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C+CT

Post-Pandemic: Permanent Changes in Landlord-Small Business Relationship

May 6, 2022

As the U.S. adjusts to a period in which COVID is less of an existential threat, some of the improvisations that occurred between landlords and tenants during the pandemic nonetheless are taking root more permanently. That means more mutually supportive connections between small businesses and the landlords that lease them space.

Emergency Response

Trademark CEO Terry Montesi said lease structures and other tenant-related deals that were unconventional and creative before the pandemic now are more widely accepted, from shorter lease terms to percentage splits to tenant improvement allowances that he said are more akin to partnerships. Store closings by some national chains really drove home the vital place of small businesses in the commercial real estate ecosystem. “The role of local and regional restaurants, for example, has become dramatically more important,” he said.

But local and regional tenants were also more vulnerable to pandemic-related closures, which resulted in “a ton of rent deferrals” and some free rent. “We got pretty consistent across the portfolio about what we did for whom,” he said. “And they’ve been pretty consistent about paying us back.” One reason that was possible was the 2020 Paycheck Protection Program, a government assistance program administered by the Small Business Administration that offered generous loan-forgiveness policies that helped small business owners keep employees on their payrolls.

While there were many benefits, the program also had some barriers in its application process that made it hard for some small business owners to get their loans. Kimco Realty covered its tenants’ legal fees when they needed assistance navigating the program. Kimco senior vice president of strategic operations Will Teichman said about 600 tenants received about $20 million in PPP funds. “We learned very early on that although the PPP was represented as a very simple process, for many business owners, it wasn’t simple. We also had to consider that not all [PPP] lenders were open for business, and we had to put a program together.”

Changes Taking Root

Teichman said Kimco experienced a meaningful dip in occupancy during the worst of the global health crisis but that business among its estimated 10,000 retail tenants nationwide mostly has rebounded. “We’re seeing basically that traffic levels have recovered to pre-pandemic levels at this point, and that’s a really encouraging trend to see,” he said.

The economic resurgence also has led to a rise in formation of small businesses. Financial software colossus Intuit forecast in its 2021 New Business Insights report that about 17 million small businesses will form this year. While that’s encouraging, entrepreneurs face the same challenges they always have, and limited understanding of the actual costs of launching in a physical space is among the greatest.

George Mosle — partner in charge of retail leasing and new business development at the Washington, D.C.-area brokerage Of Place — said many new business proprietors have great entrepreneurial instincts but lack corresponding expertise in commercial real estate. “The average small businessperson hasn’t had the experience of budgeting what would completely allow them to start and open their concept from a shell or second-gen space,” he said. “They don’t know how far away they are from being able to walk into a place and turn on the lights and start selling stuff.”

He suggests that landlords request business plans from prospective tenants and explain as fully as possible how far the tenant improvement allowance percentages in their leases will go toward opening doors to customers.

Montesi said increased use of percentage rents and higher tenant improvement allowances are becoming more common, as there are potential benefits to both parties. “If you take a higher percentage rent than normal, that’s more akin to a partnership,” he said. “If they ask for more than the historical range of cash up front and they do well, you do well, too. That has really evolved over the past few years.”

The current demand for small shop space at Kimco properties has Teichman feeling optimistic. “What we are seeing is a really robust demand for that space,” he said. “And we’re seeing successful retailers, whether national or existing franchise owners or true mom-and-pop operators who are well capitalized and have solid business plans, moving aggressively to lease space.”

The pandemic forced landlords to be flexible, and some of the resulting measures will become a normal part of doing business, from landlords using their own social media networks to market individual tenants to implementing shorter lease terms for businesses just starting out in brick-and-mortar.

Montesi said many Trademark tenants that started with 90-day pop-up leases or one- to three-year deals instead of the typical five- or 10-year term had initial success and are now in longer-term leases. That flexibility may remain an option after the pandemic. “It gives the small business tenant a chance to try it out with a lower risk up front,” he said. “And the payoff for the landlord is that if it works, they’ve basically incubated a small business.”

By Will Swarts

Executive Editor, ICSC Small Business Center

Small Business Center

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