Some tips from Ivan Friedman on retail lease negotiations and restructuring with landlords

Some tips from Ivan Friedman on retail lease negotiations and restructuring with landlords

I recently had the chance to speak with the founder of RCS Real Estate Advisors, Ivan Friedman, and ask some questions regarding the state of retail real estate and about some of the challenges companies are experiencing as their real estate footprint evolves with the times. Since RCS works exclusively in retail with some of the world’s largest companies, I thought Ivan would be an excellent person to ask some questions pertaining to the different ways retailers are going about working with landlords to make modifications to their corporate lease agreements.

And since Evergreen Trading helps its clients fund lease costs and lease mitigation fees with zero cost capital, we think this interview will be of interest to our retail audience.

ET: How would you characterize the state of retail right now?

Friedman: We really see lots and lots of problems right now. Mall traffic is down primarily in the lower tier malls while of course the best malls in the country are always going to do well. So, mall traffic is down with rents continuing to go up and sales not going up.

Even in healthy companies, there are not too many companies who don’t wish they had fewer stores. With the internet and the allocation of inventories, everybody is basically saying, “I can probably do as much business in fewer stores, have less overhead and a greater profit.”

ET: How do you see companies dealing with the situation you just described?

Friedman:  Okay, you have two ends of the spectrum. If they have been in trouble and their sales have been declining to the point where they have no alternative, more and more companies are filing for Chapter 11. Companies like Pacsun, Sports Authority, and Hancock Fabrics. Now that doesn’t mean that a lot of these companies won’t emerge from Chapter 11 as healthier companies and go forward. So that’s one side of thing: bankruptcy.

The other side of this are companies who are just letting leases expire when their lease runs out. Leaving those locations, that’s another way to pair down the stores. But the largest leverage that a company has is when leases come up for renewal. Because there you have the opportunity to either leave or extend your lease at better terms than you currently have.

So that’s how companies are addressing their problems, with some companies acting very aggressively like big companies going to the landlord and saying, “I need your help in these stores and these stores.” But then you have to think about the landlords and all the people coming to them, and landlords also have to be concerned about their bottom lines.

ET: Do you see landlords accommodating their tenant’s needs?

Friedman:  Well, you know, back in 2008 when the world was ending, everybody started going to the landlord because sales were down and we were almost in a depression.  Landlords know how much to accommodate in order to keep occupancy high. See, the main thing landlords are interested in is maintaining occupancy – not having stores close. On the other hand, they have to try to keep the rents up as best they can. So, it really has to do with who is negotiating with the landlord and how tenacious they are.  And the landlord is going to pick their spots. If the retailer is not that important to them, they’ll let the retailer be out there in the wind.

ET: So what advice would you give people to be more successful with a renegotiation of their lease?

Friedman: My advice is that if you’re going to your landlord to talk about your problems, only talk about your big problems. Because you’re going to be limited as to what relief you’re going to be getting so it makes sense to use your leverage like the renewals where you can and get the rents you need. So only go with your big problems and don’t go nitpicking because a lot of people are going to going to the landlord this year.

Maybe it’s not the best thing for a company to try to do this alone. There are professionals like RCS that do this type of thing. We can be dispassionate and objective and say, “This is where they need to be.” It’s more difficult to negotiate for yourself if you’ve made the deal so maybe it’s better to have professionals do this instead of them trying to do this themselves.

ET: Are there any other type of mistake you see people make as they try to get relief from their landlord?

Friedman: I see companies just saying that they need rent relief and they don’t provide a compelling story as to why they need to get the rent relief. No story. Not something that says to the landlord, “Listen, here’s my real problem and this is why we have to deal with it.” It’s like your kids. They tell you they need everything, but then you come down to what they really need.

ET: So what is the main advantage of hiring a company like yours?

Friedman: The first thing we do is a full analysis of their portfolio and look at their financials so that we can determine what they actually need and what points to stress that will get the landlord’s attention. So the analysis of their entire portfolio is the first thing that is necessary before we can determine what the best story is based on what the company actually needs. For most companies, that’s just not what they do. It’s not their business.

ET: So looking forward, as we go through these restructurings, how do you view the future?

