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Real Estate - Commercial property

The Fall and Rise of Pandemic-Era Retail Real Estate

The retail sector has been hammered by the coronavirus outbreak this year as well as the sweeping governmental responses around the world. Across the globe, retail has seen widespread store closures, the result of either voluntary decision-making to help fight the outbreak or governmental order, and a prolonged period of poor traffic.

COVID-19 represents a true global catastrophe, threatening to cause long-term economic destabilization as well as widespread death and injury. However, despite the disruption, business must go on for many sectors. Commercial real estate is one such field. Whether or not tenant businesses shut down, landlords still face tax and debt payments that are generally unconcerned with the status of the outbreak. With that in mind, some retailers, particularly grocery and home essentials sellers, have been able to keep demand up during the outbreak, and other types of goods are expecting a big rebound post-recovery. These trends are complex and interrelated, but of critical importance for retail owners everywhere.

This report takes a close look at the situation for retail owners during the coronavirus outbreak. We’ll investigate the full spectrum of issues facing modern retail landlords: leases and insurance, lending, taxes and legal, future strategies, landlord adaptations, and investment considerations. By uncovering the specific impacts happening right now as well as exploring the future of retail in the face of an impending vaccine, we’ll try to explain what retail landlords should be thinking about and acting on in this new age of risk and uncertainty.

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Leases and Insurance

Real Estate - Commercial property
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The most pressing issue for many landlords is the current reality of whether they can generate the income necessary to make their required debt and tax payments. Retailers, often unable to continue operating as the outbreak continues, are increasingly finding themselves unable to pay their staff, let alone the rent bill.

Rent collection

Rent collections have been the lynchpin of landlord worries this year. Retailers that see drastically reduced shopper counts suffer from lost revenue, in turn imperiling their ability to pay rent. And indeed, numerous businesses have missed rent payments this year, to the tune of over $52 billion so far this year. Many types of businesses have missed rent payments, from Bed Bath & Beyond to the restaurant chain Red Robin. While earlier in the year the big question was whether or not a given business counts as essential, that point has lost its relevance as lockdowns expire in many areas.

Now that (rent forgiveness) is over and most everything is open, to a degree, it seems like more tenants are paying rent, and more landlords are expecting it.

Grant Walker, Senior Director,
Lee & Associates

The approach of being more forgiving with smaller tenants was widespread earlier in the year. According to John McNellis, Principal at the California-based real estate company McNellis Partners, mom-and-pop tenants who were forced to close by April would receive free rent and charges for that month. Back then, small franchisees of big brands, like Subway, were receiving dollar-for-dollar credit matching for what was offered by the franchisor. For bigger companies, McNellis shared the following explanation: “Many of our national credit tenants are also suffering in this plague year, and we completely sympathize with their plight. They, however, will weather the storm. Also, they are highly sophisticated and understand that our lenders will not be forgiving any of our interest payments and that we are simply unable to offer rent breaks to credit tenants.” Consequently, these larger companies, without as much landlord flexibility, have sometimes been the ones that needed to get more creative with income generation in order to avoid defaulting.

By the later part of the year, the flexibility that some landlords have shown has been decreased by a more world-weary sense of pragmatism. According to Grant Walker, who is a senior director at Lee & Associates in Houston, “Now that (rent forgiveness) is over and most everything is open, to a degree, it seems like more tenants are paying rent, and more landlords are expecting it.” However, Walker went on to say that landlords are now giving unprecedented concessions to incentivize leasing activity.

Things are not even for all businesses within the retrail space. Some niches, like theaters, restaurants, and gymnasiums, are seeing worse payments than others. Movie chain AMC is behind on its payments by around $325 million . And 56 percent of eateries and bars in Illinois, a state known for its brutal winters, are unable to pair their rent for the month of December .

Resilient Retailers

  • Groceries or essentials
  • Existing omnichannel capability
  • Low debt
  • Flexible to leverage pop-up strategies or hire quickly

Vulnerable Retailers

  • Movie theaters
  • Gyms
  • Sit-down restaurants
  • No delivery ability
  • Unable to fill BOPIS orders
  • High debt load

The safest retailers are those that can take advantage of consumer stockpiling behavior in the face of massive eCommerce delays. This includes big box stores like Walmart and Target, as well as grocers in general. According to James Cook, JLL’s Americas Director of Retail Research, “Grocery-anchored centers have been seen as resistant to online penetration. Even with all of the online grocery shopping we don’t expect that to change.” Some of these companies have gone on hiring binges, seeking to attract the manpower to be able to handle the onslaught of consumers. Walmart is hiring an enormous 150,000 new temporary workers, for instance .

