Since the pandemic, planning for the future has become incredibly difficult. Whether it’s the one-month outlook or one-year forecast, uncertainty looms over every prediction.
2020’s widespread barriers to foresight have been causing troubles across the board. However, the impacts have been particularly intense for commercial real estate leasing.
As a result, today’s leases are more creative than ever: new clauses have been added, lease timelines have adjusted case-by-case, and a general atmosphere of openness is reshaping CRE.
This flexibility has given rise to new leasing trends that vary sector-by-sector. Unique and specialty lease terms are arising across the entire commercial industry, but some sectors are handling renewals with greater tact than others.
Retail: Pivoting at Renewal Period
The retail sector has been particularly resilient in developing creative solutions for today’s biggest leasing challenges. Right now, retail spaces are flexing new approaches to lease renewals.
Retail’s ingenuity can be linked to the specific difficulties this sector has faced in 2020. Brick and mortar retail was in a tough spot during the pandemic. E-commerce gained the upper hand as shoppers stayed home and opted for remote services. Meanwhile, retail property owners were struggling to keep their tenants from abandoning their physical spaces.
While some brands are choosing to go remote, others are holding onto their commercial real estate. CRE spaces are being viewed as essential to retail – but that doesn’t negate the persistent uncertainty. This situation has prompted retail tenants and property owners to work together to cope with today’s biggest challenges to commercial leasing.
Here’s a look at a few of the ways that retail spaces are approaching lease renewals right now:
The primary response to 2020’s lease renewal challenges was opting for shorter commitments. Typically, retail leases range from three to five years in duration. However, with five years feeling like a lifetime away, property owners and tenants reverted to one-year timelines.
Short-term leasing was the immediate way that the retail sector pivoted according to the pandemic’s hazy outlook. Shorter commitments meant lessened risks, making this a key strategy for tenants.
However, property owners took a hit. In times of uncertainty, it’s safer to have a portfolio of long term leasing contracts. These single-year leases were far less stable – but in the circumstances, it was better than no lease at all.
More Time, Lower Price
In order to solve the problem of shorter leases, property owners have made another compromise.
Today, CRE owners are offering lower rent rates for longer leases. This means a tenant gets a better deal if they opt for a longevous contract. While it does reduce the asset’s annual returns, it also keeps rent pouring in – which can be a vital lifeline during a crisis.
This trade-off is proving successful for the property owners and tenants who are trying it out. It’s attracting tenants and prompting them to sign for longer durations. The longer timelines is giving property owners a stable stream of income for years to come.
What’s coming next? To find out, be sure to keep your eyes on the new trends emerging in retail leasing.