6one5 Retail Consulting head Bill Rooney talks future trends.
I recently appeared on ABC TV, discussing how the current pandemic is forcing landlords to the negotiating table.
The program also included an interview with Mark Steinert CEO of Stockland, who fired an eviction warning shot to big tenants who don't pay their rent.
Most of the focus in the program was on the last two months' lockdown and Mark Steinert was reasonable in providing rent abatement while shopping malls are closed.
However, the real battle still to be fought between landlords and retailers is over the next 12 to 18 months when retailers will face recession conditions until a vaccine is found.
What's different this time is that I would say a majority of retailers are massively exposed due to:
High rents: We have not had a recession in 25 years and therefore rents have seen a continual climb.
Cashflow poor: This is a 100-year event with retailers already weakened by a poor summer, eCommerce disruption, and now Covid-19 lockdown for two months.
How much should you pay in rent?
This will depend on how much you are impacted by COVID -19 obviously some retailers are doing well including supermarkets, sportswear, home improvements/DIY whereas fashion, restaurants, and otherdiscretionary retailers are struggling.
As I have mentioned in several recent articles, rents will have to decline by between 30% to 50% for retailers to survive and make a profit.
The only fair way for this to occur is to pay a % rent based on sales, as Solomon Lew of Premier Retail is advocating.
For the landlords, their property portfolio is a long-term investment that has taken a major hit, what's important is to support viable retailers and keep their shopping malls full (of tenants).
As soon as customers return to pre-COVID-19 days, rents can go back up as do the value of their investment.
A short-term decline of 12-18 months for a longer-term return to normal makes good business sense.
We have modeled two scenarios, one for a high performing fashion store and one for an average performing fashion store.
We then took an optimistic and pessimistic view of the impact of COVID-19. The best-case scenario was store profits would half, the worst case was a 16% loss.
High Performing Store Model:
Average Performing Store Model:
As Kenny Rogers sang in "The Gambler" : You've got to know when to hold 'em, Know when to fold 'em.
So put on your best poker face, do your preparation but whatever you do, do not fold in your rent negotiations, the stakes are too high.