There are sales, and then there are reported sales

Most tenants are making errors reporting their sales to landlords, and the majority of those result in underreporting, according to Kenneth Lamy, the founder, president and CEO of The Lamy Group, a consultancy that helps landlords quantify retailer sales for rent-collection purposes. That’s hurting the perceived value of retail properties.

The Lamy Group performed hundreds of audits in 2020 on behalf of landlords and compared them to audits it had done prior to COVID-19. Nearly 70 percent of retailers misreported online sales that were fulfilled by a physical store in some way last year. That’s based on the definition of gross sales as laid out in each lease.

Lamy said the most common errors revolve around:

• items bought online and either picked up in store, delivered from the store to the shopper’s home or picked up curbside
• mishandling of online sales made in the retailer’s physical store.

Restaurant tenants in particular often mistakenly deduct fees and other charges from their total sales, which distorts the revenue of physical stores, Lamy says. “Credit card fees and sums paid to delivery services are a cost of doing business. Unless specifically allowed in the lease, they should not be deducted from total reportable sales, but they frequently are.”

Compounded, these errors misrepresent the health of the retailer, a shopping center and even the shopping center industry in an already tough year, Lamy says. “The result is that, in fact, brick-and-mortar retailers are doing better than they and their landlords realize, even in difficult times.”

Downwind of 2020’s deferred rent agreements

Rent payments deferred from 2020 could torpedo some retailers’ growth plans for 2021 and even lead to more bankruptcy filings and store closures. “Last year, it seemed as though nearly every retailer in America was asking for rent deferrals,” A&G Real Estate Partners co-president Andy Graiser said on a conference call hosted by investment bank and financial services company Jefferies. “Now they’re staring at a ‘deferral bubble’ of $40 billion-plus that they’re going to have to pay back, over and above their existing rent.”

When landlords initially agreed to those deferrals, he continued, many observers believed the U.S. economy would be booming by the fourth quarter of 2020. Those hopes for an imminent, V-shaped recovery faded, Graiser noted, and many negotiations shifted to rent abatement, not deferrals.

A&G was on the front lines of that shift: Last year, it reduced the occupancy costs for 61 retail and other operators by a total of $1.8 billion. “We touched 13,600 leases in 2020, restructuring 10,450 of them and securing terminations on 950,” Graiser said. “It was like nothing we’ve ever seen.”

In exchange for rent abatements granted in 2021, tenants may need to agree to longer lease terms and waive certain co-tenancy rights, he said. “Last year, in our Chapter 11 cases, we negotiated rent concessions of anywhere from 20 percent to as high as 40 or 50 percent on some of these locations. Otherwise, the stores would close.”

For these retailers to emerge from Chapter 11, landlords needed to waive past-due or deferred rent, as well, he added. “Despite all the 2020 closures, it could have been worse. Working closely with the landlords, we prevented thousands of stores from closing last year.”

In the meantime, many landlords aim to woo tenants from competing properties by paying their lease-termination fees, Graiser added. “In particular, healthier tenants with short-term leases have some incredible relocation opportunities.”

3 top concerns of real estate executives

According to law firm Seyfarth’s 2021 Real Estate Market Sentiment Survey, real estate executives worry most about

• shuttering of restaurants, stores and other gathering places
• extension of tenant and borrower protections
• economic fallout from the U.S. recession

While 85 percent of survey respondents consider 2021 a year of opportunity for their companies, 70 percent think it will take at least two years for the real estate marketplace minus the industrial and multifamily sectors to return to pre-COVID-19 levels.

Sixty percent believe the Fed will not change interest rates this year, 54 percent do not believe the Biden administration will have an overall positive impact on commercial real estate and 62 percent believe any forthcoming tax reform would have a minimal impact on commercial real estate while 27 percent believe it would have a material impact.

9 retailer updates

• An investor group that holds a 9.5 percent stake in Kohl’s asked the retailer’s management to free up cash flow with sale-leasebacks on some of the retailer’s $7 billion to 8 billion worth of real estate. Kohl’s said it would consider it.

• Italian luxury brand Valentino owes $207.1 million in rent on its former U.S. flagship on Manhattan’s Fifth Avenue, according to landlord 693 Fifth Owner LLC. The fashion company closed the store during the pandemic despite a 16-year lease that expires in 2029.

• Fry’s Electronics shut down operations and closed all 31 of its stores. The company, famous for themed experiential stores including a NASA-themed Houston location that featured space shuttle launch countdowns every hour, blamed COVID-19 and increased competition.

• Best Buy expects 40 percent of its total sales to come from online purchases this year, up from 19 percent two years ago. The company will reduce its workforce and adjust its store portfolio in response. Best Buy has 450 leases up for renewal in the next three years, and CEO Corie Barry said, “There will be higher thresholds on renewing leases as we evaluate the role each store plays.” The retailer is piloting new layouts that trim the size of sales floors and add more space for fulfilling online orders.

• Walgreens is working with delivery service provider Instacart to add same-day delivery service at 800 stores.

