Despite the enduring struggles of malls, further bankruptcies by large chains and other challenges to brick-and-mortar retail, industry leaders say the path to stability is becoming clearer. That’s especially true for properties that were fundamentally stronger before the pandemic, which are now drawing the attention of tenants in search of space.
By Joshua Burd
Matt Harding called it “a pleasant surprise, in a sense, to be where we are” as a retail management firm in April 2021, considering the state of the industry in April 2020.
The Levin Management Corp. CEO noted that most of the tenants that needed assistance last year were “up and running” across its portfolio. Leasing activity has also picked up, he added, while collections have rebounded from the height of the COVID-19 crisis.
“Overall, we’re fairly positive with the way that things are sitting right now,” said Harding, whose North Plainfield-based firm manages more than 100 properties in the region for nearly 15.5 million square feet.
He added: “I think if things continue the way they’re going and we see continued improvement in terms of vaccines and people getting back out to work, helping the restaurants and so forth, we think that there’s a steady increase from here for the rest of the year.”
Harding isn’t the only executive with cautious optimism about a recovering retail sector in New Jersey and elsewhere. Some are more cautious than others — and rightfully so, given the enduring struggles of malls, further bankruptcies by large chains and other challenges — but industry leaders say the path to stability has become clearer in recent months.
That’s especially true for properties that were fundamentally stronger before the pandemic, which are now drawing the attention of tenants that are driving new leasing activity.
“If you have good real estate, people are finding it,” said George Jacobs, president of Jacobs Enterprises Inc. in Clifton. “And the question is: At what rents? Rents are not going up, but if you can mimic or get close to the rent you had, then it just becomes a function of your obligations and how leveraged are you?”
Jacobs, whose firm owns or manages 1 million square feet of retail space in New Jersey, noted that large, outdated malls that were struggling before the pandemic are still in dire straits. Freestanding shopping centers with supermarkets, health care services and tenants that, for now, are resistant to e-commerce are “seeing the light at the end of the tunnel,” he said, and those that have adapted their business “are out there trying to do deals.”
As of early April, Jacobs’ firm had executed or was close to executing five new leases in recent weeks, with tenants including a national fitness chain and a regional salon operator. That follows a year in which he and other landlords took steps to help tenants stay afloat during the pandemic, largely through rent deferrals and other agreements, while others relied on government resources such as federal loans under the Paycheck Protection Program.
“I’m doing new deals now, whereas last year all I was doing was trying to keep alive,” said Jacobs, who also serves as the New Jersey state government relations chair for the International Council of Shopping Centers.
A recent survey of Levin Management Corp. tenants found that, while most reported a decline in sales from 2019 to 2020, more than two-thirds of respondents expressed optimism for store performance in 2021. That closely reflected the trailing nine-year average for the poll, Harding said, citing the moods of tenants that are encouraged by the vaccine rollout, the further lifting of COVID-related restrictions and other tailwinds.
The longtime LMC executive also pointed to new activity by users including off-price retailers and other “strong tenants that see an opportunity to get good real estate at good deals now, with a positive look to the not-too-far-distant future when things may be back to normal, in a sense.” Those businesses are “out there pretty aggressively looking for space,” as are grocery chains that hope to modernize their space in line with consumer demands.
Retail landlords still face questions, including looming bankruptcies by tenants whose weakness was exacerbated by COVID-19. Dan Stolz, a Basking Ridge-based attorney with Genova Burns LLC, noted that many landlords forgave rent and took other short-term measures in 2020 to help keep their tenants in place and protect their own properties. For those that did want to get their space back — often because tenants simply shut their doors or stopped paying rent — the state’s moratorium on commercial evictions and other restrictions made it all but impossible to do.
“All you’re doing is pushing the ball down the road,” said Stolz, who chairs Genova Burns’ bankruptcy, reorganization and creditors’ rights practice. “Eventually, there’s going to be a reckoning and New Jersey, being as densely populated as we are and being where we were in terms of the damage that happened at the beginning of the cycle, is probably going to be at the lead of the crisis when it comes.”
He noted that business bankruptcy filings were lower to start the year, but still believes that “the water is rising behind the dam and at some point the dam is going to break.”
Other industry experts also point to additional hardship. In a February conference call, a top executive with the advisory firm A&G Real Estate Partners said U.S. retailers will continue to file for bankruptcy and close stores in 2021, due in part to their need to repay deferred rent from 2020.
According to a news release from the Melville, New York-based firm, landlords initially agreed to those deferrals believing the economy would rebound by late 2020. But many negotiations have shifted to rent abatement as hopes for a V-shaped recovery faded.
“Last year, it seemed as though nearly every retailer in America was asking for rent deferrals,” said Andy Graiser, co-president of A&G, whose clients include Chico’s, Christmas Tree Shops and Ruth’s Chris Steak House. “Now they’re staring at a ‘deferral bubble’ of $40 billion-plus that they’re going to have to pay back, over and above their existing rent.”
The good news? Bankruptcy typically leaves a retailer with fewer locations, often in stronger markets such as New Jersey, “and then you’ve got hopefully a healthier tenant that comes out,” Stolz said. For his part, Harding said chain bankruptcies are typically “based upon underlying structural problems with the retailer,” rather than the quality of the real estate.
The list of struggling tenants still includes restaurants and other local operators that continue to rely on support from landlords. In some cases, Jacobs said the future is far from certain.
“We’ve done workouts and reached agreements, but if the pandemic keeps going, it means that the new agreements are going to be defaulted upon, too,” Jacobs said. That ultimately leads to the question of the landlord’s own financial obligations, he said.
To that end, owners with higher levels of debt on their properties who “run into these issues (are) going to be talking to the banks and the lenders about workouts,” Jacobs added. “If you’re 10 to 20 percent leveraged, you have enough room to try to survive.”
Those retailers that are left standing will ultimately have more space to choose from, Harding said, meaning it’s up to landlords to help their properties stand out. While some owners may have been especially cautious in managing their expenses last year, 2021 “isn’t the time to cut costs too much” as they look to participate in the recovery, he said.
“In terms of making investment into the space to help make the property attractive — create outdoor seating, curb appeal — those kinds of things still remain important and maybe even more so when retailers have more choices,” Harding said. “So we are doing that and looking for ways to help retailers do more business in our properties as well, which is good for both the landlord and the tenant.”