Real Estate Leases: A Look at Retail

Coming out of Q1 2023, we have a picture painted of the challenges and opportunities facing the retail sector. What is clear is that deals are more difficult to close in the current business climate. After speaking with respected tenants and landlords, we have these following insights to share with you.

Why is it so hard to get a retail lease across the finish line?

Both tenants and landlords are being more meticulous about their deals.

Tenants are spending more time and money on due diligence during the lease negotiation process than they have historically. As a result, tenants are significantly increasing the amount of time and capital commitments from the outset of a deal. Equipment supply chain delays persist, particularly with respect to HVAC and kitchen equipment, requiring smart planning and additional lead time for space design and construction material and equipment fulfillment. In many cases, landlords are making significant cash outlays to pre-order equipment and materials in anticipation of deals for vacant or soon-to-be vacant space. With so much of their monetary and manpower budgets needed early in the deal timeline, tenants are in pursuit of a heightened sense of confidence in the success of each location. In addition, the non-rent financial aspects of deals such as guaranties, security deposits and prepaid rent consistently rank as the more intensely negotiated terms in today’s transactions. 

While deal flow is robust and vacancy in urban and first-tier suburban centers is quite low, landlords are still facing a multitude of challenges. Old and outdated restrictive covenants litter the shopping center environment, prohibiting uses traditionally shunned by retail centers such as medical, entertainment, service retail and office which are now some of the most active in the market. This also impacts deal progress, requiring landlords to engage with third parties whose interests are not necessarily aligned with the landlord or the prospective tenant. Often landlords are left with little to no leverage in these discussions, resulting in a frustratingly low level of success.

The volleying of deal interruptions and time spent formulating workarounds to get the transaction back on track requires both parties to look at and value the long haul, while remaining flexible to accommodate bumps in the road along the way. Agility is a key component to deal fruition. Discussions between landlord and tenant require expectations of timeline delays, collaborative strategizing and a shared approach to marketing and branding to get foot traffic to their locations.

The bottom line: a landlord-tenant relationship with open lines of communication and mutual cooperation is critical.

What are some growing trends being tracked in the retail space right now?

1. Food and beverage uses remain the most active in most markets.
2. “Medtail.” The retail real estate industry continues to see an increase in space being used for healthcare services.
3. Fitness. Lower-priced fitness businesses are doing well.
4. “Eatertainment.” Coming out of the pandemic, consumers are valuing their time out. Having entertainment of some kind coupled with a restaurant/food/beverage experience adds a desirable layer for the customer.
5. Urban-suburban. During the pandemic, we saw a migration from the cities to the suburbs. Many businesses are striving to give the suburban customer a similar experience without having to commute into the city. We are also seeing some businesses moving back to the cities where they can see higher day-time traffic.
6. Personalization for the “click-to-brick” business. “Omnichannel” retailers are now seeking brick and mortar locations with the goal of achieving a more direct, personal interaction with their customers.