Retail

'Do we still have to pay rent?' Retailers grapple with closed stores and coronavirus

Key Points
  • Dozens of retailers are temporarily closing their stores, marking what is being described as an unprecedented situation. 
  • This raises the question: Will these companies still be expected to pay rent? 
  • COVID-19 will lead to a lot of negotiating between landlords and their tenants in the coming weeks. 
A woman sits outside the barricaded and closed entrance to the Westfield Annapolis Mall in Annapolis, Maryland, on March 19, 2020.
Jim Watson | AFP | Getty Images

When chatter started building in the U.S. around employers telling their staff to work remotely to try to curb the spread of COVID-19, Untuckit co-founder Aaron Sanandres' mind was already spinning. 

The retailer was founded in 2011 and built its business, initially online, selling comfortably fitting, un-tucked men's shirts. It now has more than 80 stores, in malls and on bustling urban street corners, across North America. Though its e-commerce operations are strong, stores play a huge role in Untuckit's business and acquiring new customers. 

And so with more cases of the new coronavirus, which still has no cure and is able to spread via human-to-human contact, being reported each day in the U.S., Sanandres and his team were put in an unprecedented situation earlier this month. Do they close their stores? And what would that mean about paying workers? What about rent? 

Shoppers browse clothing inside an Untuckit store at the King of Prussia mall in King of Prussia, Pennsylvania, Oct. 20, 2018.
Jeenah Moon | Bloomberg | Getty Images

On Tuesday, Untuckit announced that all of its locations will close temporarily through at least the end of this month. The company has said it will pay employees during this time. But Sanandres thinks the closures will drag on for much longer. 

Next up is figuring out those monthly rent payments. 

"We have started conversations with some of our landlords," Sanandres told CNBC in a phone interview earlier this week. "We are going to have these conversations with all of our stores." 

Untuckit is not alone in having these conversations. Dozens of retailers, big and small, have said their stores will temporarily go dark through at least the end of the month, likely choosing that initial time frame because they have already paid March rent in full. The list includes everyone from Nike and Apple to start-ups Allbirds and Glossier. 

The consequences of still having to pay rent on a location that is not in business could deal a huge blow to some retailers that are already strained for cash. Typically, rent is one of a retailer's biggest expense items. Couple that with the fact that many retailers' sales are about to shrink drastically, so long as consumers are holed up at home and stocking up on groceries and household essentials, not discretionary items like shoes and shirts. 

The closures raise a huge question. In some of these instances, stores are closing as the shopping mall itself remains open for business, per the landlord's decision. Retailers are left wondering: Do we still have to pay? 

Meantime, mall and shopping center owners certainly do not want to lose a batch of their tenants all at once. That could put their properties at risk. 

"I feel like there needs to be more alignment in how this partnership [between tenants and landlords] works," Sanandres said. 

He added that he is hopeful that some landlords — namely the ones in a better position with more cash on hand — will be able to work with retailers on rent abatements, meaning paying less rent, or rent deferrals due to COVID-19. 

'Act of God'

"The biggest concern is how long will this last," David Marmins, a retail litigation expert who co-leads Arnall Golden Gregory's retail team, said in an interview. 

"15 days? Three months? Of course the landlords' other concern is that their tenants will go out of business," he said. "They need their tenants. There will be somebody to take their place eventually. But it is a lot of revenue being lost, every day, that nobody budgeted for." 

Many retailers will have what is known as business interruption insurance, real estate experts said. But, typically, a pandemic caused by a virus is not covered by that. Instead, it is more for fires and natural disasters. 

The next step that many retailers are taking is figuring out if force majeure, or "Act of God," clauses justify tenants' suspension of performance of their duties under their leases — primarily operating stores and paying rent, Marmins explained. 

The answer to this, he said, will depend on the specific contract language, local law and the "causal connection between the pandemic and the particular tenant's inability to meet its lease obligations." 

Over the years, more force majeure clauses have been adapted to include "epidemic" or "pandemic" scenarios, he said, as tenants have had to work through other deadly virus outbreaks such as SARS and MERS. The more broad-sweeping the clause is, the better chance a tenant has to argue its case, Marmins added. 

A lot of this is likely going to play out over the coming weeks on a case-by-case basis, between each tenant and their respective landlord. But with April rent payments coming due in the next few days, retailers do not have much time on their hands to figure things out. 

The outside of Neighborhood Good's first location in Plano, Texas.
Source: Neighborhood Goods

"If landlords turn around and provide rent abatement, a lot of companies can pay employees for longer," Neighborhood Goods co-founder Matt Alexander said. The company, based in Texas, has three locations in the U.S. It calls itself a department store of the future because it rents space to various brands such as candlemaker Homesick and women's shoemaker Rothy's. 

Some retailers, including Neighborhood Goods, are working fast to pivot online, pushing deals to shoppers, through marketing emails, on their websites. But roughly 90% of retail sales are still made in brick-and-mortar stores. The shift to digital will not happen overnight. And the demand from consumers to shop online might not even be there right now, regardless. 

As of Thursday 4:30 p.m. ET, nearly 36% of square footage devoted to specialty retailers across the U.S. has closed due to COVID-19, according to GlobalData Retail. Over 32% of specialty retail stores are closed, the firm said. It is the grocers, drugstore chains and businesses such as Costco, Walmart and Target that are still open at this time, seemingly unable to keep enough pasta sauce, toilet paper and hand sanitizer on their shelves. 

Retail consulting firm Customer Growth Partners had been calling for 2020 retail sales in the U.S. to grow 4.1% year over year, if COVID-19 is resolved by April. But the likelihood of that is looking slim, CGP President Craig Johnson said. He said his firm's estimate for sales growth will be roughly halved, to 2.2%, if the crisis persists into June. 

'It has been panic'

On the flip side, America's mall and shopping center owners are still trying to figure things out for themselves. Unless a local mandate has asked them to shut, they also must decide whether to remain open for business. 

The biggest mall owner in the U.S., Simon Property Group, was the first landlord to announce Wednesday that it is temporarily shutting its entire portfolio of malls and outlet centers domestically though March 29. This includes The Forum Shops at Caesars Palace in Las Vegas, Roosevelt Field Mall in New York and The Galleria in Houston. Private developer Triple Five Group has also shut the Mall of America and its New Jersey megamall that has an indoor ski slope, American Dream

Don Ghermezian, President and CEO of Triple Five developers of American Dream (far left), New Jersey Governor Phil Murphy (middle) at first phase opening
Adam Jeffery | CNBC

Real estate owners Unibail-Rodamco-Westfield and Taubman Centers have also temporarily closed their malls, including Westfield Garden State Plaza in Paramus, New Jersey, and Beverly Center in Los Angeles. 

"It has been panic. ... I would tell retailers to stay calm," said Greg Maloney, CEO of commercial real estate services firm JLL's retail division. Maloney's job includes working on behalf of landlords to negotiate with tenants regarding their requests. 

"They are friends, they are our partners," he said about retailers that are increasingly anxious. "Retailers might demand free rent, but per the lease do not have the right to do that." 

"We will take a look [at tenants' requests] and see what we think is right for everyone," Maloney said. In striking deals with retailers, he added that JLL will be considering a retailer's sales and how long they might be shut down for. 

The hardest part about making these decisions, retail experts say, is not knowing what this situation is going to look like a month from now, or even two days from now. 

"This is going to be a massive cash-flow issue," said Joseph Malfitano, founder of turnaround and restructuring firm Malfitano Partners. 

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