Retail that was on its way to recovery after the height of the pandemic has since had to battle new challenges — inflation, supply chain disruption and labor shortages — that are creating new obstacles for property owners and tenants.

One of the biggest pain points for landlords is that labor shortages and supply chain delays are impeding new store openings. For instance, a tenant that leases a space with a six-month schedule for buildout and occupancy now may see that schedule stretch out to nine or even 12 months. “Getting those tenants open on time has been the biggest hit on NOI,” said Karen Raquet, executive vice president and retail property management for JLL Retail.

Many tenants are looking to their landlords for turnkey tenant improvements and store buildouts. “When we sign new leases with tenants, we’re beholden to some pretty strict timelines, especially when it’s a build-to-suit,” said Ryan Ash, project director at Vestar, a property owner and developer with assets primarily in the West and Southwest. “That is definitely a stressful thing for our construction team these days, and it is something that we’re really working with our tenants on because it is really difficult to estimate timing right now,” he said.

Not only are there long lead times for building materials and challenges in finding subcontractors, but also a number of city staff are working remotely. That is creating major delays when it comes to things like pulling permits and having building plans reviewed and approved. “City review and approval is perhaps one of the biggest hurdles we’re facing right now,” noted Ash.

Owners and managers are ordering materials early and leveraging relationships with vendors to keep things on schedule and on budget as much as possible. Landlords also are accounting for delays in leases with force majeure language and terms that account for unforeseen delays relating to supply chain issues. “The good news is that we have had strong relationships with a lot of the same tenants for the past 30 years and they understand the challenges because they are running into the same issues,” said Ash. “So I think tenants and landlords are doing a good job of working together and being reasonable to potential delays and how they might affect store openings.”

Shortage of Workers

Walk through any shopping center these days and there is no shortage of “help wanted” signs. According to the U.S. Bureau of Labor and Statistics, the nonfarm unemployment rate hovered at 3.6% as of the end of May and there were 11.3 million job openings. Though 427,000 positions were filled or removed during May, businesses still are battling the effects of the Great Resignation and high turnover, as 4.3 million people quit jobs during that month.

“The No. 1 thing that is impacting our properties is labor,” said Angelina Scarcelli, managing director of Real Estate Management Services for Colliers’ Las Vegas and Reno offices. Labor shortages are driving wages “through the roof,” the ripple effect of which raises prices for goods and services, she said. Staffing issues and rising costs due to inflation are creating an added burden for retail and restaurant tenants that weathered the restrictions and closures related to COVID. “Just when they started to see the light at the end of the tunnel coming out of the pandemic, they are being faced with new challenges, as labor is not the same as it was pre-pandemic,” she added.

Restaurants are having the most difficult time. According to TouchBistro’s 2022 State of Restaurants Report, 81% of restaurant operators surveyed are short at least one position, and one in four operators report an employee turnover rate of 40% or more. Raquet cited a restaurant that opened this year at a JLL property to rave reviews but experienced 150% turnover in its first two weeks of operation. “Labor has definitely been an issue across the board, and staffing is a revolving door for some of these hourly workers,” she said.

Property managers see similar labor challenges in their hourly wage positions, such as security, janitorial services and landscaping. When Colliers tried to increase security services at three of its properties in Southern Nevada recently, three security vendors gave the same response: They didn’t have enough employees to expand their services. “It’s causing us to cast the net very wide in terms of service providers and evaluate where we can reduce some hours for such services while continuing to maintain tenant needs,” said Scarcelli.

Lack of staffing has prompted some tenants to shorten operating hours and in some cases even close one or two days per week. Instead of operating from 10 a.m. to 9 p.m., many shopping centers around the country are opening at 10 or 11 a.m. and closing at 8 p.m. “We’ve shortened operating hours at most centers across the board, so we’re really trying to work with our retailers,” said Raquet. “Frankly, the new mall hours haven’t impacted sales tremendously. People are generally working around the shorter hours.”

Stepping Up Recruiting

Landlords and tenants are working harder to attract and retain workers with creative solutions like hiring bonuses, as well as incentives to entice workers to stay like gift cards, employee discounts and bonuses. One janitorial company with which JLL works offers free transportation for its employees. “Everyone is trying different ways to bring in that hourly labor,” said Raquet.

On its tenants’ behalf, JLL rolled out labor recruiting platform Wirkn at two of its shopping centers in June. Retailers can advertise for open positions on the platform, including information about the position and company and even videos. JLL drives job candidates to the platform through the shopping center websites, social media posts and on-site advertisements in which QR codes connect to Wirkn. “We’re trying to work with our tenants in any way that we can to help recruit people,” said Raquet. If the beta test of Wirkn is successful, JLL will roll it out across its larger management portfolio.

BH Properties prioritizes competitive compensation to help boost retention, which hopefully reduces the time and money it has to spend on recruiting and hiring. “We have begun to evaluate quarterly bonus structures in lieu of year-end bonuses, we recognize merit increases more frequently and we’re prepared to meet the market rate when recruiting,” said President Jim Brooks.

Ash noted: “It’s a hot job market right now, but ultimately it comes down to treating your employees as partners in your business. Hopefully, you can retain them, and same goes for our consultants, whether it is security or janitorial staff. We have long relationships with all of our operational consultants, and I think that has benefited us in terms of being efficient and not running into the staffing issues that some of our competitors are seeing.”

Rising Costs Squeeze Profits

Following June’s 9.1% rise in inflation, property owners are keeping an eye on rising costs’ impact on their bottom lines, as well as the overall health of their tenants. For tenants, the challenges are two-fold, noted Scarcelli: They’re experiencing these hardships internally and then, if their leases permit, seeing increased common area maintenance charges. “Most tenants currently in business have weathered the storm in terms of store closures from COVID times, but we are seeing hours shorten and definite impacts from the aftermath of COVID,” she said.

Landlords are more insulated from higher costs if the CAM terms in their leases minimize the impacts on net operating income or if they have triple-net leases, in which tenants handle property expenses. However, prospective retail tenants will look at the all-in or gross rent — CAM plus base rent — noted Brooks. “If operating expenses continue to grow, we have seen situations where reducing the base rent is the only method in which to lease space,” he said.

Labor and cost burdens also are causing some non-institutional tenants to reevaluate their long-term strategies. A tenant that previously signed a five or 10-year lease with five-year renewal options now might want to shorten their option terms because the future is a little less certain, noted Scarcelli. “We’re seeing some tenants that are asking for reduced rents to help offset the financial impacts inflation has caused, which creates an economic impact for ownership,” she said. For both property owners and managers, continuous monitoring of the state of overall business operations at their centers is the key, she added.

Views are mixed on how much these challenges will persist in the near term. “Until we have more clarity on where the economy is headed, I think we are still in for a bumpy road,” said Brooks. There are nearly two available jobs for every unemployed worker, so attracting and retaining labor will continue to be difficult, he added.

Yet there are some signs of improvement. The backlog of container ships parked outside ports has eased and the average price of shipping containers has dropped. Gas prices in many areas of the country also have been declining over the past month. “Every little bit is helping,” said Raquet. “We are hopeful because we are seeing things shift, and we are feeling very optimistic about holiday shopping and back to school, but time will tell.”