Gary Rappaport On New Retail Leasing, Trying To Buy Distress And Winter Pain

Rappaport CEO Gary Rappaport, a major owner of shopping centers in the D.C. area, said he has seen signs of the retail market improving, but he is still worried about what the winter will mean for his restaurant tenants. 

The retail development and brokerage firm, which oversees 65 properties and has roughly 1,750 tenants in its portfolio, has experienced an increase in its retail rent collections since the beginning of the coronavirus pandemic. 

Across its portfolio, Rappaport had collected 81.5% of gross receipts as of Nov. 30, compared to 46.3% in April, according to data Rappaport shared on Bisnow's Town Hall webinar Thursday. 

The firm's grocery-anchored shopping centers have performed better, collecting 84% of receipts as of Nov. 30, compared to 79% for shopping centers without a grocer. 

"A property that's anchored by a grocery store, a pharmacy, a liquor store, a bank, a fast food with a drive-thru, those centers have actually done well enough to at a minimum pay debt service and pay operational cost, and maybe even make some distributions [to investors]," Rappaport said. "Our centers that are anchored by movie theaters, trampoline parks, bowling alleys, sport and health facilities, those centers have taken a much different direction."

Rappaport said the landlord has reached hundreds of agreements with tenants to defer rent or accept a percentage-based rent model for the near term. He said many restaurants are on a percentage rent model, meaning they pay a portion of sales while they work to stay alive. 

"We're willing to accept percentage rent because we don't want them to close," he said. "We want centers to look active as we build back sales."

The owner has been able to pay back its debt throughout the pandemic on 63 of the 65 loans it has backed by retail properties, Rappaport said.

On the other two loans, he said it had CMBS lenders that didn't grant the flexibility it requested. He said the company wasn't able to pay the debt service on those two loans for "many" months, but it has since raised money to stabilize the properties and is now paying back the loans. 

While investors have been waiting for months to scoop up distressed retail properties, Rappaport said he doesn't see many available. 

"There was a lot of money raised at the beginning of this year thinking there would be a lot of distressed properties," he said. "Right now it's not happening. We are looking, but there's nothing out there. There is not even one shopping center in the Washington, D.C., metropolitan area that we would have interest in right now in underwriting and trying to purchase."

Rappaport estimated his portfolio's occupancy has dropped from 95% to 92%, as some retailers have been unable to continue operations through the pandemic, and this has created about 360K SF of vacancy that his firm needs to re-lease. 

He said the level of leasing activity for its vacant spaces has been greater than he expected at the start of the pandemic, but the company is having to offer more concessions to tenants.

"We are re-leasing that space," Rappaport said. "These new deals that we're putting together are much more flexible. We're giving more tenant improvement money, we're making the leases lesser-term if need be, we're giving more free rent if we have to."

Last month, Rappaport signed grocery store Giant to take over a 60K SF space formerly occupied by Shoppers Food & Pharmacy at the Bull Run Plaza property in Manassas. Rappaport said the firm has "several" other grocery store deals in the works, but he didn't share the details because of confidentiality agreements. 

While grocery stores have remained strong during the pandemic, the restaurant sector has experienced a significant amount of pain, and Rappaport expects it to get worse. He said he has many mom-and-pop restaurant tenants that are bringing in "minimal" sales and are unsure how to proceed. 

"Going into winter, it is stressful," Rappaport said. "It is truly really hard to handle the calls and the discussions when people are sitting there saying, 'I don't know what to do and I need your help.' We're doing everything possible to have as many people survive through these terrible times as we can."

In addition to the cold weather making outdoor dining less appealing, jurisdictions are also tightening restrictions on indoor dining because of the rise in COVID-19 cases. Montgomery County banned indoor dining Tuesday, and the Washington City Paper reported Friday that the District is planning to end indoor dining starting Dec. 23, with hopes of reopening sometime in January. 

Rappaport said the Paycheck Protection Program helped many of his restaurant tenants earlier this year, and now it is critical that the government deploy more stimulus money to small businesses to help them get through the winter.

"We've got many months of winter coming up, and we've got many tenants that are not going to survive," Rappaport said. "I just hope the stimulus plan gives enough money that we can help our tenants apply and help them survive until we get past the COVID crisis and we can get back to indoor dining and build sales back up."