It’s now June and the month of reckoning for retailers and their landlords has come and gone. Nearly half of commercial retail rents were not paid in May, according to the Washington Post. Companies as big as Starbucks say the financial devastation from the shutdown has left them unable to pay their full property bills on time. Some companies warn they will not be able to pay rent for months.
In Tucson, perhaps due to the additional month of shutdown, retail brokers are saying the number of retail tenants not paying rent last month is even greater, somewhere between 80% to 90% brokers are reporting in some retail centers.
The problem for the broader U.S. economy is that when businesses like Ross Stores and T.J. Maxx stop paying rent, it sets off a chain reaction. Landlords are now at risk of bankruptcy, too. Commercial real estate prices are falling. From property management companies to landscapers are all facing job cuts. Banks and private investors are unwilling to lend to most commercial real estate projects anymore, and cash-strapped city and local governments are realizing the property taxes they usually rely on from business properties are unlikely to be paid this summer and fall.
The situation is especially dire for owners of hotels and malls. Such retailers as Bed Bath & Beyond, Famous Footwear, H&M, and the Gap, movie theaters AMC and Regal and gyms like 24 Hour Fitness stopped paying rent entirely in May, according to Datex Property Solutions. Starbucks paid May rent but also sent a letter to landlords requesting landlords to make concessions starting June 1 and continuing for 12 months.
From J.C. Penney to Pier 1 Imports, the list of stores closing reads like a who’s who of American retailing:
- JC Penney: 154 of its approximately 840 stores are scheduled to close completely by the end of the summer. Another 100 additional units are expected to be closed before the company leaves bankruptcy proceedings.
- G-111, which operates 110 Wilsons Leather and 89 G.H. Bass footwear and accessories stores, is closing all of them, retrenching essentially to the wholesale-only business.
- Pier 1 Imports originally announced it was closing about 450 of its stores but then pulled the trigger on the remaining 540 or so stores as it liquidates the entire company.
- Tuesday Morning, which often resembles a going-out-of-business store on its best days, filed for bankruptcy and announced it was closing 230 of its 687 locations. Speculation is that before it leaves the courtroom it may be forced to shut down everything.
- Neiman Marcus is in bankruptcy but has not announced if any of its 44 full-lines stores might close, but it is shutting down its 22 off-price stores, which operate under the Last Call nameplate. Again, like Tuesday Morning, the shopper may not notice the difference that they are running going out of business sales.
- Stage Stores, which operates about 738 stores under a variety of nameplates, including Bealls, Palais Royal, Peebles, Stage, Goody's and Gordmans, is liquidating them all following its Chapter 11 filing.
- Nordstrom, which is one of the few retailers on this list not in bankruptcy, is nevertheless closing 16 of its locations.
- L. Brands (also not in bankruptcy), which owns Victoria’s Secret and Bath & Body Works and was in the late stages of a deal to sell the former to concentrate on the latter is instead holding on to both brands. But it is closing 250 Victoria’s Secret stores and 50 Bath & Body Works locations in North America.
- Modell’s, the Northeast-based sporting goods stores, actually announced it was shutting down before the coronavirus pandemic but never got a chance to run its closing sales before most of retailing shut down. Once all locations reopen, it will only be to restart the final sales at its 134-unit operation.
- Art Van Furniture is liquidating all of its 190 stores although some may reopen under new names.
- Sears and Kmart, which have been running perhaps the longest going-out-of-business sale in American retailing history, have shut down an additional number of locations beyond the 182-store-count it had announced last winter. The company, now under the Transformco name, has not said how many more stores have closed but estimates suggest that the total count could be as low as 150 or 160 now.
- Several smaller apparel chains, including John Varvatos, True Religion and Roots, have all announced they are shutting down their retail operations after bankruptcy filings, involving another 61 individual locations.
Some retailers in bankruptcy procedures, like J. Crew and Aldo, have not announced any store closings yet but history would suggest they will eventually close large numbers of individual locations in their reorganization plans.
Ascena Retail Group, which operates stores under the Lane Bryant, Justice, Loft and Ann Taylor names, and Brooks Brothers are rumored to be teetering near bankruptcy and should either or both file it would no doubt add to this list.
Likewise Lord & Taylor is heavily expected to shut down its last 40 or so stores as its new owners, Le Tote, have been unable to resuscitate the brand following its transfer from Hudson’s Bay Co. last year.
And retailers like Macy’s M have indicated they expect to close many locations — involving hundreds of doors — but details and timing are still somewhat sketchy.
None of this accounts for additional units retailers in Chapter 11 may eventually decide – or be forced – to close once the debtors’ committees, attorneys and judges have their say.
Here’s another problem, fewer than 40 percent of commercial property loans are owned by banks, according to the Mortgage Brokers Association. The rest are in the hands of various life insurers, real estate investment trusts (REITs) and investors in commercial mortgage-backed securities, which is known as CMBS.
Dozens and sometimes hundreds of commercial mortgages are packaged together into CMBS, which are typically purchased by a bunch of investors. This complex structure is supposed to spread out the risks and rewards, but it adds multiple layers of ownership to properties.
The commercial real estate market ballooned in the past decade to $20 trillion, as investors hunted for high, yet seemingly safe, returns.
“This really is a tale of who is your lender?” said Andrew Little, a partner at real estate investment bank John B. Levy & Co. in Virginia. “If you have a bank lender or an insurance company lender, you can probably get through this and hopefully get to a point where things start bouncing back. If your lender is a Wall Street CMBS lender, you are in trouble.”
Typically, when businesses stop paying their rents and the building is ultimately owned by the investors of CMBS, the tenants have to call a management company known as the special servicer. Already, $32 billion in CMBS loans have gone to special servicers, according to Moody’s, and almost all have been hotel and retail properties. These servicing firms have little incentive to give tenants a break, Little says, because they make money by tacking on extra fees and penalties.
What this all means is that hotel and retail properties are under severe strain to pay the rent and could collapse in a wave of defaults and foreclosures, warn real estate experts. Already, big investment firms are preparing to scoop up cheap properties. Blackstone and Oaktree have raised massive funds to plunge into the distressed commercial market, much as they did with residential homes after the Great Recession.
Lawmakers are trying to figure out how to prevent businesses — as well as their landlords — from going out of business, but government leaders are struggling to figure out how to help.
Some landlords are asking local governments to delay property tax collections, but many municipalities are already financially strained as tax proceeds plunge and costs skyrocket during the pandemic.
Small-business advocates are pushing Congress to change the rules on Paycheck Protection Program loan forgiveness qualifications, so more than 25 percent of the money can be used for rent and other overhead costs. A House bill that passed last week would allow up to 40 percent of the money to go toward rent. The Senate approved the bill last week.
Washington D.C. passed emergency legislation in May requiring commercial retail landlords to agree to rent payment plans. California is debating an even more aggressive proposal to force landlords with tenants that have been severely affected by coronavirus closures to renegotiate leases. Landlords say this upends the very basis of contract law.
See the Datex Tenant Tracking of Who's Paying Rent and Who's Not HERE