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Monday, Apr 22, 2024

Retail Landlords Face Slowdown

By ANDREW FOERCH Staff Reporter The coronavirus outbreak and resulting emergency restrictions have forced retailers throughout L.A. County to close shop. For businesses with little to no revenue coming in during the crisis, the question arises: What will landlords do about rent next month? Am I expected to pay in full as I would any other month? Commercial real estate broker Todd Nathanson, president of Illi Commercial Real Estate in Encino, said there is no one-size-fits-all answer, and businesses suffering interruptions should begin working with their landlords now to find a fair solution. “We’re expecting a lot of small tenants to, at best, look for some type of rent forgiveness and hopefully not close their doors altogether,” he said. “I’ve dealt with several (landlord) clients who are willing to play ball. … It’s going to be case-by-case.” Good landlords, Nathanson said, often adjust their expectations or grant temporary rent deferrals in times of extreme economic turmoil. He compared the current business shutdowns to those that occurred in the aftermath of the 1994 Northridge Earthquake. Then and now, preserving tenancy is the ultimate goal. “A prudent landlord with a good history with their tenants is going to make allowances to keep their tenants afloat with the understanding that it’s not rent forgiveness, but rent deferment long enough to sustain and recuperate,” Nathanson said. Even so, some tenants will go out of business – a worst-case scenario for landlords looking to avoid vacancies at all costs in this stagnant retail market. Nathanson said landlords aren’t likely to evict tenants who can’t pay for that reason. He added tenants with triple net and common area maintenance clauses in their leases should try to keep those expenses paid each month, even if their landlord has agreed to a rent deferral or discount. “The real question is: What are lenders going to do? What are utility companies going to do? This trickles upward,” Nathanson said. Rick Pearson, a principal specializing in tenant representation at Cresa in Woodland Hills, said the situation is more akin to what happened during the 2008 market crash. “It was a slow crash. People were still in business, but over the next year or two, people didn’t renew their leases or they took less space. I think this is going to follow a pattern like that,” Pearson said. “Companies that are losing revenue are going to lay off employees and take less space.” “My job for the next year probably is going to be short-term renewals … until (clients) can see how this will affect their business long term. That’s assuming we all get back to work in a month. If this prolongs and nobody’s back to work in three or six months, it’s totally unprecedented,” Pearson added. He predicted helpful landlords will work with tenants on payment plans that spread a few months of rent over the rest of the year. “I don’t think landlords are going to just waive rent. Landlords are pretty good at protecting themselves in getting paid,” he said. He added the government could eventually play a role in helping small business owners with loan forgiveness or 0 percent interest loans. Pearson primarily works with office and corporate sector clients, which he said will generally fare better through business interruptions than the already-hurting retail sector. In fact, he said, the office sector could actually end up benefiting from a forced experiment in remote work and work-from-home. “Some companies are going to say, ‘Wait a minute, this works! Maybe I’ll take less space on my renewal.’”

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