Retailers Pressure Landlords Publicly for Rent Cuts, With Varying Results
costar.com
CoStar Highlights Several Cases of Tenants Seeking Rent Relief, Landlords' Varying Responses and Experiences of Leasing and Tenant Rep Brokers
E-mail this article
Print this article
By Sasha M Pardy
February 10, 2009
Faced with a deepening recession and declining shopper spending, retail chains are increasingly exerting public pressure on landlords to renegotiate leases to achieve rent cuts and other concessions, warning they could be forced to join the growing list of retailers closing stores unless their contracts are amended.
For example, Pier 1 Imports, Inc. (NYSE: PIR) on Feb. 3 announced a plan it described as designed to "meet the challenges of the current environment and to position itself for optimum performance in a post-recession economy." The furniture and home accessories retailer said it has already begun, via the services of Melville, NY-based DJM Realty, to open talks with landlords to "achieve rental reductions across the chain." The company then warned that if such rental reduction negotiations were unsuccessful, it would terminate the leases of up to 125 stores.
Seizing the opportunity, tenant representation brokers are issuing some public advice of their own.
"Companies can find a silver lining in today's volatile economy," said Doug Haynes, managing principal with tenant representation firm Cresa Partners. He labeled the era officially a "tenant's market" and advised tenants to exercise the greater control they now have "in dealing with landlords who desperately want to hold onto credit-worthy tenants" during negotiations for new lease terms, lower rental rates, expiration rights, new tenant improvements and other concessions.
Pier 1 isn’t alone. Following is just a sampling of retailers that have made their lease renegotiation efforts public, along with some commentary from retailers and their landlords -- and their property disposition, tenant rep and lease restructuing specialists -- on the degree of success they’ve have had in reducing occupancy costs.
GAP
Gap isn't just trying to reduce rent paid for its stores, it's trying to do so by reducing its store square footage by 10% to 15%, which also results in additional vacant space for landlords. In its most recent quarterly conference call with analysts, Gap Chairman and CEO Glenn Murphy, commented on the casual apparel retailer's progress in negotiating with landlords.
The company has a renegotiation team that is leveraging Gap's "good position" as a retailer with 40 million square feet of store space that is "dependable," has a "strong balance sheet" and has "never defaulted" on any of its leases, said Murphy. "Landlords are really trying to hold on to people like us … but we have to be firm on our negotiations," he added.
CHICOS
In a Jan. 15 management presentation, women's apparel retailer Chico's FAS announced a formal real estate strategy to "pursue occupancy cost reductions" in order to increase profitability and productivity. Management is conducting a store-by-store review of the chain’s lease portfolio, ranking opportunities based on the level of success it expects it could have in rent relief.
To back up its requests, Chico's said it will conduct CAM audits and research leases for any opportunities that exist to remedy leases based on existing co-tenancy clauses. Chico’s also plans to reduce rent at some stores simply by reducing square footage. The company has 340 store leases up for renewal through 2011. Fourteen days following this presentation, Chico's added that its ongoing evaluation of underperforming stores "may result in the eventual closing of as many as 25 stores."
OFFICE DEPOT
In its most recent quarterly conference call with analysts in October, Office Depot commented on its level of success in backing out of signed leases for new stores. Steve Odland, the office supply retailer's chairman and CEO, said that while the company has "worked aggressively" to reduce its new store openings plans, it is "still sitting on about 40 planned openings" for 2009.
"Those are all committed leases. We have done the analysis of the financials on trying to get out of the lease versus opening it, and right now they all come back to that it’s more financially astute to open those sites," he said. However, Odland warned that Office Depot is still working to reduce that number and said it is looking at whether it makes sense to keep some stores dark, "even though they’re signed and pay the rent for some period of time until the economy picks back up."
Apparently, this public warning gave Office Depot some additional leverage with landlords. On Dec. 10, 2008, the company said it had negotiated backing out of 20 more new store leases. Additionally, the retailer announced the closing of 126 existing stores and six distribution centers.
FINISH LINE
Sports footwear and apparel retailer, The Finish Line, issued a warning in its January conference call that it is "willing to close unprofitable stores in cases where it can't mutually agree" on terms with its landlords. Like others, Finish Line has commenced negotiations with landlords to downsize some larger stores, as well as "negotiate terms that work for both us and our landlord," said Steve Schneider, president and COO. The retailer said 40% of its stores have leases that are either expiring or hitting "kick-out" provision dates in the next 12 to 15 months.
Schneider said that where kick-out clauses exist, Finish Line has even more leverage. "In those cases, we’ve been batting a pretty high percentage...of getting the landlord to come up with the minimal lease terms that make sense for both of us. In many of these cases, what may happen is that we push the kick out clause one, two or three years and go to some kind of alternative rent," -- usually percentage rent or a lower number, he said.
Schneider said that Finish Line planned to close 20 to 30 stores over the next five quarters, but warned, "If the landlords get really difficult then that number could go up some."
CHRISTOPHER & BANKS
In a Jan. 7 quarterly conference call, Christopher & Banks' SVP of planning & allocation, Monica Dahl, said the company's VP of real estate, "has worked diligently and aggressively throughout the year to reduce occupancy costs," and has been "able to impact about 16% of our store base by working to renegotiate lease terms more favorably." In part, rent reduction has been achieved through the company invoking existing co-tenancy clauses.
`BC |
