Despite the fact that relief has been made available to small businesses throughout the COVID-19 pandemic, it's estimated that more than 80,000 have already closed their doors on a permanent basis -- and that's just through the end of July. Of course, that's bad news for commercial landlords, who may now be staring at a major rent deficit.
But it's not just mom and pop operations that are dropping like flies. A number of major retailers are closing stores and have not paid their rent in full through July, and if this trend continues, a lot more commercial landlords stand to get hurt.
Who's not paying?
The list of big-name companies that have not been paying rent, or not coming close to paying in full, is extensive. Restaurant chain Chuck E. Cheese, for example, paid just 3.09% of its rent at the end of July. Meanwhile, The Gap (NYSE: GPS) paid 15.83% of its rent at the end of July. And these are just a couple of well-known names.
In fact, many retailers not only aren't paying rent but are making plans to close stores. This includes smaller retailers as well as department stores.
Franchises are feeling the pain, too. Pizza Hut is planning to close 300 locations in the near term while other restaurant chains are gearing up to do the same. All of this spells bad news for landlords, who face delinquent rent and vacancies in the not so distant future.
How can commercial landlords weather the storm?
Clearly, commercial landlords have a rocky number of months ahead between rent delinquencies and leases that are unlikely to be renewed. But rather than throw their hands up in the air, landlords can instead favor a model of flexibility.
In the coming months especially, commercial landlords will need to grant tenants a fair amount of leeway. This especially applies to small businesses that don't have the same access to capital as larger retailers do. By negotiating lease terms and being flexible with rent, landlords can not only do their part to generate some income but also help countless businesses avoid falling victim to permanent closures. And while that benefits those businesses, it also benefits the landlords who want to retain them as long-term tenants.
Of course, landlords may have less leeway when it comes to bankrupt tenants. At that point, there's a legal process involved in which tenants must decide whether to retain an existing lease or reject it. And unfortunately, rent payments are not guaranteed during this decision-making process. Commercial landlords may therefore need to seek legal help when entangled in bankruptcy proceedings.
When will the bleeding stop?
Lawmakers are currently in the process of working out a second stimulus package that could include a new round of small business relief. That could, in turn, make it a lot more feasible for small businesses to keep up with their rent in the coming months. But even if that happens, commercial landlords who rent to larger retailers may be in for a series of financial blows in the near term.