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This week on our podcast Brick & Order, we chatted with Kazuko Morgan, Vice Chairman for Cushman & Wakefield, a global commercial real estate firm.
Kazuko was named one of the Women in Real Estate Award winners for California in 2017. She has sold some of the most famous retail properties in the world, including the iconic Tiffany & Co. building in San Francisco’s Union Square. She is currently finalizing leasing at Thrive City, home to the Golden State Warriors.
We were grateful to hear Kazuko’s perspective and some rent negotiation tactics that retailers can employ in light of the current retail and real estate landscape.
We have found that if a landlord is in the position financially to provide some rent relief or reduction, they will do so, but that requires the tenant to be as open and transparent about their current business situation.
Here, we’re sharing an abridged version of our chat with Kazuko. To listen to the whole interview, head over to the seventh episode of Brick & Order.
Q: What does the commercial real estate landscape look like at this specific moment?
We are in a really challenging environment where there’s a lot of uncertainty for some of the sectors, particularly retail, and the restaurant and hospitality industries. [These industries] in particular are in, as we call it, crisis mode.
Q: What advice would you offer retailers that are seeking rent relief?
I think the number one [piece of] advice is communication. For the most part, a landlord is sympathetic to what is going on. Right now, it’s not the tenant’s fault, but it’s also not the landlord’s fault. For now, most of the lenders are not being as cooperative if you can even find somebody to speak to.
We have found that if a landlord is in the position financially to provide some rent relief or reduction, they will do so, but that requires the tenant to be as open and transparent about their current business situation.
Q: Is there anything that retailers should think about if they’re dealing with larger entities, like a management company or a real estate developer, versus a local or mom-and-pop owner of the property?
If you have an institutional landlord or a landlord where the majority of their income is coming from other parts of the building (say an office) and retail is a small component, you will most likely get some relief from your landlord landlords there. They’re traunching the tenant pool into different buckets. One is the major credit tenants, one is the medium size, and then the next one is really the small mom-and-pops. For most landlords during this time, everybody’s equally affected, but the mom-and-pops are really under financial stress.
Most of the landlords are not providing much relief to the larger corporate tenants. They’re saying, ‘You have a lease as we have mortgage payments, we have real estate taxes, we have property insurance.’ Those are fixed costs that are not going away, and nobody’s giving them any relief on that. So they’re pushing for the larger tenants to pay their rent so that they can offer assistance to the smaller tenants.
Q: Are there key clauses that retailers should look for in their leases when they’re seeking rent relief, other than a pandemic clause?
I have been [in the real estate industry for] 20 plus years and I’ve never seen a pandemic clause in any lease. This is something that nobody’s ever anticipated, so most leases do not cover it. But what’s happened in this current situation is that most insurance carriers are saying the pandemic was unforeseen and it’s a virus. A lot of the language actually carves that out specifically in many of the tenants’ insurance.
Then, as it relates to force majeure, most of that [language] was drafted in the event of a catastrophe or emergency, such as a fire flood, earthquake, where there’s actually physical damage and you cannot get onto the property, or your space has been ruined and it’s not in proper order to conduct a business. In the world we live in today, there is no physical destruction. You could open the doors. So most of the force majeure clause is not applicable. That is why we really are in a crisis mode here because there is no coverage and the landlord is not willing to take the hit 100%. It’s certainly not fair for the tenant either because even if they wanted to operate, they can’t.
Q: One of our community members submitted this question: “We’re looking for rent forgiveness or reduction of some kind. What are resources you recommend if the landlord is not communicating with us?”
We have found that a lot of the smaller tenants have actually paid rent while they were really not in the financial position to do so, where these larger corporations who do have the wherewithal to pay rents have withheld because the smaller tenants are so worried that the landlord would kick them out and they would have no lease.
It really shouldn’t be that way and, while I don’t recommend this, not paying rent does make a landlord have to respond because they need that rent. So it’s a last resort [option] to get the landlord to come back to the table and talk to you. I think more and more so, landlords are coming around to the fact that if I don’t help these people out, [they] will not have a tenant and those transaction costs and the downtime are far greater than giving some relief to the tenant. In this environment, while there’s always tenants that will lease space, it’s not going to bounce back so fast.
Q: If retailers are unable to pay their rent while they’re not operating and they’re unable to negotiate some relief from their landlord, one option remains: breaking their lease. What would your advice be in those situations?
Once again, communication with your landlord is really, really important. If you have to break the lease, [because your business is] facing bankruptcy, or you just can’t afford to operate, you really need to be forthright with the landlord and be an open book with them.
Openly discussing with [your landlord] and having an exit plan is far better than no communication. No communication results in very angry landlords and angry landlords have no incentive to work with their tenants so they’re gonna go after everything. Whereas if you communicate well with them, they will work towards a plan.
Q: Two of our key learnings are 1) to focus on communication and be very open with your landlord about the situation; and 2) to stay on top of any local developments because they vary by state and county in terms of relief and protections. Is that a fair summary?
That is a fair summary, and we’re seeing weekly updates. Some people take what is proposed as what is the new law. So you have to be careful with that too, because it’s very confusing to people. It’s really turning into a bit of a case by case situation. So even if the law generally says something, I would encourage everybody to really try to strike the best deal that is fair with your landlord.
This episode also features Sally January, owner of Siempre Viva, a lifestyle brand and retail concept that empowers artisans from rural Mexico with sustainable employment. Listen to the episode to hear her interview, and check back soon for her story on the blog!
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