Williams Mullen: Retail Tenants Back Off Rent Concessions as Market Conditions Improve

Williams Mullen: Retail Tenants Back Off Rent Concessions as Market Conditions Improve

BY: ROBERT CHARLES LAWSON

In North Carolina and Virginia, although rental concessions still play a part in retail leasing negotiations, such rental concessions have softened compared to 2009, 2010 and 2011.  Commercial brokers in the North Carolina and Virginia regions have confirmed that the retail markets have begun to stabilize.  This stabilization has led to retail tenants demanding less from their landlords in rental concessions for both new and existing leases. 

The current retail market in North Carolina and Virginia is one of continuing recovery.  The amount and length of rental concessions for new retail tenants (such as abated rent or reduced rent during the beginning of the lease term) have diminished compared to a few years ago.  In 2009 and 2010, rental concessions for retail tenants were the highest.  At that time, it was not uncommon to find abated rent for a period of one year or longer in a five to ten year lease.  Although leases vary on a case-by-case basis, an abated rent period of 60 to 90 days for a current retail lease is much more likely in today's market.  It would also be common, during the downturn, for landlords to grant rental concessions to existing tenants that were struggling.  In order to keep such tenants, some landlords forgave outstanding balances, allowed reduced base rent, or changed the rent structure altogether. 

New leases

In 2007 and 2008, many new shopping centers opened.  In 2009 and 2010, existing retail businesses began closing their stores, putting more retail space on the market.  Furthermore, it became difficult for retail tenants to obtain financing from their lenders for new ventures.  When new shopping centers were unable to lease all of their space and existing shopping centers began losing tenants, landlords began offering extraordinary rental concessions for new tenants to occupy these spaces.  To attract tenants, landlords had to be creative, which often led to rental concessions, abated rent, and allowances as an alternative. 

In 2012, the market has improved.  Banks have begun to lend to retail tenants again, and vacant retail spaces have begun to fill.  Other retail space has been restructured for alternative non-retail uses.  Due to these improved market conditions, tenants have been less likely to ask for, and landlords have been less likely to grant, the larger rental concessions that were common in 2009 and 2010.  The range of rental concessions for start-up businesses, regional chains, and national chains has decreased since 2009 and 2010.  Christina Coffey, Director of Brokerage for Hunter & Associates (a leading retail brokerage firm in Raleigh, North Carolina) says, "In 2012, we have seen a decline in tenant concessions in the Raleigh area.  The retail market continues to stabilize as tenant activity increases." 

Existing leases

In 2009, 2010, and 2011, existing tenants that were struggling were requesting rental concessions from their landlords.  Retail businesses were closing at a rapid pace.  Big box stores were going out of business and filing for bankruptcy.  Consumers began to reduce their spending and to shop less.  Landlords began making concessions to ease the burden on tenants so that the retail businesses could survive and not be forced to close. The rental concessions were due largely to declining retail sales.  Existing tenants requesting such rental concessions would often have to provide financial statements and information about their retail sales to their landlords.  Often, the landlords and tenants would work together to adjust the rental rates so that both the tenant and the landlord could survive.

Although some existing tenants are still requesting rental concessions, the number of tenants requesting such concessions has declined in 2012.  Retail business closures are declining and new retail stores are opening in formerly unoccupied spaces.  Landlords are splitting prior big box vacancies and filling them with new businesses.  Optimism and an improved sector outlook are assisting in the rise of retail sales in both North Carolina and Virginia.  Landlords in these areas now have more of a choice about whether to grant existing retail tenants months of abated rent or to market that space to a new tenant without such rental concessions. 

Beyond 2012

The 2012 outlook for North Carolina and Virginia points to steady growth.  The retail market has a sense of optimism among brokers, landlords, and retail tenants.  Vacancy rates for retail centers continue to fall. The average national vacancy rate for 2012 is projected to fall to 9.2%, and effective retail rents are forecasted to rise 1.2% on a nationwide basis, according to Marcus & Millichap Real Estate Investment Services. "We look forward to the market continuing to strengthen over the next couple of years," says Christina Coffey.


Please note:
This newsletter contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. For more information, please contact us.

© 2012 WILLIAMS MULLEN, A PROFESSIONAL CORPORATION - ALL RIGHTS RESERVED 

Disclaimer