Friedman: Well, everything is a cycle. Nothing is going to end. I think we are in a period where there is going to be a lot of restructuring. I think the landlord community has to understand that rents can’t keep going up is the sales are going down. So just like 2008 through 2010, there’s going to be a new look at where the base should be in the real estate and I think that the landlords have to set different parameters for what they expect for rents and as we cleanse through this whole thing I think we’ll go forward just like we did in 2008 and 2009.

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RCS Real Estate Advisors was established in 1981 primarily as a restructuring company handling bankruptcies, renegotiating leases, lease terminations, and other problems of retail real estate. They have since expanded their offerings to now help companies grow and, in some cases, become a company’s real estate department doing everything an internal department would do. All of this for more than 40 million square feet of real estate per year.

Top five trends in retail real estate for 2015

Top five trends in retail real estate for 2015

Shopping Mall -City Life - Modern Architecture - Downtown DistriAs buyers of surplus retail real estate, we are keen to understand the market forces driving supply and demand of brick and mortar. According to the PwC report Emerging Trends in Real Estate, investment and development strength in the retail sector ranks the lowest of all the major property types. Despite that bleak outlook, there are some very positive trends in retail real estate of which savvy retailers can take advantage. We’ve collected what we believe to be the five most important such trends influencing retail real estate.

1. Main street is back

Not long ago, the hollowed out streets of urban downtown were thought to spell the end of main street shopping. Big box stores, the internet and massive suburban malls were predicted to kill off main street shopping. But in one way, the opposite has become true. Ecommerce has helped bring back main street by using it as display, advertising and distribution. The above mentioned PwC report lists US Neighborhood/Community Centers as the best retail investment opportunity by more than a factor of five. Between the growth of omni-channel distribution and the resurgence of brick and mortar, urban downtown is coming back in a big way.

2. The redefinition of malls

While the massive indoor malls anchored by the upscale and mid-market stores may becoming played out and not expected to return to that form, malls continue to have a value but that value is being redefined. As consumer confidence grows and shopper preferences change, pedestrian-friendly “lifestyle centers” are popping up across the American landscape. Malls are being redesigned to be more welcoming, with attractions such as high-end restaurants, health clubs and specialty grocery stores. Another interesting trend is the emergence of pop-up stores – specialty retailers who set up shop for a few weeks or months at a mall kiosk, vacant mall or downtown storefront without incurring large overhead costs.

3. Bricks born of clicks

Not too long ago, many of us were predicting the demise of brick and mortar retail. After all, with everything at the click of a mouse, who needs to travel to the store? But some innovative companies are coming to realize that while stories can be told online, the palpable feel of a brand comes best from a physical store. Take Bonobos, a menswear apparel brand launched exclusively online in 2007. In 2011, Bonobos created brick-and-mortar stores called Guideshops, hybrid stores combining top shelf customer service with the ease and convenience of online retail. Shop and order in the store and receive your purchases via mail two days later. And with others like Birchbox, eyewear brand Warby Parker, and Nordstom boutiques following suit, this trend is gaining momentum. Yes, the internet is changing retail as we know it, but it looks to be creating a whole new role for the physical store.

4. The 18 hour city

Remember when your bank was open 10 -4 Monday through Friday? Even with the ubiquity of cash machines, branches are now open longer and on the weekends, some even on Sunday. No longer the exclusive province of the great coastal cities, urban centers in second and third tier cities are alive night and day and on weekends – some even 24/7. Revitalization of downtown areas are bringing young people back and following them are the shops and restaurants catering to their tastes and round-the-clock lifestyles.

5. Technology as both friend and foe

Once seen as strictly the enemy of offline retail, the internet can be a profitable tool for retail chains with vision. Forrester Consulting recently released the results of a study on onmi-channel retailing in which 73 percent of shoppers claimed they would buy from local retailers if they could check the product’s availability online first. Rather than fighting the instant online access to products, technology can be harnessed to increase sales and spread the physical experience of shopping and of the brand. But to truly take advantage of technology in this way, brands must create an in-store experience worth the consumer’s time and effort. Cutting store costs and service in order to compete with online outlets will continue to prove futile.

 

The only consistent aspect of retail is change. And while change is often disruptive, it can also create great opportunity for those fearless enough to embrace it. The retail real estate market is rebounding, but taking advantage of this new opportunity requires not just the embrace of change, but the courage to lead that change.