By Jonathan Fishman, co-founder, Bizydev
Every business-oriented publication for the last 18 months has almost certainly churned out dozens, if not hundreds, of articles detailing how they believe COVID-19 will or has or might affect their market or industry.
Real estate publications have exhaustively covered the deceleration of commercial office leasing, the population outflow in urban cities and corresponding battering of the multifamily market and the lack of business travel and tourism resulting in catastrophic conditions for the hotel sector.
And of course, analysts and experts have been quick to note the sharp decline in physical retail space success thanks to the onslaught of e-commerce, further fueled by social distancing measures.
Facing these challenges, many retail landlords have been forced to ask themselves what advantage they provide for their tenants. Given the realities of the commercial real estate market, landlords must explore ways to create value for their tenants and seek common ground with them to keep afloat.
It’s no longer acceptable for landlords to just provide a storefront, a door and a raw space if they expect to be competitive in the retail leasing market today. They need to find new ways to market their spaces and highlight their unique advantages over shopping online.
One way to improve the tenant experience that landlords have been experimenting with has been the provision of concierge services. As Brandon Famous, executive vice president at CBRE, recently remarked, “Services like valet parking, curbside pickup and daycare are beginning to become commonplace in high-end shopping districts.”
Offerings like these prove that landlords are rethinking their retail environments and reevaluating how they can best adapt to the times and provide services that cater to their tenants and their tenants’ customers’ needs.
Beyond concierge services, real estate tech also presents opportunities for landlords to enhance their properties. Retail property owners might consider partnering with companies like 1010data or Locate or any other platform that would help them evaluate their markets and spaces better.
They might also think about the physical technology that would help them better assess their properties’ performance with foot-traffic counters. Platforms such as Dor or various types of smart devices can keep an eye on optimizing operating conditions.
Utilization or implementation of the right technology and upgrades or installations at a property could have tremendous effects on the amount of attention a landlord receives and the quality of retail tenants the landlord is able to attract. Not only can proptech improve leasing interest and the tenant experience, but it can also help landlords day to day by automating, optimizing and organizing various tasks and needs, providing a better overall end-to-end experience for all parties involved.
A New Dynamic
Each of these potential explorations is indicative of a larger shift in the retail leasing market. Without reducing the entirety of human consumptive habits and their effects on commercial real estate to an oversimplified understanding, landlords and retail tenants are engaged in a battle against e-commerce and online retailers.
Using that line of reasoning, landlords and tenants would be wise to come to an understanding about how they can work together to mutually create value. We no longer live in a world that pits landlords against their tenants, but rather one that encourages collaboration between the two to promote the well-being of each side. There are even those out there that believe that the direction the industry is going may lead to them actually looking at each other as partners.
So, what does that cooperation entail? It inherently requires good-faith communication and dealings between the two. Perhaps landlords need to be more flexible and amenable with their leasing terms and stipulations. As COVID-19 has clearly exposed, the days of setting a base rent because of market conditions and drawing hard lines in the sand are not reflective of what is needed today.
For retailers to feel confident in their use of space, they need to feel like their landlords understand them, which can be reflected in the lease. When the world went into lockdown, tenants and landlords of all asset classes were forced into heartfelt conversations with each other about what they needed. That was constructive. That dialogue should serve as a starting point for more open communication in the future so that both parties can be satisfied with the result.
In that same vein, retail tenants have been negotiating with landlords to shorten lease terms. One study in 2019 found that since 2007, average retail lease terms had dropped from six years to just four-and-a-half. Clearly tenants want shorter, more flexible leases that will allow them to move and adapt to changing market conditions. That’s just a fact that landlords will have to accept.
However, with good-faith communication at play, retailers must also be willing to work with their landlords. Whether this means finding a way to properly prorate and attribute online sales into percentage rent leases or be more transparent about their own success, communication and a “partnership” must be a two-way street.
Furthermore, landlords and retailers have different strengths that they should capitalize on. For instance, landlords are typically the real estate experts in a relationship between the two. Thus, they should be up to speed on all of the trends and market changes occurring in their area.
Landlords should also recognize that most retail space is used as a manifestation of a company’s brand, or essentially as a tool to promote that brand. They should organize and treat their spaces as such. It is also incumbent upon property owners to evaluate the real estate in the surrounding set of spaces so that tenants can be competitive and successful in their spaces.
If a landlord owns a strip of storefronts or a collection of properties in a certain area, he or she must consider the composition of his or her offerings and determine the best use of the spaces between retailers, restaurants and service companies. In this way, the landlord is not only creating value for tenants, but also optimizing the space for customers.
The future of retail space will be led by the united front of tenants and owners. Landlords are welcome to reminisce about days when they held the most magical retail corner in the world. But if they want to continue to be viable in the brick-and-mortar retail market, they should acknowledge the changing reality of commerce and adapt to it.
That will mean adjusting their spaces to be attractive to retailers and flexible with the market while also working with companies to communicate their brands. We have yet to see the innovation that could result from such partnerships, but many in the retail real estate industry are confident about its future
— Bizydev is a New York City-based business development firm that helps startups accelerate growth and increase revenues.