A guest looks down an empty hallway at The Fashion Mall at Keystone, Wednesday, March 18, 2020, in Indianapolis. Simon Effects Group, the largest owner of shopping malls in the nation, is closing all of its malls and retail properties because of the coronavirus outbreak.
Darron Cummings | AP
Mall and shopping center proprietresses around the country are getting ready to come face to face with a major legal hurdle: Co-tenancy clauses.
The coronavirus pandemic compel accelerate the rate of permanent retail store closures, as sales shrink close to nothing with many shops for a short shut to try to halt the spread of Covid-19. Liquidity also is drying up and finances are being squeezed. UBS is expecting there wishes be 100,000 stores permanently shut between now and the end of 2025.
Meantime, online sales as a percentage of total retail sales in the U.S. are contemplated to grow to 25% from 15% over that same timeframe, UBS analyst Michael Lasser said.
With another gesture of department store closures inevitably looming, and some chains potentially filing for bankruptcy, landlords’ phones on likely be ringing — with retailers on the other line demanding rent reductions or outright saying, “I’m leaving your mall.”
Here’s how co-tenancy clauses off, on a basic level: They are typically built into the leases of the specialty tenants, like a Gap or an AT&T store, in the middle of a mall, or the seeks situated along a grocery-anchored shopping centers, like a Big Lots or a TJ Maxx.
The clauses will say something along the professions of: If less than 80% of space is occupied at this property at any given time, or if a major, anchor tenant cognate with a department store or a grocery store goes dark here, the tenant is allowed a break in rent. Or the tenant is the truth the ability to terminate a lease early. The clauses are meant to protect tenants when circumstances happen that are shell of their control.
Tom Mullaney, head of restructuring services at commercial real estate services firm JLL, said all of his retail customers are watching their co-tenancy clauses “like hawks.”
“As majors close and do not reopen, my clients are pulling out their rent outs,” Mullaney said. “The whole purpose of a mall is to generate large amounts of foot traffic.” If you lose an anchor or two, the point is lost, he said, and retailers will have an opportunity to speak up.
A wave of retailers demanding rent reductions, or depart malls and shopping centers entirely, would deal another blow to an industry that has already been striving to fill excess space.
Store closures are nothing new. A record was announced in 2019. But the rate of closures is only successful to accelerate due to the Covid-19 crisis. This could put some malls entirely out of business. Already, some retail proprietors, including mall owners, are defaulting on their mortgage payments to lenders, CNBC reported.
Many analysts say America is quietly over-retailed. Currently, there are nine malls per 1 million households in the U.S., according to an analysis by UBS. That is up from eight malls per million in 1980, when retailers didn’t equalize have websites, the firm said. Ironically, the number has grown as e-commerce has proliferated.
“This is where you’ll really see malls start to suffer,” said Daniel Herrold, a dealer for Stan Johnson Company.