Gary Tenzer, co-founding principal of George Smith Partners, said that “I would expect that the coronavirus will affect sales very positively at the grocery anchor, but the restaurants and side shops in the centers will be hurt badly in the ensuing downturn.” The success of this field can be capitalized on more effectively by some firms than others, though. Big box retailers that also offer groceries are seeing high traffic throughout their groceries and essentials sections, but much less in higher-margin departments like apparel. This could cause problems for retailers that typically derive more revenue from non-grocery items, such as Target.

Other lease clauses

Subsequent clauses within leases have also come under pressure from the outbreak. Law firm Baker Donelson calls attention to the fact that many retail leases include clauses dictating things like open hours and abandonment. One of the law firm’s recent articles recommends clear communication on what lease clauses are or are not still valid during this period of disruption since these questions don’t have clear answers across the board. “If a landlord or tenant is in doubt over its position or what the other side to its lease contract may or may not do or be able to do, communicate,” the article says .

Baker Donelson also warns that COVID-19 may trigger the force majeure clause of a typical retail lease. However, Mike Jaworski, managing director for software and consulting firm CREModels, cautioned that many leases may be too general to reliably trigger this clause .

In fact, the past months have seen force majeure cases go several ways. In one example, in Florida, the tenant’s attempt to invoke force majeure was met with failure, largely because the court rejected the tenant’s claim that the government shutdown prevented it from meeting its rent obligations. However, another force majeure attempt in Louisiana was met with success by the tenant, Bed Bath & Beyond. In this case, Bed Bath & Beyond was able to attain courtroom victory when the court found that Bed Bath & Beyond had “a plausible basis for believing that [rent] was not due,” and that while the tenant didn’t follow default-curing protocols per the lease, “ any deficiency in that regard is excusable by the global circumstances. ” Another case was recently won by a restaurant group in Illinois, when the court found that the group was unable to pay rent due to the government-mandated shutdown set as a response to COVID-19 .

These three outcomes show that while force majeure cases can be winnable by tenants, they are far from guaranteed. Tenants seeking to exercise a force majeure clause must be certain as to the specific, unique wording of their lease as well as the history of legal interpretation and reputation of the court they will appear in.

Finally, co-tenancy clauses represent another concern for retail landlords. These clauses, giving retailers the opportunity to recoup money or break their lease if certain other tenants or portions of the shopping center close down, could be triggered by the shutdowns caused by COVID-19. There may be no easy solution to this situation. According to Patrick Abell , an associate with Thompson Hine LLP, “Landlords will likely be subject to the effects of such co-tenancy provisions if co-tenants stop operating due to the spread of COVID-19.” The best option for landlords may be to have realistic conversations with tenants, noting that the coronavirus outbreak is a temporary setback.

Another option for landlords is to look toward other types of tenants who show more long-term resiliency. However, some co-tenancy clauses include provisions against replacing anchors with other types of non-traditional occupiers. According to Michele Krause , a partner with the law firm Ginsberg Jacobs LLC, “Tenants with co-tenancy clauses will likely ask for and sometimes even receive a rent reduction, money to freshen up their store or other benefits in exchange for amending the co-tenancy clause to permit a less traditional or once-prohibited use.” However, if the end result is tenants that are more resilient to economic disruption that last generation’s shopping mall staples, landlords might do well to consider these costs more akin to growing pains than true losses.

In addition to concerns over rent payments, COVID-19 is forcing landlords to contend with a range of tax, legal and debt issues. It is taxes and mortgage requirements that represent the most pressing recurring payment needs for most landlords. At the same time, insurance claims regarding COVID-19 will likely be accepted or rejected based on how proactive landlords are in communicating with their insurers.

Lenders don’t want to take buildings back, they don’t have the resources to manage them.

Brian Snow, Vice Chairman, Eden

The coronavirus outbreak has also led to some legal challenges for landlords. Crosbie Gliner Schiffman Southard & Swanson partner Chris Rizza said that “Liability is a key concern. Given the nature of the COVID-19 virus and how quickly it can spread when people are in close proximity to one another, landlords should be aware of potential liability issues and claims from the spread of the virus in the common areas of their buildings and projects.” Baker Donelson suggests that disruptions like this outbreak will likely not justify business interruption insurance claims, since these policies are meant to protect against loss due to physical damage to a building, not worker incapacitation. Jaworski also told us that “Some business interruption insurance policies specifically address pandemics but many do not so there may not be relief there either.”

