Retailers and landlords have never been the best of friends, but the COVID-19 pandemic is a whole new ball game, as the likes of Westfield, Mosaic Brands and now reportedly Solomon Lew contend with the idea of padlocked stores.
Underneath the bluster, torrid trading conditions across the industry have given new life to a recurring question on the minds of retailers large and small: are retail leases worth what they used to be?
No, says Party People chief executive Dean Salakas, who counts 22 ‘for lease’ signs within a one-kilometre radius of his Sydney store.
“The balance of power has shifted,” Salakas tells SmartCompany.
“Some are refusing to see it, and they’re getting burnt.”
Like many retailers, Salakas is of the view that retail rents have been overpriced for years, but where previously landlords had avoided a correction in line with changing market conditions, they’re now likely to have little choice.
“Before [COVID-19] it was ‘we can charge whatever we want and people will pay for it, and if not, we can find another tenant’,” Salakas says.
“Now they’re getting vacancy rates increasing and no one is coming to fill them because no one can afford it.”
Westfield: Padlocked stores and billion-dollar write-offs
Negotiations between some of Australia’s most prominent retailers and shopping centre owners have collapsed in spectacular fashion in recent weeks, with Westfield ANZ owner Scentre Group starting to padlock the stores of those traders unwilling to buckle.
Most recently, reports have surfaced Solomon Lew’s Premier Investments will become the target of Scentre’s store locking campaign, about a week after 129 stores owned by Mosaic Brands were forcibly shuttered.
At the core of each dispute is rents, which means the question is more precisely about what the value of bricks-and-mortar retail is in a post-COVID world.
Major shopping centres have written billions of dollars off the values of their property portfolios in recent months, and retail chains, buoyed by skyrocketing e-commerce sales, are now looking to downsize after several years of gradually reducing their lease liabilities.
Mosaic Brands said earlier this week it may close more than a third of its 1,333 stores over the next few years, while others have signalled an intention to invest more money in online over physical stores.
As far as SME tenants go, Salakas recounts being offered myriad cheap rental deals for his short-term Halloween pop-up this year, and while he said no to every offer, the business owner says the pitches were illuminating.
“Landlords have been charging rents outside the market rate for years, it doesn’t make sense they should continue to go up at the rate they have historically,” Salakas says.
“This is an inevitable correction.”
High CBD rents poised for reduction
Retail leasing consultant Lawrence Brown says he’s also noticing cheaper rent offers in the wake of the pandemic, with a temporary store he recently signed in Sydney going for 60% of the usual rate.
“I will not look at long-term leases in the current markets and I’m sure the owners do not want masses of vacancies in their centres,” Brown tells SmartCompany.
“Owners know of many of the retailers that will not survive this pandemic. It’s their choice.”
Under laws put in place by federal and state governments earlier this year, SME tenants benefit from a mandatory code of conduct guiding leasing negotiations during the pandemic.
While the code has been described as a saving grace, it won’t last forever, and will eventually leave operators back to negotiating the price of their stores in the market.
Brown says there may have to be an adjustment in the market rate for rents of 20% of more in the wake of the pandemic, driven by an extended period of depressed trading in CBD areas, where rents are historically very high.
“The bigger problem will be the city centres given that the time to get back to pre-COVID levels will be at least some three years,” Brown says.
“During this time, too many smaller retailers will not survive, and as such, the backup list that is normally there doesn’t exist anymore.”