When lifestyle brand J.Crew filed for bankruptcy in May, it was clear that the retailer would seek to cut costs in order to conserve cash. And this week, it announced that it's renegotiated its store leases with landlords across the country in an attempt to do just that.
All told, J.Crew anticipates about $130 million in savings on rent alone as part of its recent move. In the meantime, the retailer has managed to reopen over 450 stores, or roughly 95% of its locations.
Clearly, negotiating a rent deal worked out well for J.Crew. For its landlords, not so much. And given the number of struggling retailers out there, commercial landlords may need to brace for similar negotiations in the coming months.
Retailers will be looking to cut costs
Dozens of retailers have filed for bankruptcy in the course of 2020, and some of those filings were spurred by the financial damage caused by the COVID-19 pandemic. Upscale department store chain Neiman Marcus filed for bankruptcy in early May. J.C. Penney (OTC: JCPNQ) filed for Chapter 11 bankruptcy protection on May 15. Kitchen and home goods retailer Sur la Table went the bankruptcy route in July and is being purchased in a deal that is expected to keep 50 of its 121 stores open.. And Brooks Brothers, a mainstay in higher-end malls and shopping areas, initiated its bankruptcy filing in July as well. Brooks Brothers is in the process of being bought by Simon Property Group (NYSE: SPG) and Authentic Brands.
These are just a handful of examples, but the point is that a lot of retailers have struggled with revenue of late, and the COVID-19 crisis has only made an existing crisis even worse. As such, a lot of retailers will be looking to cut costs wherever possible -- and that could mean pursuing discounted rent. And if J.Crew managed to negotiate its lease agreements, there's a good chance retailers with similar financial concerns and constraints will seek to do the same, which could put commercial landlords in a very tough spot.
On the one hand, landlords may be willing to come down on rent prices if it means retaining tenants and avoiding vacancies. On the other, signing longer-term leases at lower price points could impact a lot of landlords' and real estate investors' bottom lines.
All of this comes at a time when many retailers were already reassessing their real estate strategies and closing stores in favor of boosting online sales. In early February, before the pandemic took hold, Macy's (NYSE: M) announced that it would be closing around 125 stores, or one-fifth of its locations, over the next three years and shifting resources toward online operations. If more retailers continue to pivot to online models, the demand for physical storefronts will drop, leaving commercial landlords in a similarly tough spot.
As such, landlords with retail tenants need to brace for some changes in the near term. J.Crew's recent negotiation may be a sign of less profitable things to come.