The National Law Review sees this as a real issue, too , cautioning that it is tied into the insurance question: “One key issue every business should consider promptly is whether liability insurers will insist on broad COVID-19-related exclusions at policy renewal and what impact such exclusions may have on coverage for any COVID-19-related claims that may be brought against the business after renewal.” For liability insurance, many policies specify that coverage will only apply to claims made during their term and not after, even if the underlying issue occurred while covered. This means that owners seeking to renew their insurance should be very clear about what is and isn’t covered. In many cases, owners can protect against this risk by providing their insurer a “notice of circumstance” that they expect a claim to be made in the future.

According to the National Law Review article, “Whether providing a notice of circumstance of potential COVID-19-related claims might benefit a business will depend on the specific liability risks facing the business, the precise terms of its current liability policies, and the likelihood of broad COVID-19-related exclusions at renewal.” With that in mind, owners will need to carefully review their policies and renewal timelines. If renewed policies are expected to exclude coronavirus-related coverage, providing a timely notice of circumstance could be crucial.


Beyond taxes, the other big recurring payments that retail landlords are feeling pressure to meet right now are their mortgages. In general, it is the most overleveraged owners that are the ones facing the greatest danger at present. This affects both the landlords themselves and the retailers that occupy their properties, adding up to a double dose of exposure.

In-store adaptations

  • Transparent panels in check-out lines
  • More staff performing high-visibility cleaning
  • Markers on the floor indicating social distancing measurements

By August, retail landlords were displaying about a 15 percent loan delinquency rate . And while not every lending institution has taken their borrowers to task over missed payments, some, particularly amongst nontraditional lending vehicles like private equity funds, have begun to go after their missing payments in court. In turn, this pushes landlords to go to court against their delinquent tenants. But nobody wants this outcome.

Brian Snow, vice chairman for property management tool Eden, told us that while they are not likely to forgive debt, “lenders don’t want to take buildings back, they don’t have the resources to manage them.” Without general guidance or governmental action on loan forbearance, landlords should specifically communicate with their lenders to identify each company’s policies during the outbreak.

Lease underwriting will probably continue to change in response to the outbreak, as well. According to Peter Solomon , PJ Solomon’s founder and chairman, “You will see a considerable number of bankruptcies because a number of retailers do have leverage. You cannot stop demand as we just have in the country and have these guys survive. They pay rent. They pay interest. They pay their workers. They will have to stop paying their workers in a couple of weeks.” Mr. Wamble also noted the severity of the situation for landlords, saying that “This is a stress test for retailers. Who has the cash reserves to stay alive?” Going forward, understanding more about a given tenant’s balance sheet may become just another part of the underwriting process.

While interest rates are low, the longer the outbreak goes the harder it may become for retail real estate investors to find debt. Writing in a Wall Street Journal op-ed , Brian Graham, co-founder and partner at investment and advisory firm The Klaros Group, said that “ The 5,000 or so U.S. community banks, with about a third of total assets, are two to three times as concentrated in commercial real-estate lending as the approximately 30 larger banks.” As more and more companies go belly up and more and more retail owners experience distress, some of these banks may decide enough is enough on the retail real estate lending front.

Future Strategies

Different retailers are experiencing varying effects from COVID-19 and the resulting response. Retail owners need to track comparative performance trends as they plan their tenant mixes and build resiliency against future outbreaks.

Landlords, beholden to their lease obligations, are somewhat at the mercy of their tenants and lease expiration dates when it comes to planning for future resiliency. However, there is plenty that can be done looking towards the retail landscape that will follow. What types of tenants shopping centers offer, and in what mix, is the most direct way for landlords to protect their investments over the long term.

Experiential and omnichannel

A prominent trend in retail recently has been experiential shopping. For retailers, being able to allow customers to try out out different products or engage in various fun experiences is widely seen as a counter to the growth of eCommerce. Despite the fact that Amazon’s stock is up almost 70% since the start of the year, you can’t, after all, try out a pair of shoes on Zappos, the shoe company that was acquired by Amazon a decade ago.

