Storefront Leases Must Change

Since COVID hit, the cap rates deals with retail have been lower. Everyone who wants a brick and mortar space is looking for a deal. Some landlords are making it work. More than likely those are the ones that actually own their properties and don’t have to deal with the bankers. Other landlords are in a stand-off with possible tenants. Forward-thinking reality is not at play here in the world of commercial real estate.

What can we learn from this? Certainly, the market became ridiculously frothy and made it almost impossible for the store owners to make money. Someone told me years ago that it was the old-time real estate owners that understood downtimes and community. They think long term keeping rents that make sense while newer owners think short term grabbing as much as possible while leveraging their properties.

Perhaps this is true but even if it is, it is time to rethink how commercial real estate works particularly when it comes to storefront properties. In any city, we want to see every storefront rented. It creates a vibrant community. It isn’t a good look when a street is full of empty storefronts.

If you have a 10-20 year lease that is locked and escalates only so much a year, at a relatively good price, you can probably figure out how to make it work. The issue is many of the stores and restaurants don’t always evolve as the times have. Sometimes there are classic restaurants that for whatever reason make it that long but stores are much more difficult without change. The issue here is that storefronts become stale and that’s not great for the neighborhood either. So how do we change that?

There needs to be a partnership between landlords and tenants.  A percentage of the top line should be rent with a guaranteed minimum per month. I believe that those landlords and tenants will end up doing better in the long run. As a tenant, if you aren’t making it work, then you are forced to shake it up and think differently about your spot. As a landlord, you want to be more involved with helping your tenants be successful. It forces tenants to evolve. It keeps things new and happening.

Many of the stores on Bleecker Street, a street that runs from one end of the Village to the other, that have now closed surprised me that they were still open even a year ago. The customer that lived here 20 years ago doesn’t exist anymore. It isn’t that they don’t live here anymore but they aren’t going to head shops instead they want matcha green tea.

Community happens on many levels. Commercial real estate needs to change the way they do business particularly at the storefront level or in a decade we will be back to the same place that we left when COVID hit. I am convinced we can not move forward the way we have in the past. Nothing will be the same and it shouldn’t be. It is easier to change things when everything is in play.

The time for change is now.