COVID-19–related restrictions have proven to be a boon for some retailers, including online sellers such as Amazon and home improvement chains. However, for many stores—from apparel shops to appliance chains—the lack of foot traffic has made 2020 a year to forget.

For many resellers, one of the keys to surviving the slowdown has been finding ways to slash expenses. Often that’s meant not only laying off workers but also negotiating with landlords to get a break on the rent.

A recent survey by the National Retail Federation (NRF) and the investment bank PJ Solomon revealed that a little more than half of stores that fell behind on rent during the lockdown were able to obtain some rent relief. Still, with COVID-19 cases rising nationwide and colder temperatures on the horizon, whether that help will be enough remains an open question.

Key Takeaways

  • More than 90% of retailers have asked their landlord for rent relief this year, according to a National Retail Federation survey.
  • While some landlords have been willing to reduce base rent for their retail tenants, the most common form of relief has been deferred rent payments.
  • Property owners often ask for concessions before granting rent relief, such as removing restrictive use clauses or waiving force majeure rights that tenants can otherwise use during unforeseen crises.

Brick-and-Mortar Sellers Hit Hard

Despite a massive spike in unemployment this year, overall consumer spending has been surprisingly strong. According to initial U.S. Census Bureau estimates, retail sales for the first 10 months of the year were up 2.8% compared with 2019. However, those aggregate figures obscure the fact that while there have been a number of successful categories this year, others have been going through very hard times.

For example, while online merchandisers have seen sales surge 21.9% through October, and hardware stores have experienced a 13.2% year-over-year increase, most brick-and-mortar retailers saw revenues nosedive earlier this year, when many states issued lockdown orders to curb the coronavirus. The NRF survey, released last month, found that as many as 73% of U.S. retail chains had to shutter at least three quarters of their physical stores at the height of the lockdown. 

Among the hardest-hit categories has been clothing and clothing accessories, which has seen a more than 30% drop in revenue compared with the first 10 months of 2019. It’s also been a miserable year for electronics and appliance stores, whose revenue is down 14.6%, and furniture and home furnishings, where income has dropped 7.2%. One of the results has been a string of bankruptcies, including iconic names such as Neiman Marcus, JCPenney, and Tuesday Morning. “Consumers still have some financial firepower, but that hasn’t been spread equally across the economy,” says Mark Mathews, vice president of research development and industry analysis at the NRF.

Rent Crisis

With revenue slowing to a trickle, paying rent on time became an impossible task for many of those stores; fewer than 33% of retailers were able to pay at least 75% of June’s rent, according to the NRF. With stimulus money in the consumer’s wallet and looser restrictions in many states, that number increased to 65% in July, although many stores are still facing a significant cash shortage.

Renegotiating rent has been one of the primary strategies store owners have used to stay afloat. The NRF study found that more than 90% of retailers have asked their landlord for relief of some kind. While some property owners have reduced base rent payments during the toughest months, the most common resolution has been a deferral of rent payments until the end of 2020 or into 2021. 

Landlords often look at a retailer’s financial position, including its ability to access credit or government aid, before extending rent relief.

Seeking Compromise

According to Aaron May, a Chicago-based attorney specializing in commercial real estate transactions, when weighing requests for relief, building owners will typically look at the financial position of the tenant. For example, they often ask to look at the store’s balance sheet before and after the health crisis and inquire about government assistance or other sources of income that they may have access to before making concessions.

According to the NRF survey, more than half of retailers who leaned on their landlord this year were able to get some kind of rent relief. The ones who are more successful in getting a reprieve, May contends, are those that understand the need for give and take. “If you’re reasonable in your request and timely in your repayment, that’s something I would look favorably on if I was a landlord,” says May. So what kind of give and take, exactly?

Rent Reductions and Deferrals

Typically, the landlord—whether it’s an individual investor or a large real estate investment trust—is more willing to reduce rent for shops that need that extra cash to survive long term. However, landlords may be wary of slashing payments for tenants in the most dire circumstances. “If they reduce the rent by half, their bankruptcy claim just got reduced by half,” says May.

For retailers with greater financial flexibility, a temporary deferral may be as far as the property owner is willing to go. “I think that’s more palatable for the landlord,” says May. “They see it as rent that they’re going to get back.”

Relinquishing Tenant Rights

Landlords may require store owners who are given a deferral to waive future force majeure rights, which in some leases entitle them to suspend payments in the case of unforeseen events. That way the store owner can’t come back in a few months and once again claim that they can’t pay their rent.

Another concession that landlords sometimes seek, according to May, is removal of restrictive-use clauses that protect stores from having competitors set up shop nearby. “Their tenant pool is diminishing, so they may argue that they have fewer options and need that flexibility,” says May.

More Stimulus on the Way?

The combination of warm temperatures and the lifting of stay-at-home restrictions helped brick-and-mortar retailers regain some of the traffic this summer that they had missed in the spring. Total clothing sales, for instance, reached $19.5 billion in September, according to government figures, compared with a meager $3 billion in April.

However, the onset of harsher weather and a recent spike in COVID-19 cases nationwide—official figures suggest they’re up 95% since mid-September—makes for a tenuous recovery. “I absolutely expect that if we revert back to the more restrictive shutdowns, more retailers will come back and ask for help,” says May.

The inability of Republicans and Democrats to agree on another major stimulus deal is only adding to the uncertainty. Mathews says the checks of up to $1,200 that consumers received as a result of the spring relief package provided an important boost for retailers, especially from lower-income shoppers. Now the retail industry is hoping that lawmakers can find common ground and provide additional relief for struggling consumers. “The money that it puts in people’s pockets is incredibly important for this sector,” says Mathews.

The Bottom Line

The sudden loss of customers in spring 2020 due to the pandemic forced the majority of brick-and-mortar retailers to seek relief from their landlords, typically in the form of reduced or deferred rent payments. While traffic to stores rose over the summer, a lot of retailers still face looming back payments that won’t be easy to make, especially without additional stimulus money in the consumer’s wallet.