The unfortunate irony of the COVID-19 outbreak is that experiential retail’s big selling point is rendered useless when social distancing and store shutdowns are in effect. This doesn’t mean that experiential retail is dead, however. Rather, it points to the importance of omnichannel distribution models amongst retailers. Companies selling things like clothing and tech should be able to offer their customers great in-store experiences with various perks and experiences, but also be able to provide convenient, fast shipping for times when going to the store is impossible, as is widely the case now.

Omnichannel doesn’t just mean shipping deliveries to the consumer’s house after being bought online. Another important component that will be increasingly important is the need for spaces that facilitate easy pick-up of groceries and other goods. Some retailers, like Walmart, have the resources to build “pickup towers” where consumers can grab their goods in-store after purchase in the BOPIS (Buy Online, Pickup In Store) model. Amazon Go grocery stores, with their checkout-free, automated purchase sensing technology, represent another approach. Both of these models minimize the amount of time shoppers need to spend in-store, and reduce or eliminate the need for face-to-face interaction. This is critical given the ongoing need for social distancing. Retail landlords can capitalize on this trend by offering spaces that are adapted for BOPIS as well as delivery. Offering parking lots that can handle smaller delivery trucks is one option, and providing the street furniture necessary to expedite curbside pickup options is another.

Other landlord adaptations

By now we have settled into a new reality of daily life, and while the disruption continues, the most prescient landlords are realizing that adapting to the demands of COVID-19 in many ways means adapting to the realities . Indeed, what would be considered proactive today may become a demand tomorrow. For one thing, owners of larger centers and malls may want to invest in technology to help identify likely COVID-19 carriers before they can spread the virus. Thermal camera companies have seen huge orders recently , since the technology can detect people with fevers, but the efficacy of these tools is limited since people can be contagious long before getting a fever. In fact, an increasing number of commentators have opined that tools like thermal cameras are part of “hygiene theater” meant to promote a feeling of safety more than an actual increase in it.

Nonetheless, many buildings continue to use measures like these. And other, simpler adaptations are seeing persistent use as well. According to Mr. Cook, stores like Kroger have been using plexiglass dividers between shopper and cashier, and tape on the floor to indicate social distancing measurements. Such equipment may become more permanent and commonplace during tenant build out work in the future. Similar to thermal cameras, the jury is still out as to effectiveness. While there isn’t much authoritative research on the subject, the most educated perspectives emphasize that barriers can stop the spread of large droplets but have limited utility against aerosol transmission .

Landlords should consequently focus on instituting, or helping their tenants institute, multi-level systems of risk preventation. To the best extent possible infected people should be kept out of public spaces, and thermal cameras can play a role there, even if it is a small one. In addition to plexiglass barriers which might be able to further reduce if not eliminate risk, retailers should also keep more staff on the floor to perform high-visibility cleaning tasks.

Within shopping centers and malls, landlords will also have to deal with the reality of more shuttered stores. This is a financial challenge as well as a security one, since vacant stores are inviting to criminals. Hiring security guards is one option to deal with this, but according to Ryan Schonfeld, Founder and President of RAS Security Group, “guards may not come into work if they have high-risk family members.” Mr. Schonfeld instead suggested that property owners invest in normal security cameras and security software to keep commercial spaces secure. “This is tech that you can continue to use in the building after the setback,” he said.

That vacant space can find alternate uses, as well. Landlords could potentially lease vacant units, with short-term leases, to pop-up retail operators. While pop-up retail often takes the form of heavily disrupted businesses like fashion, during the course of this outbreak, grocery and convenience pop-up stores could potentially absorb much of this vacant space. This is what a coffee shop in North Carolina recently decided to do, by adding a 60-day curbside operation out of a vacant drive-through bank . Alternatively, existing tenants could lease some vacant units to manage or even launch their omnichannel operations.

One area of possible respite is single tenant net lease investments, which are widely considered very stable when tenanted with high-credit businesses. On one hand, many of these investments are convenience stores, which have done well thanks to the essential products they offer and status as essential retail. On the other hand, single-tenant properties may become less desirable compared to centers, since offering only one tenant space increases exposure to black swan events as typified by the coronavirus outbreak. Even tenants with high credit ratings can be exposed to disruption or even bankruptcy due to COVID-19. Consider the example of STORE Capital . STORE is a REIT focused on single tenant net lease properties, which substantially leases to AMC Entertainment, the theater chain still facing deep coronavirus trouble.

