Retail Coronavirus Playbook: Landlords May Find Markdowns Not Just For Retailers

As the Coronavirus pandemic rolled across the globe North America and European retailers began closing up shop mid- March with tentative plans to open at the end of the month.  Unless you have been living on the Island of Denial you probably were not surprised to hear Nordstrom and Tapestry announce extended closings through April 5th and 10^th,respectively.  Realistically, an additional two weeks of closures are on the serious side of optimism and likely Easter will be the next retail casualty to the tune of an ~$18B potential spend.  

As we think about the weeks and more likely months ahead of a consumer shutdown the focus is on the proposed US $2T fiscal stimulus package which includes direct transfers to adults of $1200, $500B in funds to struggling sectors and $350B in loans to small business.  Considering retail supports 1 in 4 American jobs, according to the NRF, retailers and malls could use plenty of direct assistance and the sooner the better.  For now, retailers with strong balance sheets are continuing to pay employees and provide benefits but even the strong can only hold out so long.  For example, Nordstrom said it will pay stores employees through April 5^th.  Very few companies are holding their own or actually benefiting from stockpiling behaviour including Costco, Walmart, Target and CVS.  In stark contrast to heavy discretionary retailers (Macy’s, Nordstrom, Specialty Apparel) those select few are issuing bonuses, raises and in some cases hiring.

There is already a line of global retailers and brands asking for rent payment deferrals or concessions (Primark, Mattress Firm, Subway to name a few).  In the UK the mall operator INTU Properties reported only 29% of Q2 rent payments have been received as of March 25^th compared to 77% of payments received this time last year.  The UK government has announced businesses would not forfeit their leases if they chose to delay paying rent.  In addition, the UK govt is directly pitching in by covering 80% of employee salaries (up to £2500 per month) if employees are kept on but are unable to work.  That provides significant relief to retailers big and small and their employees who are hoping to come out the other side of this retail Armageddon.  

While many eyes are on landlords (big and small) to save the tenants don’t forget they too have expenses in the form of taxes and mortgages.  So while retailers will be looking to the landlords to give them a break this will no doubt trickle down bank concessions.  In the long term as we think about coming out the other side with perhaps as many as ~18,000 store closures this year (SW Retail Advisors estimate) rents will likely come down permanently.  As many retailers have learned the hard way, going down a discount path often has a no returns policy.  Landlords might find short-term discounts just as sticky.