• Japan-based retail conglomerate Pan Pacific International Holdings acquired the upscale, 27-unit California supermarket operator Gelson’s.

• A judge approved Belk’s plan to restructure under Chapter 11 bankruptcy protection and cut its debt load by $450 million without closing any stores.

• Skincare brand Heyday secured $20 million in financing and plans to open hundreds of stores in the next five years via franchising.

• Women’s specialty apparel retailer Evereve is opening at least six locations in 2021, including entry into California and Florida.

This time last year

The topics grabbing headlines in SCT a year ago remain at top of mind a year in to the pandemic.

Can restaurants make money from delivery apps?
How restaurants use real estate in the age of delivery and takeout
Plot twist: Here’s where Amazon is actually spurring brick-and-mortar retail
Mall REITs squeezed more returns out of top properties in Q4
Who's building what, where

Construction spending won’t improve until later this year

Every year from 2012 to 2019, U.S. construction costs inflated by between 3.5 and 5.5 percent, according to JLL’s H1 2021 Construction Outlook. For the full year, 2021 will have bounced back to be within that range and may even approach the higher end of it. Labor costs will continue to grow in 2021, by between 2 and 5 percent for the year. Materials costs will increase by between 4 and 6 percent; the volatility from the pandemic will remain elevated this year, the report says. Nonresidential construction spending will decline by between 5 and 8 percent for the full year 2021 but will begin to increase month-over-month in the third or fourth quarter, returning to growth in 2022, the report says.

C-suite changes are triggering promotions down the chain of command

Agree Realty CFO Clay Thelen has departed. Simon Leopold is coming in from Taubman and will serve as CFO and executive vice president. Agree also promoted chief investment officer Craig Erlich to COO and made Laith Hermiz executive vice president of real estate.

At InvenTrust Properties, Tom McGuinness has resigned as president and in August will resign as CEO. DJ Busch has become president and CFO and in August will become president and CEO. Senior vice president and chief accounting officer Mike Phillips will become CFO. InvenTrust also has named Christy David, who had been chief investment officer and general counsel, as COO.

These announcements follow news that Federal promoted Jeff Berkes to president and COO and Jan Sweetnam to Berkes’ previous role as western region president, among other promotions. SCT also had reported that Olshan Properties had reorganized after CEO Andrea Olshan left the firm to lead Seritage Growth Properties.

The latest shopping center developments

Terra and Grass River Property broke ground on Miami’s mixed-use Grove Central. The project will include a 23-story residential tower with 402 residential units, a 1,250-space public parking garage and 170,000 square feet of neighborhood-oriented retail anchored by Target. The project, which will connect to the adjacent Coconut Grove Metrorail station, is part of a Miami-Dade County initiative to improve connectivity between residential living, commercial development and mass transit through private development on county-owned land. Terra and Grass River Property have entered into a 90-year ground lease with the county to build, manage and lease the property. Delivery is expected in 2023.

Developers are demolishing the former Sears at Merle Hay Mall in Des Moines, Iowa, to make way for an open-air, mixed-use space.

Sleiman Enterprises will develop the 90,000-square-foot, Publix-anchored Crossings at Wildlight in Nassau County, Florida. It will include three multi-tenant retail buildings, two single- or multi-tenant buildings and as many as three outparcels. Construction is expected to begin by March 1 and deliver in spring 2022. Raydient Places + Properties, a subsidiary of Rayonier Inc., is developing the broader 2,900-acre, master-planned Wildlight community.

Empire Resorts will convert the 90,000-square-foot former Bon-Ton department store at the 390,000-square-foot Newburgh Mall in Newburgh, New York, into a $32 million entertainment facility with as many as 1,400 video lottery terminals.

Developers are moving forward with the 50,000-square-foot Phase 2 of Lane Parke in Mountain Brook, Alabama. The center will attach to the Grand Bohemian Hotel and 276 apartments. Completion is scheduled for May 2022.

The Lerner Co. is set to break ground on the 500,000-square-foot, grocery-anchored Northstar Crossing in Lincoln, Nebraska. The center will open in 2022.

Developers plan a regional entertainment district anchored by a sports complex with a skate park, food trucks and shops at the former McFarland Mall in Tuscaloosa, Alabama.

A 50,000-square-foot Giant grocery store will anchor Benner Pike in Bellefonte, Pennsylvania. Construction is scheduled to begin in 2022 for a grand opening in 2023. Preliminary land development plans also include a fuel area that’s associated with Giant, a 4,300-square-foot fast food restaurant, a 3,600-square-foot fast food restaurant, a 2,200-square-foot coffee shop or fast food restaurant and a 7,200-square-foot medical/office building.

At Eugene, Oregon’s Oakway Center, a 9,200-square-foot former Pier 1 is transforming into a multi-tenant building with room for three tenants. The storefronts are expected to be ready by fall.

WRDC is converting the former Kmart at Cumberland County, Pennsylvania’s Summerdale Plaza into space for AutoZone and Tractor Supply Co.