The acceleration of the retail apocalypse under Coronavirus

David Goldsmith

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10 days ago:

Brooklyn ice cream shop Ample Hills files for bankruptcy, won’t close locations

Today:

Ample Hills Creamery to lay off all 101 of its workers

Layoffs come in the wake of the creamery’s bankruptcy filing
 

David Goldsmith

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That's true but I think more would have made it through bankruptcy without losing everything and resulting in vacant retail spaces.
 

David Goldsmith

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How will hotels and retailers survive until their customers come back?
Travel bans, social distancing and forced closures bring two already-troubled sectors to their knees

By early March, Terminal 1 of John F. Kennedy Airport, one of the busiest airports in the country, was nearly a ghost town.

The novel coronavirus was sweeping East Asia and spreading around the world, and the terminal — which serves departures for China Eastern Airlines, Air China, Korean Air and Japan Airlines — had taken a huge hit since carriers began suspending flights to Asia in February. Retailers there reportedly saw sales fall by 50 percent in just a few weeks.

JFK’s Terminal 1 was New York City’s “patient zero” for the impact of coronavirus on the travel and retail sectors less than a month ago. But the contagion has since spread quickly and broadly, devastating hotels, restaurants, entire shopping corridors and malls. Now, desperate hotel owners are filling empty rooms with overflow hospital patients, and already struggling shops in Soho are boarding up their storefronts like an abandoned rural downtown.

In a telling convergence of how the pandemic is walloping hotels and retail, on March 13 the International Council of Shopping Centers canceled its annual conference slated for late May in Las Vegas.

That was just one of hundreds of conferences and events canceled as the fear of contagion spread even faster than the virus itself. Many mall operators canceled all public events, and major retailers began shutting their doors even before mandatory closures left most stores no choice. By mid-March, trade groups for retailers and hoteliers — who were already facing strong economic headwinds — were appealing for multibillion-dollar taxpayer bailouts.

Late in the month, New York’s iconic Plaza Hotel announced it had stopped taking guests and would lay off 251 of its staff.


“The malls are closed, people aren’t shopping the way they were, and obviously big business, Las Vegas, convention centers, business travel stopped,” said Haendel St. Juste, a real estate investment trust analyst at Mizuho Securities USA. “Who’s got the most risk? Retail, gaming, lodging.”
Real estate investment trusts exposed to these sectors tanked as the crisis escalated. The FTSE Nareit All REITs index, which includes all listed U.S. REITs, lost more than 12 percent of its value in the second week of March and nearly 22 percent the week after that with hotel and retail trusts taking the biggest hits.
Pebblebrook Hotel Trust saw more than 56 percent of its value wiped out between March 2 and the hotel industry’s March 17 plea for federal aid. Mall owners Macerich and Simon Property Group fared little better with drops of nearly 56 percent and 54 percent, respectively. Starwood Property Trust, one of the nation’s largest mortgage REITs, saw its shares plummet by more than 40 percent, and even a stalwart such as Boston Property Group took more than a 21 percent hit.

With escalating lockdowns keeping customers at home, hotel occupancy rates in some markets plunging into the teens and no clear picture of how long the crisis will last, firms are responding with mass layoffs and appeals for government support. Policymakers are imposing rent and eviction moratoriums, and analysts are warning of permanent changes in shopping and travel habits and supply-chain disruption that could even run into the holiday shopping season.

Over just a few days, New Yorkers went from avoiding handshakes and shunning the water cooler at work to holing up in their homes under a state-mandated lockdown with schools, offices and “nonessential” businesses closed indefinitely.

Barry Sternlicht, chairman and CEO of Starwood, offered what he characterized as an optimistic take on the impact of the coronavirus in a mid-March interview with Bloomberg.
 

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Chicago firm buying billions in real estate from retailers on the brink
Oak Street Capital’s plan involves leasing back the properties

With every crisis comes opportunity. Private equity firm Oak Street Real Estate Capital has $5 billion and plenty of opportunities.

