Retail Landlords Need to Abandon the Rent-Collection Model

Retail landlords have quickly caught on to the experiential retail concept, curating tenant mixes and investing in communal spaces that help drive consumers out of their homes. But, the change is far from over. Ultimately, retail landlords will need to abandon the standard real estate model of lease and rent collection and invest both in retailers and in creating a universal branded experience. Sean Slater of Retail Design Collaborative likens the future of retail to something akin to WeWork in office.

“If I had a vision for what the future of retail is going to look like, it is WeWork,” Slater, a principal at Retail Design Collaborative, tells GlobeSt.com. It is going to be a very different experience than the mall experience.” Companies like Simon, Macerich and Brookfield are “ahead of the curve,” according to Slater, and are investing in physical spaces and creating spaces for digitally native brands to temporarily operate in a highly branded space.

This is different than the pop-up trend that has become popular, which Salter calls a cheaper version of what will come. Landlords will need to play a more active role in the retail business, and that will naturally mean a shift in the retail real estate model. “The physical space that retailers need to invest heavily in isn’t really a return. It is survival for one and it is also a stake that they will take in these brands. I think that you are going to see landlords owning part of these retail companies in lieu of what was a really easy rent collection model in the past.

Today, landlords are focused on filling vacancies and collecting rent, largely because capital markets sources rely on occupancy and cash flow to underwrite an asset. “Today, it is better for a landlord to put a bad tenant in a space and collect some rent than to have an empty space, because their only business model is rent collection,” says Slater. “Landlords have to figure out a completely different model, and the underwriting also has to change. Lenders have to ask if they want their loan to be in default or if they are willing to change the expectations or change the payback.”

Slater said that new model has yet to emerge, but landlords will have to find another way to get a return. While 2019 isn’t necessarily the year when the rental retail model will end, Slater says that it is coming soon. “I think that we are really in time of transition, and I don’t know when the change will come. Institutions will realize that they need to revolutionize the way that they collect money from real estate transactions, and it isn’t rent. There are other intangibles and the value of the real estate itself. I think that lowering expectations of return will also provide some cover,” he says. “Landlords are going to have to invest on their retailers to get their return back in another way, rather than just collecting a rent check, which seems to be a model that its going to fade in the next couple of years.”