pretty much for the rest of 2020, and sometime through 2021, if they're still getting help from the landlord, they can't pull the card of, oh, you lost Barnes & Noble, I'm going to percentage rent only,” James said.

“But they're very, very reluctant to let go of that clause because they've got it in their lease and they still want that protection later down the road.”

Brokers tend to agree that the true impact of the coronavirus pandemic on Houston’s retail sector won’t become evident until the fourth quarter of 2020, or even the first quarter of 2021.

“Right now, when you drive down the street, you don't see that big of a change in our Houston landscape, but I think as September, October approaches, or maybe the end of the year, we will see some more vacancies,” Golden said.

James said the retail sector will likely see more bankruptcies in the fall and after the Christmas shopping season, a peak time for retail shopping activity.

“A lot of people wait to see that fourth quarter, to see if they're going to have enough to survive — if they don't, that's why we always see big announcements in January. It's usually when you hang it up,” James said.

The survival of many businesses will depend on whether they are forced to close again, in response to rising cases of COVID-19, the disease caused by the coronavirus.

“I don't think it's possible for us to get in a situation where we shut down for another however long, because I just don't think, economically, it can be supported,” Wilson said. “Business shutting down every time one employee gets it — I think it's going to be a hard thing to sustain and survive.”

James was more blunt in his assessment.

“That will be catastrophic, if they try to [shut everything down] again,” he said.

“It will be the nail in the coffin for a lot of people.”