The bell has rung and tenants are coming out swinging. A number of strong retail tenants are taking advantage of the recession by seizing the opportunity to secure long-term leases with lower rents and conditions not seen in many years.
Financial institutions like TD Bank and others are signing leases for ground floor spaces in the range of $150 to $175 per square foot on Third Avenue, representing a drop in rents. And landlords, interested in maintaining occupancy, are providing extra incentives for financially sound tenants who can weather the recession.
The level of incentives today is unusual, according to one expert.
“Landlords are now providing longer periods of free rent and other incentives, which may include the payment for tenant improvements,” said Joanne Podell, executive vice president of retail services at Cushman & Wakefield. “This is not at all commonplace in New York City for retail. In the past, retail tenants were fully responsible for all of the tenant improvements and took possession of the space ‘as is.'”
Many retailers hurt by the recession are asking their landlords to give them a break on their rent. Malachy Kavanagh, a spokesman for the International Council of Shopping Centers, said, “I think that every developer that I’ve spoken to has been approached by retailers looking for concessions.”
The big question then for a landlord is whether it is better to collect less rent or say no and risk losing a tenant.
Sleepy’s, the discount mattress store, is a major retailer with nearly 700 locations in 120 cities across seven states. Late last year, the chain sent a letter to all of its landlords requesting a rent reduction of 25 percent. The letter was accompanied by a rent check with the reduced amount.
Charles Hirsch, president of Milbrook Properties, a landlord of Sleepy’s, said, “We did not accept the rent reductions, but some weaker landlords have no other option than to accept the rent reduction or have a vacant space.”
Trans World Entertainment, one of the largest specialty music and video retailers in the U.S., operating over 800 stores in 49 states, also sought rent reductions. Their stores include F.Y.E., Coconuts Music & Movies, Spec’s Music, Suncoast and Wherehouse Music. John Sullivan, chief financial officer, said, “The company was able to renegotiate more favorable terms on about two thirds of 300 store locations where the lease was expiring last year.” He added, “That’s just the market you’re in today.”
Carlo Tunioli, president of Benetton, the Italian clothing retailer with over 5,500 locations worldwide, said, “In general the recession has had an effect on retail. It helps a tenant go get much better deals on new and existing leases.”
Restaurants, especially well-established brands and restaurant groups, appear to be taking advantage of the confluence of more amenable landlords and lower rents in particular.
Marty Shapiro, a partner at Myriad Restaurant Group, which was created by Drew Nieporent and operates 19 restaurants in New York City, said, “It is the greatest time to open; there is a lot of opportunity in this market.”
Terrance Brennan, chef and proprietor behind renowned New York City restaurants Artisanal Fromagerie, Bistro & Wine Bar and Picholine, said, “Lease rents are coming down. You can secure a good deal at the best price point that I have seen during the past seven years.” Brennan told me that for the first time in years, landlords are now getting a lot of financial support from developers.
“For a restaurant owner, it is now a great time to grow; prices are coming down. I could never find so many great deals,” said David Swighammer, president of Union Square Hospitality Group, owner and operator of Danny Meyer restaurants, which include Union Square Café and 11 Madison Avenue.
David Pasternack, the chef and co-owner of Esca restaurant in Hell’s Kitchen and the operator of Catch of the Day at Citi Field, said, “Tenants are now in the driver’s seat. I recently went to my landlord to extend my lease for 10 years at my present rent, and he said, ‘No problem.'”
That’s because, as Podell explained, “Landlords don’t want to have an empty store, and you might even put in a loss leader to help the retail presence in a specific location.”
At the same time, she said, “Tenants who are struggling to pay rent pose the greatest challenge for ownership. Rent abatements or concessions must be viewed on a case-by-case basis. There is really no map for these times.”
But she suggested some guidelines: If tenants appear to be stable and simply affected by the recent downturn in the market, they receive a short-term rent concession. Typically, the landlord claims a right to recapture lost rent later on.
Hirsch echoed Podell: “Let the tenant show me what the sales are now, and we will often go back to historical sales from 2005-06 for a percentage rent.” It’s best when “the landlord and the tenant come to a consensus on terms,” he said.
With few transactions being completed today, it is challenging to agree on a market rent, Podell said. As a result, she said she is seeing more landlords extend lease terms for a few years and delay longer-term commitments.
As the recession grinds on, expect to see new tenants who previously were deterred by the New York City market gain entrance at lower rents, terms and conditions. As they say in the world of professional boxing, we are in the early rounds, and the tenants are winning.