Marc Zahr and co-founder Jim Hennessy are telling companies in distress to sell them their property and lease it back, according to a report from Crain’s. The firm recently struck a $725 million deal in Ohio with Big Lots. The deal allows the retailer to pay down debt, and Oak Street gains control over four distribution centers, which will be leased by Big Lots, according to Crain’s.

Oak Street has completed or is finalizing deals with seven publicly-traded companies to buy roughly $1 billion of real estate and subsequently rent it back to the companies, Zahr said. With additional financing, Oak Street plans to scoop up about $3 billion worth of property, Crain’s reported.

Still, there’s risk on Oak Street’s end: the leases are typically for 15 to 20 years, and there’s a good chance the companies can’t survive a recession.

In January, Oak Street bought 2.1 millions square feet of space from struggling retailer Bed Bath & Beyond. It leased it back to the company. Some retailers have resisted such real estate plays: Target fought off an attempt in 2008, for instance. The retailers need the underwriting to allow them flexibility to maneuver through uncertain times.

Oak Street is backed by major public pension funds like the Illinois Municipal Retirement Fund and the Chicago teacher’s fund. It’s on track to close its fifth fund with a cap of $2.5 billion, according to Crain’s.
 

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Retail landlords are creating a blacklist of tenants who aren’t paying rent
Mall owners may declare non-paying tenants to be in default after grace period

While mom-and-pop retailers may be feeling the economic pain of coronavirus the hardest, some bigger companies have decided to forgo rent payments as well. But landlords aren’t buying it.

Owners of malls and shopping centers have been putting together a “blacklist” of financially stable tenants that haven’t met their April rent obligations, the Wall Street Journal reported.

“We think that it’s their duty to pay April rent,” chief executive officer of Kimco Realty CEO Conor Flynn told the Journal. “The customer base is going to recognize who the bad actors are.”

According to Marcus & Millichap, April rent collection has ranged from just 10 to 25 percent for mall owners with higher concentrations of nonessential tenants, to 50 to 60 percent for landlords with “essential” tenants such as grocery stores and pharmacies.

Large retail tenants that have failed to pay rent in full include Burlington Stores, Petco Animal Supplies, LVMH Moët Hennessy Louis Vuitton, Victoria’s Secret and Staples.

Staples, which has been able to keep many stores open in areas where it is considered essential, has told landlords that it will not pay rent because of a drop in sales. Dick’s will not pay rent at stores that were closed due to government orders, but will continue to pay rent for stores that it closed voluntarily.

While some mall owners have indicated that they plan to declare non-paying tenants in default, smaller landlords may be more hesitant to confront big tenants over rent payments. Retailers appear to recognize that they have the upper hand, but things could get messy.

“The retailers think they have leverage here and they’re trying to use it,” Green Street Advisors analyst Vince Tibone said. “I see it potentially becoming a fight and going into litigation.
 

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‘Pretty Catastrophic’ Month for Retailers, and Now a Race to Survive
March brought a record sales plunge as the coronavirus outbreak closed stores. A long shutdown could leave lasting changes in the shopping landscape.
Retail sales plunged in March, offering a grim snapshot of the coronavirus outbreak’s effect on consumer spending, as businesses shuttered from coast to coast and wary shoppers restricted their spending.

Total sales, which include retail purchases in stores and online as well as money spent at bars and restaurants, fell 8.7 percent from the previous month, the Commerce Department said Wednesday. The decline was by far the largest in the nearly three decades the government has tracked the data.

Even that bleak figure doesn’t capture the full impact of the sudden economic freeze on the retail industry. Most states didn’t shut down nonessential businesses until late March or early April, meaning data for the current month could be worse still.

“It was a pretty catastrophic drop-off in that back half of the month,” said Sucharita Kodali, a retail analyst at Forrester Research. She said April “may be one of the worst months ever.”

The resulting job losses continue to mount. Best Buy, which has 125,000 employees over all, said Wednesday that it would furlough 51,000 hourly store workers beginning Sunday, including nearly all of its part-time staff.

And in the months ahead, the question is how quickly spending will bounce back once the economy reopens, and how many businesses will survive until then.

People who lose jobs won’t quickly resume spending once businesses reopen. And those willing to spend may be reluctant to congregate in malls, restaurants and other businesses that rely on face-to-face contact.

Michelle Cordeiro Grant, chief executive and founder of Lively, a lingerie brand acquired by Wacoal last year, said it wasn’t clear how customers would want to shop and “what the new culture of shopping in physical retail will be.”

(More in link)
 

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Simon says malls will reopen but some states say otherwise
Nation’s largest mall landlord has reactivated dozens of properties but was blocked from doing so at locations in New York and Indiana, and may have to adjust scheduled reopenings in other areas

Simon Property Group’s plan to reopen several dozen malls across the U.S. has not gone as smoothly as expected.

While more than three dozen states have partially reopened to business — or will be soon — some cities within those states remain under quarantine.

Simon has postponed the opening of at least seven malls in New York State — which has been hit harder by the coronavirus than anywhere else in the country — and four others in Indiana, according to the Wall Street Journal.

The openings in Indiana were blocked when officials from Marion and Monroe counties extended their stay-at-home orders through May 15. The malls in New York were set to open May 16. The state is allowing some counties to begin industry-specific reopenings based on criteria such as infection and hospital rates. New York City, which has recorded the highest number of cases of Covid-19 and the highest number of deaths, remains under a stay-at-home order, with nonessential businesses shuttered.

Late last month, Simon — the country’ largest mall landlord — planned to open 49 malls in 10 states, but that list has changed and is expected to continue to change in the coming weeks depending on local and state rules, the Journal reported.

Despite the setbacks, CEO David Simon said that 77 of its malls had opened as of Monday.

Simon was hit hard by the pandemic in the first quarter, with a 20 percent year-over-year decline in net income, it reported on Monday. The company expects those results to darken in the second quarter, when the full impact of the virus-led shutdowns will be revealed. In late March, Simon announced it would furlough 30 percent of its workforce because of coronavirus.
 

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Mall free fall: Macerich collects just 26% of April rent payments
anta Monica REIT scrambles to negotiate with landlords, tenants

We know it is a bad time to own malls, but retail landlord Macerich’s Tuesday earnings call highlighted how dire matters are.

Tom O’Hern, CEO of the Santa Monica retail real estate investment trust, reported that the company “collected about 26 percent of rent” from tenants at the 47 shopping centers Macerich owns throughout the country, malls replete with brands like H&M and Pottery Barn that have been shut down throughout the coronavirus pandemic.

This is a problem: More than 90 percent of the company’s revenue comes from leases. In the first three months of 2020, Macerich generated $226 million in revenue, with $211 million coming from lease payments, and posted a net income $8.7 million.

But O’Hern admitted at the call’s start that the Q1 earnings, “seem, frankly, not that relevant.”
Market analysts’ questions about the lease payments dominated the earnings call.
“We are having literally hundreds of discussions with our retailers that are underway,” O’Hern told one analyst who asked about the paltry 26 percent collection rate. “Many of them are asking for rent deferral. It’s a long process. There’s a lot of uncertainty.”

Much of the uncertainty, O’Hern said, centers upon when malls will reopen. Macerich’s portfolio is largely in California, New York City, and Chicago, locales that imposed coronavirus-induced mall shutdowns in mid-March, which are only beginning to be reassessed.

Macerich does own 13 total malls in Texas, Colorado, Missouri, Iowa, Indiana and Arizona that have recently reopened. And company executives expressed hope that all shopping centers would reopen by mid-June, gameplanning on the call about hand-sanitizers, “social distancing markers for fitting rooms,” and curbside pickup.

How Macerich expects to deal with tens of millions in unpaid rent is not totally clear, though a couple of partial solutions were discussed.

O’Hern said the company “continues to have conversations with lenders” to “defer payments so the outflows match the inflows.”

“Those conversations continue today,” the CEO said, declining to specify the state of negotiations or potential lenders willing to make a deal.

The biggest cost cut laid out was property redevelopment. The company said it would slash renovation spending to $60 million from the budgeted $150 million.

That cut does not include the mammoth redo of One Westside Pavilion in Los Angeles, which Macerich is doing in conjunction with Hudson Pacific Properties. The site is being converted into office space for Google.
 

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April’s 16.4% drop in retail sales is worst on record
The percentage drop is nearly double that of March, which also set a record low for U.S. retailers

The numbers are in for last month’s retail sales and they aren’t pretty.
Despite an increase in online purchases, total sales fell 16.4 percent in April — the largest monthly drop ever recorded, the New York Times reported, citing the latest report from the U.S. Department of Commerce. The amount of money spent was the lowest it’d been since 2012, even without accounting for inflation.

April’s figures were nearly twice the 8.3 percent drop in March, which had also set a record for U.S. retailers.
As expected, brick-and-mortar businesses saw the most significant declines in activity. Restaurants and bars lost half their business, while furniture stores sales fell by 66 percent. Clothing stores fared the worst of all with an 89 percent drop in sales.

Many industry experts and business owners predicted that April would be the worst month of the coronavirus pandemic for businesses, as state governments across the country mandated that non-essential businesses stay closed.

Now, some parts of the country are starting to re-open, which could buoy sales in May. But a recovery isn’t expected to be quick. With layoffs across industries, it’s uncertain how much disposable income consumers will have — or if they will feel safe shopping in public.

Some businesses could limp along for years before succumbing to the wounds inflicted by the pandemic and government mitigation measures. UBS estimates that 100,000 stores will close over the next five years.

A third of business owners surveyed by the Census Bureau this week said they expected it would take more than six months to recover, and 6.6 percent said they didn’t expect a full recovery at all.
 

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J.C. Penney to close 242 stores in bankruptcy restructuring
Coronavirus pandemic could be nail in retailer’s coffin

Department store J.C. Penney announced Monday it plans to close 242 stores across the country as part of its bankruptcy restructuring.
The 118-year-old company filed for bankruptcy Friday. The stores to be closed comprise about 30 percent of J.C. Penney locations and will leave it with just over 600 stores nationwide, according to the New York Times.
While the coronavirus pandemic and resulting retailer closures likely factored into J.C. Penney’s bankruptcy, the company was in a dire financial state long before. As of late April it was in discussion with its lenders for a debtor-in-possession loan of at least $800 million.

Bankruptcy filings show that J.C. Penney plans to close 192 stores this year and sell 50 stores that it owns next year, according to the Times. It plans to hold on to its best performing stores, which accounted for 82 percent of last year’s revenue. The company also aims to boost online sales from 14 percent of its revenue last year to a quarter of revenue by 2024.

April was a devastating month for U.S. retailers. Total sales, including online, fell 16.4 percent from the month prior as the vast majority of physical retail stores were closed all month. That was the largest drop on record, followed by the 8.3 percent drop in March.

Less money is moving up the financial food chain. In mid-April, some landlords had collected just 15 percent of their usual monthly rents and there’s concern that missed payments could lead to a wave of defaults.
 

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Home-Decor Retailer Pier 1 Looks To Close For Good

Bankrupt Pier 1 could not find a buyer during the coronavirus pandemic. Now it's asking the bankruptcy court to approve a complete liquidation of the chain.

Pier 1 Imports — one of America's most prominent home-decor chains — is packing it in.
The company, known for its colorful housewares and wicker furniture, declared bankruptcy in February. The coronavirus pandemic forced temporary closures of its approximately 540 stores and dashed its hopes of a recovery.
"This decision follows months of working to identify a buyer who would continue to operate our business going forward," Pier 1's CEO and Chief Financial Officer Robert Riesbeck said in a statement. "Unfortunately, the challenging retail environment has been significantly compounded by the profound impact of COVID-19, hindering our ability to secure such a buyer and requiring us to wind down."

Pier 1 is now asking the bankruptcy court to approve "an orderly wind-down" as soon as its stores are able to reopen. That would include a complete sale of its inventory, intellectual property and other assets through a court-supervised process.
The chain, which started with a single store in 1962, was already on track to halve its store count. It's been struggling to compete against a rising tide of home-decor offerings, often at cheaper prices, by competitors such as Target, Walmart, Amazon, Wayfair and TJ Maxx.

The coronavirus pandemic has devastated "nonessential" retail stores and cut sales at furniture and home furnishings stores by more than half.
"Our first customers were post-World War II baby boomers looking for beanbag chairs, love beads and incense," Pier 1's online history says. "Pier 1 has carried a wide selection of merchandise through the years, from chocolate-covered ants to clothing lines to life-size Spanish suits of armor."
 

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The impasse between landlords and retail tenants could lead to massive closures.

Major restaurants and cafes seek rent cuts, irking landlords
Accounting rules, property value impact discourage rent forgiveness

As coronavirus closed stores across the country in March and April, many landlords proved willing to work with tenants and defer rent payments to a later date. Reducing rent outright, however, is another story.

According to accounting rules, deferred rent can still be booked as income, whereas reduced rents are treated differently, the Wall Street Journal reported. Rent reductions can also impact property values and the landlord’s ability to get loans.

“We are not offering forgiveness,” NewMark Merrill CEO Sandy Sigal, whose firm owns over 70 shopping centers in California, Illinois and Colorado, told the Journal. “We understand the situation and are doing our best.”

But that hasn’t stopped restaurant and cafe tenants — including large publicly traded companies like Starbucks and Chipotle — from making such requests. Even as the economy begins to reopen, many operators say social distancing rules will require them to modify operations and cut costs.

“Starbucks will require concessions to support modified operations and adjustments to lease terms and base rent structures, so we can withstand this uncertainty together,” a Starbucks executive wrote to landlords in a May 5 letter.

“We are a strong tenant with significant growth ahead of us, and we expect our landlords will partner with us during this difficult time period,” Chipotle CFO Jack Hartung told investors last month.

NewMark Merrill’s Sigal says he offered percentage rent to some tenants instead of deferral, although no tenants have taken up the offer yet.
 

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Simon reopened malls but foot traffic dragged
Anonymized cell phone location data shows mall shoppers across the US were slow to return early on

Despite Simon Property Group’s promise to enforce social distancing guidelines and screen potentially sick employees at the dozens of malls it planned to reopen, foot traffic dragged at those locations early on.
From May 3 through 10, overall foot traffic at those 46 reopened malls was about one quarter of its total on Jan. 1.
The information was gathered using anonymized cell phone location data from geospatial analytics company Orbital Insight.

Nationwide, the lowest-performing Simon property was the St. Louis Premium Outlets mall, where May foot traffic only reached 5 percent of its January level. Traffic in Oklahoma and Arkansas locations was also low. The Penn Square Mall in Oklahoma City, the Woodland Hills Mall in Tulsa, Oklahoma and the McCain Mall in North Little Rock, Arkansas together averaged just 18 percent of traffic on Jan. 1. Both states are also among the ones with the least restrictive coronavirus-related rules nationwide.

Georgia and South Carolina were the only states where average foot traffic broke 30 percent of its Jan. 1 level. The average foot traffic in Georgia was skewed by the Calhoun Outlet Marketplace in Calhoun, where foot traffic reached nearly 90 percent of its previous level. That was the highest total recorded at any Simon location Orbital Insight examined.

The coronavirus pandemic has been a coup de grace for malls and big-box retailers, many of whom were already victims of a retail apocalypse that spanned the last decade. In May, Neiman Marcus filed for bankruptcy protection and JCPenney announced it would sell its 242 stores as part of its bankruptcy restructuring. And it’s probably only going to get worse over time: Ratings houses expect retail vacancy rates to break all-time highs over the next several quarters.
 

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Stephen Ross to retailers: Brace yourself for bankruptcies
The Related Companies chairman said he is concerned that many retailers and small businesses will be unable to bounce back

Stephen Ross predicts the coronavirus pandemic will result in a “flood of cases going to the bankruptcy court.”
The chairman of Related Companies appeared on CNBC’s “Squawk Box” Tuesday to discuss the impact of the virus, and said he’s especially concerned about the effect on retailers and small businesses.
“Many of them probably don’t have the wherewithal to reopen,” he told CNBC.

Neiman Marcus, which anchors Hudson Yards, is one of Related’s most high profile tenants to declare bankruptcy. The retailer had said it was the pandemic that triggered the filing.
Ross said he doesn’t view the wave of bankruptcies as “induced by bad practices.”

“It’s really all driven by the pandemic,” he said on the TV segment.
Related CEO Jeff Blau previously told CNBC that the company had collected 35 percent of its overall retail rents as of mid-April. However, at its enclosed shopping centers, Related collected 20 percent of rents. It’s unclear how collections fared by the end of the month.

Blau has previously said that tenants who are able to pay rent should not take advantage of the current climate. “It’s a whole ecosystem. The people that can pay need to pay,” he said in April. “Landlords need to help out those that can’t.”
 

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Simon Property Group sues Gap for $66M in unpaid rent
The apparel company is the mall operator's biggest in-line tenant

The gloves are off between the biggest mall operator in the country and one of its most important tenants.
Simon Property Group is suing Gap Inc. for its alleged “failure to pay more than $65.9 million in rent and other charges due,” according to a lawsuit filed Tuesday that was reviewed by The Real Deal.

The complaint, filed in Delaware state court, marks an escalation in the battle between multinational retail tenants and the real estate investment trusts that control a large chunk of U.S. retail space.
Many tenants including Gap stopped paying rent after coronavirus stay-at-home orders that launched in March, a decision landlords are having a hard time stomaching.
Simon Property Group CEO David Simon made reference to laggard tenants in a May earnings call.
“The bottom line is that we do have a contract, and we do expect to get paid,” Simon said.
That simple message animated a lawsuit that barely stretched six pages against a tenant who leases more than 400 properties from Simon Property Group, and is, according to CNBC, the company’s biggest in-line (non-anchor) tenant in terms of rent.
Gap, a San Francisco-based company whose brands include Old Navy and Banana Republic, is in contractual default “for failure to pay rent for April, May and June 2020,” the suit states. “The amounts due will continue to accrue each month, with interest,” according to the suit.
Simon Property Group is asking the court to order Gap to pay up the $66 million plus any future rent payments.
Gap declared in an April public filing it would stop paying rent for shuttered stores. That stance has already sparked lawsuits by individual landlords in Manhattan and Orange County against the clothing company. It’s unclear how long the company plans to continue its nonpayment policy, as the company said last month that it would reopen in 800 locations by the end of May.
Messages left with Gap Wednesday were not returned. A company spokesperson declined comment to a separate query earlier this week, stating the Gap was in a quiet period before an earnings call.
Both landlord and tenant have taken a beating since the pandemic struck.
Simon Property Group’s stock has went from $142 in February to $72 at close of business Wednesday as the company has battled with tenants over rent payments, and state governments on when they can reopen stores.
A TRD analysis found that foot traffic at malls Simon Property Group opened at the start of May was 25 percent of pre-covid foot levels.
Gap’s stock price has nearly halved since February. and the company laid off 10 percent of its corporate workforce last month after furloughing most physical retail employees.
 

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The next big problem for the economy: Businesses can’t pay their rent
Nearly half of commercial retail rents were not paid in April and May

Nearly half of commercial retail rents were not paid in May. 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.
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 an alarming chain reaction. Landlords are now at risk of bankruptcy, too. Commercial real estate prices are falling. Jobs at property management companies and landscapers face 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.

Overall, Datex found that 58.6 percent of retail rents were paid in May. Office and warehouse tenants are still paying rent for now, but there remain concerns about whether tenants will renew leases as working from home gains in popularity.
“Social distancing means financial Armageddon for commercial real estate and municipalities in coming months,” warned R. Christopher Whalen, head of Whalen Global Advisors, on his blog for investors. He predicted defaults could be worse than the peak losses of the early 1990s commercial real estate bust “by a wide margin.”

The crisis is particularly threatening for tens of thousands of small businesses, some of whom operate on such small margins that they say they won’t survive the pandemic recession if they have to pay rent right now. Many small companies are asking landlords for a break, but commercial properties often have a complex chain of owners. Getting them all to agree quickly is proving difficult.

Will Eastman has a lot of nightmares lately that he’s going to be the owner who closes down the iconic U Street Music Hall forever. Eastman said he has tried everything to save the independent music venue and club in Washington, D.C., but it’s hard to generate revenue when U Street Music Hall has been shut since March 13 and doesn’t expect to host live shows until the fall, at the earliest.
“Right now my biggest challenge is with rent. We have had a back-and-forth with our landlord that is kind of mind-boggling,” said Eastman, who hasn’t paid April, May or June rent. “We have no shows scheduled for summer.”

Eastman is in talks with his landlord, but finding a solution has been difficult. Real estate experts say at least U Street Music Hall knew who to pick up the phone and call because his landlord and the property’s mortgage holder are nearby in the D.C. area. For many other businesses, the ownership of their property is far more complex.

“It’s not just the landlord and the tenant that have to talk. Many properties are owned by a number of investors,” said David Ling, a real estate professor at University of Florida. “A lot of this is going to have to be sorted out via lawsuits and the courts.”
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 Wednesday.
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.
“It’s not appropriate policy to have blanket rent forgiveness. It could really create some chaos,” said John Worth, executive vice president for research at the National Association of Real Estate Investment Trusts.

Lawmakers behind these initiatives say the goal here is to avoid a massive loss of small businesses.
“Businesses and individuals are hurting because of this crisis and it is no one’s fault. We’re trying to make sure people can survive,” said D.C. Council member Mary M. Cheh (D-Ward 3), who sponsored the emergency legislation. “In the end, the rents will be paid.”
Perhaps the most effective intervention so far has come from the Federal Reserve, which has purchased about $9 billion of CMBS and told banks they won’t be penalized for making reasonable concessions on loans. The Fed’s actions have helped unfreeze the commercial real estate market for investors, although it has done little to help small businesses unable to pay rent.

For U Street Music Hall in Washington, paying the rent looms large. The venue has sold more than a thousand T-shirts to fans to make money during the pandemic. An online donation campaign to help U Street workers has raised over $20,000, and Eastman managed to get $120,000 from the federal government’s Paycheck Protection Program for small businesses. But to have this loan forgiven, he has to use $90,000 of the funds to pay his workers.

The remaining funds can be used to pay rent and other expenses, but there’s barely enough leftover to cover the $21,000 rent each month. Eastman has not paid April or May rent and doesn’t expect to pay June, either. He recently asked his landlord for a payment plan.
U Street Music Hall’s landlord is Hanny Chan, owner of JRC Standard Properties, a small commercial real estate company in Washington. Despite the pandemic, Chan still has to pay the mortgage, taxes, insurance, utilities and trash collection for the property where U Street Music Hall is located. His bills have not stopped, either.

Chan spoke with his lender, Industrial Bank, about relief on the mortgage, but Chan found the terms were too onerous, according to his lawyer.
JRC, as the landlord of music hall, “has not received any mortgage relief from its lender. After the public health emergency was declared and U Street Music Hall was shuttered, it withheld rent for April and May without any request for any rent relief,” said Ian Thomas, a lawyer at Offit Kurman who represents JRC. He said JRC has asked U Street Music Hall for more detailed financial information, including about its PPP loan, but the documents were not provided.
Industrial Bank prides itself on serving the D.C. community, said chief executive B. Doyle Mitchell Jr. He said the bank has provided “probably 30 percent” of its commercial real estate clients with some sort of workout plan.
“We have come to the aid of our customers and some non-customers quickly during this pandemic time,” Mitchell Jr. said. “Some borrowers looked at the [forbearance] program and decided they did not need it. All of our borrowers know it’s available.”
Chan and Eastman are headed to court to work it out. Their situation is further complicated by the fact Eastman and Chan have been in a legal dispute for the past year over management fees and the lease extension.
For now, U Street Music Hall’s full rent is still due.
“We are not asking for free rent. We are not asking for a handout. We are just asking for a reasonable payment plan because our entire industry has been eviscerated by this crisis,” Eastman said. “Our 2020 plans are to survive.”
 

David Goldsmith

All Powerful Moderator
Staff member
Open M
Seritage terminates leases on most of its Sears, Kmart locations
REIT also reported it collected just 52% of rents in May on its 224 open stores

The real estate company that Sears spun off five years ago to shore up cash is cutting ties with most of the struggling retailer’s remaining stores.
Seritage Growth Properties is terminating the master lease covering 12 of the remaining Sears and Kmart stores in its portfolio, the company announced Thursday.
The real estate investment trust will collect a $5.3 million termination fee from Sears’ parent company, Transformco, as part of the deal. The payment is due by Sept. 30 or “the completion of going-out-of-business sales.”
A spokesperson for Transformco declined to comment and a representative for Seritage was not immediately available.
Transformco, which acquired Sears out of bankruptcy in February 2019, announced in November that it would close 96 Sears and Kmart stores across the country, leaving the retailer with 182 locations.
Seritage owns more than 200 properties. The company said that as of Wednesday, 224 of its 280 tenants were open and operating. The REIT said it collected 52 percent of rents in May, down from 65 percent the month before.
Sears spun its real estate assets out into Seritage in 2015 in an effort to raise cash amid declining sales. Many large department stores have faced similar struggles in recent years due to competition from online retailers and changing consumer tastes. Those challenges have been compounded by the Covid-19 induced economic shutdown, which has pushed department stores like Neiman Marcus and JCPenny, as well as retailers such as J. Crew, to file for bankruptcy.
Seritage took hits to its earnings last year as Sears struggled financially. The REIT has pitched alternative uses for former Sears locations, such as redeveloping them into apartments.
 

David Goldsmith

All Powerful Moderator
Staff member
“This is a tsunami”: These big retailers stiffed their landlords in May
Bankruptcy looms over some retailers who paid zero percent in May


About 40 percent of national retail chains once again skimped on their rent in May, according to the latest monthly report on collection rates.
Among those are 24 Hour Fitness, AMC Theaters and Pier One, all of which have either announced potential bankruptcy or plans to liquidate assets.
Overall, national retailers paid 60.1 percent of rent, a small increase from April’s 56.7 percent collection rent, according to a report from the data firm Datex Property Solutions. Total collections – from both national and local retailers – checked in at 58.56 percent in May, up from 54 percent in April, according to the data.
However, an increase in collections may not be a silver lining. Many retailers have negotiated rent relief with their landlords, which could make the numbers seem higher than they actually are, according to Datex CEO Mark Sigal.
At the end of May 2019, national retail chains were able to pay 96 percent of their rent. Even just two months ago, that figure was at 94 percent.
The plummet in rent collections is largely a consequence of the coronavirus pandemic, which has shuttered stores, in some cases permanently.
Fifteen companies, out of the 131 companies included, have not paid a dime of rent last month. Bed Bath & Beyond, H & M, Century City, AMC theaters, Regal Cinemas, The Gap and Party City are among those. Seven others have paid very little, including Barnes & Noble and DSW Shoe Warehouse. On Wednesday, The Real Deal first reported that Simon Property Group sued The Gap for $66 million for withholding rent in April, May and June.
“A lot of the growth has been around more lifestyle oriented retail, the kind of retail where there’s a goodness to being present,” Sigal said. “With social distancing, the retailers that most build around that, folks like gyms and yoga studios or movie theaters — the types of operators where people are in the same space and close quarters — are the ones that have been most existentially impacted.”
The report counts major chains as those that have a minimum gross monthly rent of $250,000 or lease 10 or more locations. It is based on verified collections from Datex’s portfolio of clients that report payment information from thousands of U.S. properties.
However, not all companies are on their landlord’s naughty list this month. Unsurprisingly grocery stores, like Giant and Aldi have paid almost all their rent.
Between competitors, companies’ collections differed greatly. PetSmart, according to Datex, paid 89 percent of its collective bill, while Petco paid 42 percent. Hobby Lobby similarly paid 99 percent, while Michael’s trailed behind at 39 percent, per the data.
In part, this may be due to different franchisees or unsuccessful expansions in different areas, according to Sigal.
“This is a tsunami that is unanticipated,” Sigal said. “Within that, you may have heard of this quote, ‘bad companies are destroyed by crises; good companies survive them; great companies are improved by them.’ Retail is that story”
The restaurant sector experienced similar contrasts. McDonalds and Taco Bell, for example, paid the majority of their bills, while Jamba Juice and Five Guys paid less than half of theirs.
 
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