Landlords Accommodate More Risky Short-Term Retail Leases

Retailers increasingly are insisting on short-term leases, CNBC reported.

The sector has been hit especially hard by closings stemming from the pandemic and already was reeling from the shift toward online shopping. About 1.5 billion square feet of retail space, or 14 percent of the U.S. market, is covered by leases that will expire in 2021, CNBC reported, citing data from CoStar Group.

CNBC quoted numerous players on both sides of the market, which is producing abundant risks to go around. For landlords, short leases are risky because they undermine predictability around occupancy rates. For tenants, short leases are risky because they leave open the possibility of surges in rents if the market allows for them.

“As we look to the near-term, there will be higher thresholds on renewing leases, as we evaluate the role each store plays in its market, the investments required to meet our customer needs, and the expected return based on a new retail landscape,” Best Buy CEO Corie Barry said in a conference call with analysts cited by CNBC.

Barry reportedly told the analysts that Best Buy, which has closed more than three dozen stores over the last two years and says it’s planning to close more in 2021, has 450 leases coming up for renewal over the next three years.

VF Corp., owner of Vans and Timberland stores, has been signing shorter leases for years, executives with the company told CNBC.

“The way we structure our leases now allows us to be quite nimble, quite agile, and … we can pivot as consumer behavior changes,” Chief Financial Officer Scott Roe told CNBC.

Going forward, he reputedly said, they’ll be even shorter.

Added VF Corp. CEO Steven Rendle, according to CNBC: “The landlords have been cooperative and working with us. We both have the same objective, which is to be viable and to be productive.”

CNBC quoted David Simon, CEO of mall-owner Simon Property Group, as saying that his company is “OK” with retailers signing shorter leases in the current environment.

“I’d rather negotiate two or three years from now [than have an empty store],” he reportedly said. “I think actually that could be in our best interest, too, because … we don’t quite have the ability to point to sales as a way to increase rent.”

“It’s actually a two-way street, and it’s working out fine with a vast majority of our retailers,” he added, according to the report.