New game plan 🎲

Abby here with the first of a three part series covering my grievances with the owners of retail properties. Juicy, right?

First though, I want to be clear that being a great retail landlord is a ridiculously challenging endeavor I’d not soon attempt. The core job is to increase the value of a property, which is more than just collecting rent; it's selecting the right retailers whose businesses make sense for a given space and contribute to (or at least don't detract from) the rest of the neighborhood. The best retail landlords need keen understandings of what makes these inherently cyclical and sensitive businesses successful. It also takes a whole lot of luck. 

There are definitely easier ways to make a buck! But, if this is your stated vocation, I’ve got some notes for you.

When a landlord rents a space to a tenant, they’re making a bet that their tenant will pay them rent every month. On some level, we’re all doing a version of that every day as we participate in capitalism – I’m betting that the Honeybee Lavender Latte I just paid for has the correct milk : syrup : espresso ratio and is worth my $7. The dry cleaner who has already used his time, equipment and supplies to painstakingly remove the pesto sauce toddler handprint from my white button-down is betting I’ll return to retrieve said shirt, and pay him when I do. 

Owning and renting out a retail space is much more complicated. It’s not just a one-and-done transaction – a landlord needs confidence they’ll be able to collect rent for 120 consecutive months. But beyond that, the actual operations of the retail business are really important, because they affect the value of the building.

🛍️ If the property in question is a shopping center, the vibrancy of the retailer is important, because customer traffic to one store can boost traffic to the others through cross-shopping.

🔧 If the property is mixed-use with office or residential above retail, an exciting, amenitized ground floor is a valuable leasing tool.

🏠 Even when a landlord owns a one-off parcel in a Main Street environment, vibrancy begets vibrancy… which ultimately translates to value. (And, as you can imagine, the opposite is also true – a business that is failing, running poorly or a bad fit for the community can tank a buildings’ value).

Suffice it to say, owning retail real estate is a complicated and risky business, and many landlords try to mitigate that risk by avoiding independent businesses entirely and renting only to retailers with national credit.*  I see it all the time, and it is maddening. After nearly 15 years of retail leasing, I have come to the opinion that they have it backwards: indie retailers are actually a better bet for landlords. Here’s why…

❤️ No one cares as much as an owner-operator. Brick-and-mortar retailing is one of the most demanding kinds of business to own – margins are thin, overhead is high, and the staff is effectively performing on stage every moment customers are present. When any aspect of the very complicated, labor-intensive spectacle slips – the merchandising is meh, inventory gets stale, sales associates eat burritos at the cash wrap – customers notice and act accordingly.

When you own a brick-and-mortar, managing all the moving pieces keeps you up at night. Literally. The decisions are endless, and every misstep is felt on a visceral level. Owner-operators develop personal relationships with their staff and with customers. When’s the last time Foot Locker asked you about your aging mother? Don’t get me wrong, some of the big guys have exceptional customer service, but even their most senior managers are limited in how much they really care and want to personally invest. Ultimately, it’s a job.

No one works harder or cares more than the owner. Why? Because the business is an extension of themselves – emotionally, financially, and energetically. 

💪 Mom and pop retailers want to operate their business, because if they don’t operate, they don’t have income. Over the course of the lease, there are countless WTF circumstances that can make opening for business really hard. There’s your standard fare like obnoxious weather events, and there are less common (and way more severe) disruptions like a global pandemic or a Rav4 taking a joy ride through the storefront glass (happens more than you think)... the list is as long as you can dream up.

When you’re a national retailer, of course you want to get back to business as quickly as possible (especially when an impacted store is high performing). If you’re the person whose job it is to manage the hot mess, it’s certainly stressful, but great news – corporate is still direct-depositing your paycheck on Friday. An unexpected store closure is an unfortunate inconvenience, but it’s quite unlikely to be fatal to the larger operation.

When you have a cash reservoir, ASAP means one thing, but when you’re depending on today’s sales to make Friday payroll, it means another.

Most independent retailers are going to do everything within their power to get back to business. We can all remember the creative ways mom-and-pops reinvented themselves during lockdowns – I myself have PTSD (and probably permanent brain cell attrition) from making hand sanitizer as the Director of Real Estate with a local coffee shop. For most indie businesses, temporary closures are simply not an option. Close too long and you’re hemorrhaging cash —you risk losing your staff, your vendors and your customers.

💸 Fewer resources means fewer ways out. National credit retailers are the gold standard for a certain type of landlord – dare I say a less retail-savvy type. Without a doubt tenants with a big balance sheet and super strong credit are financially the least risky bet. Having national credit tenants expands the financing options and terms available to landlords, and most of the time increases the value of a property. It is with no disrespect that I classify landlords who are fixated on credit as uncreative – not everyone can be (or wants to be) a retail expert.

But here’s the thing – money is power. A tenant with a portfolio of stores, super stable cash flow and a sizable net worth also has the leverage to negotiate the most tenant-favorable lease terms from the jump. If a national credit tenant decides to close a store before the end of the lease term, it’s hardly tragic. It’s far more likely they have go-dark rights, termination options and assignment flexibility. They also likely have the legal and financial resources to negotiate an early exit.

Consider Amazon Fresh. Amazon launched the concept in 2020 and ultimately opened 57 U.S. stores and tied up many more supermarket-sized spaces that never opened at all. Less than six years after the concept debuted, the company decided to close every Amazon Fresh location, acknowledging that it never found “a truly distinctive customer experience with the right economic model needed for large-scale expansion.” (Quite the experiment, if you ask me.)

Collateral damage to the failed launch were landlords who’d spent millions of dollars on buildouts, brokerage commissions and transaction costs…all for a few years of subpar activation, or, in some cases, no activation at all. Amazon hasn’t publicly disclosed how much they ultimately paid to terminate these leases, and while settlements may mitigate the financial fallout in many cases, they don't replace the customer traffic and momentum landlords expected from an operating grocery anchor.

The irony, of course, is that the businesses with the smallest balance sheets are the ones who are the least able to protect their assets in the event of an untimely end. In practice, the “teeth” of a guaranty are way more motivating to a mom-and-pop than they are to a national credit tenant. For mom-and-pops, the potential personal financial impact of failure is deafening and ever-present. But if a tree falls in the Amazon, does anyone hear it?

*For the uninitiated, here’s how Claude defines national credit: “National credit" refers to a tenant — typically a well-capitalized national or regional chain — whose financial strength makes a landlord's lender treat the lease as a reliable, bankable income stream.