Lease consultants get a boost in business as retailers struggle

Consultants are cashing in as they help retailers cash out.

Real estate is typically the second-biggest cost for a retailer — after payroll — and as the industry struggles, many companies have been shedding some square feet.  The likes of Bebe Stores Inc. and Pacific Sunwear of California Inc. have hired lease-consulting firms to help score better deals from landlords, including reduced rent.

Consultants advise their clients to explain to landlords that if they fail to cooperate, it could end up hurting them more than a rent cut. They also help regional or national tenants negotiate rates for their combined portfolios, rather than taking on one store at a time, the Journal reported.

Gregory Apter, president of real estate services firm Hilco Global, said landlords rarely agree to rent reductions, but are more likely to if the other option is a default, which causes owners to lose revenue and see higher costs.

“We need to provide a compelling story that is true and articulate that a rent reduction would provide critical runway for the retailer,” Apter said.

Landlords told the Journal they look at a tenant’s sales at the store, its rent-to-sale ratio and how it compares to the retailer’s national average and the national average of the industry before making concessions. When a company is highly leveraged to the point where it may be forced to terminate leases, landlords often feel pressure to lower rates, according to the Journal.

When retailers plunge into bankruptcy, landlords often struggle to collect the full amount of rent they are owed. The owners of freestanding, single-tenant buildings — such as electronic and fast-food stores — are especially vulnerable in these circumstances.

Spirit Realty Capital, an investment trust that owns free-standing buildings across the U.S., said during its first quarter earnings call that it suffered a “perfect storm” when some tenants stopped paying rents. [WSJ] — Subrina Hudson