With a front-row seat on negotiations involving retailers, landlords and lenders, A&G’s Andy Graiser urges flexibility in opinion piece for GlobeSt.com
All parties in the shopping center industry need to “share the pain” to overcome the massive challenges triggered by the pandemic, advises Andy Graiser, Co-President of A&G Real Estate Partners, in an opinion piece for GlobeSt.com.
“Retailers need enough flexibility to restructure their portfolios, whether in or out of bankruptcy, without taking advantage of the crisis,” he writes. “Likewise, no landlord should ever push so hard that every tenant in the shopping center is forced to go dark … and it is time for lenders to give serious thought to what it will look like to take back centers that, with some constructive collaboration, could have continued operating and generating income.”
In the August 31 column (“Why Deferred Rent is No Solution to the Crisis in Retail”), Graiser presents observations drawn from more than 100 interactions with retail and restaurant companies since the virus hit. In some cases, his firm is merely listening to these previously healthy operators and acting as a sounding board; in others, Graiser and A&G are formally advising them on strategy and/or executing their lease-restructuring plans.
According to Graiser, who has decades of experience in real estate portfolio strategy–including occupancy cost reductions, lease terminations, dispositions, valuations and acquisitions–the continued presence of COVID-19 is highlighting a reality that not everyone in the industry wants to admit: Rental deferments are no solution to the massive challenges in retail real estate.
In some cases, he observes, landlords are hamstringing tenants by asking them to waive co-tenancy clauses or make other painful lease modifications in exchange for rental deferments.
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“Is it realistic to expect retailers to be able to pay back these deferrals next year?” Graiser asks. “Just put yourself in the shoes of the retailer. Will those higher payments be manageable given your margins? In our view, it is much more likely that, for a great many operators, the added pressure will force more store closures and Chapter 11 bankruptcy filings.”
At the same time, the tenor and tone of today’s tough retailer-landlord negotiations certainly owes in part to the aggressive way in which some retailers, starting in early March, responded to the lockdowns, Graiser writes.
“To put it candidly, some of their ‘asks’ of landlords were really more like flat declarations made without any visibility into the business impact of the events at hand,” Graiser explains. “A typical refrain: ‘Our chain, nationwide, will not pay any rent for the next year.’ It’s no wonder so many landlords responded with aggression of their own.”
Meanwhile, many lenders have yet to adapt their timeworn practices and norms to the new normal and are still taking a reflexively defensive posture. “They hired and trained people to respond to landlord requests by digging in and saying ‘no’ or just providing a small and ultimately inconsequential deferral to that landlord,” Graiser writes.
To work out these problems, all parties need to reengage with openness and humility. “Continued operations are in everyone’s best interest,” Graiser writes. “Getting through the present crisis requires a willingness of all parties to share the pain.”
