2020 completely upended many sectors of the commercial real estate industry, including, but not limited to, retail, multi-family and of course, restaurant. When the pandemic hit, some states mandated temporary rent freezes to act as a tourniquet against the shuttering of business after business that was unable to pay its rent. Once things started opening back up during the summer, tenants and landlords explored ways to move forward in a way that helped both parties. And so, creative lease agreements and incentives have become more and more common.
In the multi-family sector, landlords across the nation are offering big incentives, especially those in urban centers. Seattle apartment landlords are offering 6 weeks of free rent. In New York City, Philadelphia and Boston, they are offering two full months of free rent. Others are offering cash incentives or discounts off tenants’ first month rent.
COVID sparked a small migration of renters out of city centers to more affordable suburban areas. Since there was no longer the ability to take advantage of the conveniences of living in city centers, such as bars, restaurants, nightlife, museums, etc., renters opted for the suburbs where living would be cheaper.
Beyond incentives and discounts, landlords have tried other creative ways to entice current tenants to stay and to attract new tenants. Some have gifted in-suite exercise equipment since many fitness facilities and gyms have closed. Others have offered to waive pet fees or provided gift certificates to tenants.
This push to suburban areas isn’t seen as something that will cause major damage in the future, as it hasn’t been a mass exodus, and once leisure spaces begin to open again, renters will likely migrate back towards urban centers.
The retail sector has been hit much harder since COVID began. According to Forbes, during April and May of 2020, retailers paid just under 60% of rent to landlords. As things have opened back up, these tenants are trying to find ways to work with their landlords and create leases that are as win-win as possible.
Percentage leases are becoming one of the most popular options for tenants and landlords alike. The tenant pays a lower base rent plus a percentage of monthly sales. This ends up helping the retailer, especially in the case of another closure or if a month is particularly slow.
However, it can be a little more dangerous for the landlord. Until recently, most rent was fixed and triple net, meaning that the tenant paid a portion of the taxes, insurance and maintenance. Obviously, with percentage leases that is not possible, so it presents a challenge to the property owners to ensure that they can still cover their bottom line.
Thus, it becomes crucial that both sides, tenants and landlords, come to an understanding of the difficulties and challenges each face. Property owners still have obligations to lenders, and they don’t get the benefit of payment term flexibility for their loans, which presents a major drawback to percentage leases.
Regardless of the pros and cons of any creative lease type, the fact of the matter is that they will be a common theme of at least the first half of 2021, if not longer. Have you heard of other creative lease structures that have come about as a result of the pandemic? If so, leave your comments below!