What to Consider if You’re Signing a Retail Lease in 2021
Trends, Lease Clauses and Choosing the Right Location
The pandemic often put landlords and tenants at odds, as an unprecedented onslaught of shutdowns had each party looking out for their own interests, searching for ways to compromise and, in the most basic sense, just trying to survive.
But as the retail market has recovered, both tenants and landlords have new considerations that are top of mind — from the best place to set up shop to protecting themselves in their next lease — and those that can navigate the market adeptly will be positioned to prosper.
To understand these trends and strategies, LoopNet spoke with Taj Adhav, CEO and co-founder of Leasecake, a lease management software platform, about where the retail market stands now; where it’s headed; and how tenants and landlords can create successful lease agreements that foster resiliency and growth for both parties.
The retail market was heavily impacted over the past year. How are things looking now as stores and restaurants have reopened?
We saw so much activity through our platform, and I think the market really debunked the myth that retail and restaurants were dying and that they would never make it through COVID. Everything we have seen so far has been the opposite. The theme has really been this: the strong are getting stronger, and those that are struggling don’t want to be left behind.
Gyms and fitness centers are one category that I’d say has been really strong. People also assumed that quick-service restaurants would collapse, but those quick-service restaurants and retailers that understood how to harness touch-free dining, online ordering and contactless pickups and deliveries from the beginning actually have sales exceeding pre-COVID levels. Looking at things from a macro level, COVID really accelerated a movement that was already happening in the market for the prior two or three years, where UberEats and DoorDash emerged and people were starting to get comfortable with using those services, and then boom, everyone was forced to use it. Now, people are dining out or ordering in multiple nights a week, or picking up lunch more often. Quick-service restaurants have been strong because they have gotten really dialed in about their operational metrics, made it simple to order, and therefore have gotten more customers and their average order values up.
Are there any other segments of retail that adapted to endure the pandemic or even emerged stronger?
Another strong category was salons and personal services-based businesses, like massage therapists, which were successful because they are a one-on-one experience. They were able to build-out the lobby area safely, get people comfortable with being there and then the treatment was done in a single room. So, it was relatively safe, and you weren’t interacting or mingling with that many people in a large space.
What should retailers and restaurateurs be looking for in a location?
It's going to be very specific to each category, and I don’t think there is any one silver bullet for the post-COVID market. For example, if you are a donut or a coffee shop, you want to be along someone’s morning drive, and you want to be in an end unit. Those kinds of features are general. I would say overall, the movement from malls to freestanding buildings is one that without question isn’t turning back. If you look at companies like Signet Jewelers, Kay Jewelers and Zales Jewelers; Bath & Body Works; and even Macy’s and Nordstrom Rack; they’re all moving to smaller footprints in freestanding locations. They want to be where the traffic is, and where customers are now shopping and expecting them to be. These stores don’t want to be in an enclosed mall. Now, there are definitely still some Class A malls out there, but I think that in general, these neighborhood, lifestyle and power centers are where the action is.
What impact do you think that shift to freestanding locations will have on retail leasing?
This will make lease terms a lot more flexible with landlords who are pretty well capitalized and who will be willing to provide more favorable terms. These retailers don’t want to make long commitments in malls where the competition is right next door and on every other floor of the mall. The smart retailers that are located in a center with the right mix and customer segmentation, and the right marketing message, can really increase their customer loyalty locally and create a following. The metrics are already proving themselves here, where same store sales comps are increasing because it’s much easier for customers to say, ”hey, let me stop and get my teeth cleaned, grab a smoothie and pick up those earrings that my wife wanted, all in one location where everything is 20 feet from each other.”
That’s a great segue to talk about the emergence of “medtail,” where medical practices have begun to take space in retail locations. Can you talk about how you’re seeing that segment evolve now?
Medtail is huge. We have hundreds of medtail locations on our platform — physical therapy practices, dental offices, teeth whitening, med spas and more. It’s really just about being where the customer expects these services to be these days — it really just comes down to convenience. [Consumers] don’t have to go to a medical complex to get services. Businesses should be right where the customers are, and that’s why medtail is exploding the way it is.
You mentioned that landlords of freestanding spaces would be more amenable to favorable terms for tenants. What are some ways landlords and tenants can create a successful partnership?
Again, it will depend on the tenant mix. There are discretionary spending retailers and necessity retailers. Necessity retailers are the ones that landlords really want, and so they’re likely to sign a longer-term lease for a good location where it’s a freestanding location with a lot of visibility from the road or with good pedestrian traffic. On the discretionary spending side, a landlord would likely be okay signing a longer, 10- to 15-year lease with a national credit tenant, like Nordstrom Rack, for example, but would go with a five- to 10-year lease for an independent retailer or one with a smaller footprint.
Especially for a discretionary retailer, it really depends on the customer segment, because discretionary retail can be fleeting — hot one day and not the next. For example, computer repair stores went out pretty quickly, and a landlord doesn’t want to sign a 20-year lease and then be left with a vacant space. So, it’s really important to have a hybrid mix of tenants. If your development is plotted really well, you can market your investment property by showing you have two necessity, national credit tenants, mixed with smaller retailers, for example, and showcase that you have a varied blend of tenants and a diversified portfolio.
What clauses should tenants be looking for and evaluating before signing a lease?
Tenants, [as well as] landlords and private equity companies acquiring businesses or real estate, need to do a lot more due diligence than they used to, and COVID has proven that. They need to be thinking about how to safely manage the risks of expansion and clauses that could impact them six months or a year ahead.
The most important [clauses] we are seeing right now are dark provisions, rights to contract and expand and transfer provisions; there will be a lot more scrutiny on those. [For dark provisions,] tenants will be asking things like, “Can I close down for a month? Can I do major renovations in that time? What happens if there is another COVID outbreak and I’m forced to shutter? Could I be kicked out of the space because of that?”
Rights to expand and contract are also important to look at. A restaurant owner might realize they don’t need as much seating [as they used to] and want to reduce [their footprint] by 25%, and will want to know if that’s an option in the future.
Last is the transfer provisions. The business owner might consider if they have to be the guarantor when selling a location; how much notice they have to give if they want to sell that location; and what kind of rights the landlord has over the buyer. Those are just some of the unfortunate vagaries that can happen, so it’s about making sure that multi-tenant operators and landlords have their eyes wide open for the things that matter to them most.
This interview has been edited for concision and clarity.