Past COVID-19

With several vaccines now in the early stages of distribution in a number of areas, retail investors will have a whole new series of challenges to face as their traffic continues to ramp up and many people receive vaccine jabs.
One challenge will be deciding how to allow people back into their stores, with or without masks. Some privacy experts may have their doubts, but electronic vaccination verification systems that use an app to confirm a person’s vaccinated status are one option. By requiring only those who can display an app guaranteeing their vaccination status, some businesses may be able to reopen their doors a little sooner. Of course, such an approach would not only disenfranchise people without access to the vaccine, but also people who may not have a smartphone or may not have the level of technological proficiency to get a new app and confirm their status manually on it.

Another question retailers will have to face is what to do with all of the adaptations that they have made in the past months. Markers for one-way aisles and plexiglass dividers may not be terribly intrusive but some retailers may end up competing to become the first to return to normal, which could increase infections before everyone receives the vaccine.

On the other hand, landlords and tenants should work together to keep mask use high for now, even with a vaccine. Scientists do not yet know whether the vaccines we currently have to work with simply offer respite from the symptoms of COVID-19, or if they also diminish its infectivity or stop its spread. Without that knowledge, the retail world cannot yet safely return to a mask-free mode of operation.

Coming out of the pandemic will also have some interesting implications for the investment world. The numerous bankruptcies we have this year have left a lot of excess space on the table, but until now many of the most promising potential users have been unable to do their thing. Recreational venues like arcades, for instance, have been forced to operate at a fraction of their capacity so far. 2021 might bring back demand for these spaces with a vengeance. This could lead to operators looking to sign more leases, which in turn could present an opportunity for savvy landlords who have been able to pick up new space at bargain pricing.

For landlords with grocery and traditional retail tenants, omnichannel order fulfillment solutions will probably be persistently in demand. Around the world, we’ve now seen just how convenient many of these solutions can be, particularly for “boring” shopping trips like the weekly grocery run or hardware store.

One thing landlords should avoid doing is thinking that a huge rebound in in-person retail sales shortly after widespread vaccine deployment is indicative of a long-term disinterest in omnichannel order fulfillment. Since it will probably be close to a year and a half of periodic lockdowns and constant social distancing by the time most Americans receive the vaccine, it stands to reason that practically every type of store will see a big traffic jump when it is safe to shop again. But while the return to in-person will probably stick for experiential retail, exciting sectors like tech, and luxury high-touch fields like upscale clothing and jewelry, department and grocery stores will likely see persistent demand for pickup and delivery ordering.

For landlords who own gyms, restaurants and theaters, the vaccine rollout will come with a sigh of relief. But while traffic at these places will probably surge as Americans indulge in almost forgotten activities, landlords and their tenants alike must be careful to properly manage the return to normalcy, with preemptive hires in fields like security and custodial services.


Despite the fact that a vaccine is now being deployed, we still have months to go until it is safe to start returning to indoor retail en masse. For those who manage to make it through without becoming insolvent, a valuable lesson will have been learned: what the economic response, as well as the lingering effects, of a serious outbreak look like.

There is no one path to success for retail owners in this landscape. However, a few lessons rose to the top through our research. First of all, it is important that landlords maintain close contact and clear communication with their tenants. Armed with the knowledge of whether tenants will be able to make their rent, and what adaptations they may need to make, landlords can maximize the chance that their recurring expenses will remain met. In addition, providing further clarity to lease clauses like force majeure and co-tenancy will help avoid confusion in the future.

At the same time, landlords should carefully consider what their tenant mixes will look like over the long term. We’ve seen through our research that some businesses, like groceries and discount retailers, and in particular businesses with well-established omnichannel delivery platforms, have avoided the worst of the crisis. When leases come up for renewal, landlords may want to operationalize this information by pursuing those tenants that are best positioned to push through future outbreak scenarios. Looking back on the pandemic thus far, some of the most outbreak-secure retailers could be discount or luxury grocery stores that occupy smaller spaces and offer convenient pickup and delivery options.

Even given the arrival of a number of vaccines, the economic impacts of COVID-19 will continue to cast a long shadow on commercial real estate. Even if the virus were to suddenly disappear, consumers, retailers and landlords everywhere would be left with the memory of the incredible economic disturbance that the outbreak left behind, along with a deep concern about what the next outbreak might look like. Retail will always be exposed to pandemics, but with good communication and resilient tenants, owners will be able to position themselves to survive not only the continued growth of eCommerce but future outbreaks as well.

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