- Commercial landlords have been more willing to make concessions during the COVID-19 pandemic
- Lower rents, deferred payments, and other relief aim to avoid large-scale vacancies
- Retail is in the midst of a major shift, with some trends predating the pandemic
While the COVID-19 pandemic has created a new challenge for the retail industry, it has also opened up opportunities for both existing stores and entrepreneurs looking to start a retail business. Commercial tenants have typically gained the advantage in lease agreements as landlords look to forestall large-scale vacancies.
Many retailers have suffered revenue losses during the pandemic due to business restrictions, or because consumers are wary about shopping in person or gravitating to e-commerce. December marked the third straight month where retail sales in the United States dropped, driven in part by a third wave of COVID-19 infections and renewed restrictions in many areas.
Commercial landlords have taken a more conciliatory approach to tenants, even as many shops experience financial shortfalls, to avoid higher vacancy rates. Commonly offered forms of relief have included forgiveness of past-due payments, lower rents, deferred rent payments, or changes to lease conditions. In some cases, landlords are attempting to avoid triggering lease conditions that lower rents if enough businesses leave.
Tenants are sometimes asked to make some concessions in return. The National Retail Federation says the most common trade-offs include a reduction in co-tenancy rights or delayed kick-out clauses.
The shift in landlord-tenant relations is part of a larger scale transformation of the retail industry, with some trends emerging before the pandemic. The crisis highlighted retail weaknesses such as the declining popularity of shopping malls and the lack of differentiation in major department stores, while also accelerating the demand for e-commerce. Urban retailers are also less likely to be profit drivers as remote work becomes more commonplace, more people look to move out of cities, and tourism remains depressed.
A McKinsey report on the future of retail anticipates that there will also be a continued demand for adequate health and safety measures at brick-and-mortar stores, as well as a number of trends that could benefit local markets. These include more support for local retailers, a demand for quality goods, and a shakeup in customer loyalty that has made consumers more open to trying new brands.
The pandemic is also driving potential solutions for the innovative reuse of vacant retail spaces. These could include office space, fulfillment centers, or pop-up stores.
