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When retailers came up short in paying their rents in 2020, some landlords allowed their tenants to pay a percentage of their sales as rent instead of a fixed dollar amount.
Now that the economy is reviving, that unusual lease arrangement is continuing in many cases.
Percentage-of-sales leases are particularly popular in shopping centers, especially in agreements with new businesses.
Under the leases, young businesses need not meet high fixed rents every month.
Also, shopping centers lost tenants in droves during the pandemic, leaving thousands of empty storefronts to fill. In the Age of the Online Shopper, the novel leases encourage brick-and-mortar stores to continue in business while also making the centers that offer them more competitive as places to locate.
“Tenants love it; landlords hate it” because it leaves rents unpredictable and often below what would be a normal monthly rate, Michael Reilly of consulting firm Reilly Retail Solutions said of the arrangement in an interview with the Wall Street Journal.
As a result, “percentage” leases typically are for a set period – the first year or two of the lease, for example – then rents revert to the conventional model of a fixed price per month.
TREND FORECAST: To survive, owners of retail space will be forced not only to live with lower rental rates, but also to create new incentives such as “percentage leases” to attract and keep tenants.
As online shopping grows and becomes even more convenient in the future, a large number of all-purpose shopping malls will be converted to other uses, such as fitness centers, medical clinics, or community colleges. Viable retail space will be concentrated in downtowns, tourist meccas, and similar areas where merchants offer unusual merchandise and specialized goods to targeted interest groups. (See “Brick and Mortar Retail on the Ropes,” Trends Journal, 6 February, 2020.)
And, as we have detailed in this and numerous Trends Journals, with less people commuting, the commercial real estate sector will be hit hard.