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In today’s current economic climate, landlords are being inundated with lease restructuring requests from retailers. The landlords are gearing up for battle. Many of the landlords don’t recognize certain factors that might make them more cooperative and interpret these potential negotiations as something that is in their best interest instead of adversarial.

First, industry experts were forecasting a Tsunami of store closings in 2009 that in many cases were anticipated at over 14,000. In particular, many articles anticipated huge numbers of closings for the beginning of 2009. Why haven’t we seen these huge numbers of closures? Retailers are undertaking the lease restructuring effort first and foremost in order to try and stave off store closings. This is a positive for the landlords. Less stores will close due to many successful lease restructurings. Although many stores will still close due to underperformance or from bankruptcy, the numbers will likely be significantly less than initially anticipated. When these closures do occur, landlords will be even more vulnerable, as tenants that want to renew early now may not want to renew when they observe additional vacancies.

Retailers focused efforts now on lease restructuring, store closures, store transfer sales and other important decisions will not only reshape their real estate portfolio, but will also be a catalyst to expedite the recovery of the industry as a whole. If the retailers are calling to renew two or even three years ahead of the lease expiration and are willing to give extended term, then the landlords ought to listen and perhaps consider granting reasonable requests for reductions. Why, you ask? We are really in the early stages of commercial real estate devaluation. If the landlords tell the retailers to call back in a year, the market rents are likely to be lower and vacancies higher. This result doesn’t increase a landlord’s leverage. The best leverage they have is to work something out now. The retailers will be looking to obtain market rents when they call back and those most certainly will be lower than the market rents today.

Let’s look at it from an economic historical perspective. One of the last things to recover in a recession, as most know, is job growth. It might even be fair to say, if all goes well, that positive job growth probably won’t be seen until mid-2010. Typically, real estate recovery trails job growth. During the last recession real estate didn’t commence a recovery until a full 18 months after the first month of positive job growth. This means that vacancies will rise and rents will likely continue to decline through the end of 2011 or even into early 2012 (even beyond if a broad based recovery doesn’t start soon).

In other words, retailers are calling the landlords early in the downturn. Landlords will also benefit by renewing tenants early, even if it means lower rents. Doing nothing and letting time pass, will likely have a detrimental impact on landlord’s assets. By no means am I recommending that landlords accept unreasonable or meritless requests. Retailers and landlords need to work closely with one another to come to reasonable values, especially since the market is rather subjective currently due to a lack of recent comparables (since expansion has been slow for some time now).

Retail rents, prior to the present decline, were like many other asset classes – very high and perhaps near or at a bubble. It’s not like a pendulum has swung to the landlords and is now back with the retailer. Many articles suggest that tenants have all the leverage in this market. Perhaps for a select few that is accurate. However, most retailers don’t have the sales to support the current rents they are paying. I believe we are entering a “new economy” where all asset classes are revalued and upward movement comes at a more reasonable pace. Retailers, as part of their survival now and into the future, need to have rents that reflect the times and the economic realities.

If the retailer is willing to give extended term in exchange for a market rent (or thereabouts), it seems a prudent business decision for the landlord to accept even if lease expiration is two years or more away. It potentially solidifies the landlord’s other tenancies, as well as the overall asset. It even might enhance the landlord’s ability to finance or refinance the asset. Ability to finance is going to become increasingly more important, as lenders have been entering into a large number of one year extensions. Many landlords may need to raise cash through the sale of real estate assets in a year or so if the lenders become less willing to give short-term financing. Accordingly, landlords will need assets with viable tenants that have decent term commitments. This economy gives landlords the opportunity when retailers call to restructure leases, to solidify an otherwise shaky asset. Clearly, there will be winners and losers in the process, but landlords need to recognize the symbiosis that exists between themselves and retailers, and start working with retailers more as these requests are made. I am hearing of stories where some large landlords are just saying “no” to helping tenants. I worry for the future of those landlords. Again, I am not suggesting landlords make senseless deals. However, there may be a silver lining for the landlords if they recognize how much worse things might get and act now when the retailers come calling.

Weiner is the president and CEO of Lake Success, NY-based Excess Space Retail Services. Opinions are the author’s own.

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