As the coronavirus asserts its outsized influence on the market, the industry that’s being hit the hardest is retail. But nothing in a modern economy happens in isolation.
“There is a domino effect that is happening to the warehousing and manufacturing sectors,” says George Pofok, senior vice president at Cushman & Wakefield/CRESCO Real Estate. “Retailers here were hit first because they were the first ordered to close their doors. Now many of them are asking for rent relief from their landlords.”
This has elicited a variety of responses from landlords. Some are giving a blanket, 90-day moratorium on rent. Other landlords might effectively pause rent but still expect tenants to make up payments at a later date. And some landlords are reducing rents while others expect payment in full. But for many tenants, there won’t be any relief unless they ask.
“When you’re asking a landlord for some form of rent forgiveness, it’s critical that it is realistic,” Pofok says. “Most tenants have an existing lease and they’ll want to make sure to preserve the relationship with the landlord on a go-forward basis.”
Smart Business spoke with Pofok about what tenants affected by the coronavirus can do if they’re struggling to make lease payments.
Why should landlords consider leniency on tenant lease payments?
It makes a lot of sense for landlords to be understanding because the alternative is an empty building, and that means down time. There are also costs landlords will bear while they look for and put up a new tenant.
Conversely, the real estate market, at the moment, is extremely strong. The coronavirus will no doubt impact vacancy rates, but it’s unclear to what extent it will contribute to that in the long term. Many small businesses won’t be able to survive this and larger more established companies will face negative consequences as well. So there’s a chance that landlords could end up with net gains if they drop a tenant that they might have been looking for a reason to cease relations with. But, for the most part, landlords are cognizant of what’s going on in the world and have been working in the best interests of the people they currently have in their buildings.
What should tenants focus on when talking to their landlord about rent payments?
It’s important for tenants to be realistic. They should make a request for something like a moratorium on rent when they’re really feeling the pain. Those that can still afford to pay even a portion of the rent should pay.
Keep in mind that landlords may also have a mortgage to pay, so they might not be able to offer much in the way of forgiveness.
Whatever the situation, tenants should be realistic about their request, and patient and polite throughout the conversations.
How does a tenant’s contract situation play into this?
Tenants that have an existing lease agreement might find there are some terms within it that could be favorable to them in negotiations. For example, tenants that have a year left on their existing lease agreement with an option to renew might want to go to their landlord and negotiate a freeze in rent payments while also exercising their early renewal option. That will likely make that landlord a bit more comfortable knowing they have a lessee for a longer term.
Tenants with lease agreements that have a right to terminate clause may have leverage in rent negotiations if they agree to waive that option in their existing lease agreement. It’s really part of a back and forth in which landlords and tenants potentially give on specific items in the lease agreement that might be mutually beneficial for all parties.
It’s possible that, moving forward, there is new language inserted into lease agreements to account for something as damaging and unforeseen as what we’re experiencing now. But in the meantime, tenants should realize they’re not alone. There are professionals who are capable of helping tenants figure out the best path forward, whether it’s a financial adviser, attorney or real estate practitioner. Connect with an expert to find the best solution for the situation.
Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate