Current Condition of the Retail Market Since Covid

Overall, 58.6 percent of retail rents were paid in May, up from 57.5 per cent in April, according to data from the Office for National Statistics, but still less than half of the rent paid now. Office and warehouse tenants still pay rent, and there is no guarantee that tenants will renew leases as work from home becomes more popular. The crisis is particularly threatening for tens of thousands of small businesses operating in retail space and surviving pandemics and recessions without paying rent. Starbucks sent a letter to landlords asking them to make concessions that would apply for 12 months from June 1, or at least six months after the end of the lease.

Commercial property often has complex chain owners, and many small businesses are asking landlords to pause. Commercial landlords and tenants face a number of critical, immediate problems in the short term and possibly in the foreseeable future. How should both parties address the issues concerning the ability of tenants to operate and repair their rented premises? How should landlords react, taking into account the rent paid by tenants and the cost of repairs and maintenance of the property, such as water, sewage, electricity and other infrastructure?

All these questions must be clarified in a lease agreement, whether it is a lease for a CRE or a lease for one year or a lease for ten years for office space. Office landlords have a responsibility to tenants to pay what they have agreed in their lease. While companies like Facebook are delivering on their promise to let many more employees work from home, there is no evidence that a sustained decline in demand for office space should lead to lower rents and fewer new buildings.

Since many properties are owned by listed real estate investment funds, you can get a sense of what financial market participants think about what happens to real estate values, even if there are few transactions on the market. In the long term, you could envisage a scheme called a percentage lease, where the landlord reduces the initial base term rent. For this to work, the landlord would have to recieve less in base rent, in exchange, if the tenant passes a pre established sales threshold, then the Landlord would be entitled to a percentage of sales past said threshold. For landlords, "the constant need to monitor tenants" incomes could discourage them from adopting more variable rental rules.

While many companies have taken a break, the pace of transactions is in line with the current market situation. Commercial property has generally lagged six to nine months behind the economy and, although we have seen no change in demand for rents during this period, strike rates and landlord concessions have shifted. There are still leasing deals that take place depending on the company and industry, but while many of them are taking a break, the pace and transaction are consistent with current market conditions.

Although we cannot predict what the distant future will bring, we believe strike rates for active short-term transactions will fall by at least 10 percent and increase in the longer term, our analysis shows.

Los Angeles is and will remain one of the factors that will likely help the market move and respond and recover faster than others, and some of these factors will respond more quickly to others.

But the bitter fact is that Investors, landlords and retailers need each other more than ever. Retailers cannot make sweeping statements by refusing to pay rent for their rent because landlords are accountable to their lenders and partners. It would get so bad that it would be economic suicide if landlords and tenants simply backed off and took an intractable position. Over the past decade, the pressures of e-commerce have presented common challenges for landlords and tenants, but also for the retail sector as a whole, and landlords in particular.