For the last 18 months, Noah Shaffer has been counseling retail landlords who lease space to Pier 1 Imports to be ready for the company to declare bankruptcy.
Pier 1, known for its eclectic mix of home goods and furniture, filed for Chapter 11 bankruptcy protection in March. This week, the Fort Worth, Texas-based retailer said that it was unable to find a buyer for its business and that it will close all stores nationwide. Shaffer’s clients, however, were ready and already in talks with new tenants to take the space.
Navigating tenant bankruptcies will be far more challenging in the era of Covid-19. The novel coronavirus pandemic has forever changed the restaurant and retail business, beginning with stay-at-home orders across the U.S. in March and April to a severe drop-off in consumer spending. A wave of bankruptcies is expected in both the retail and restaurant industries in the coming months, affecting everyone from national chains to mom-and-pop shops.
Here’s what Shaffer is telling his clients to prepare as best they can. This interview has been edited for brevity and clarity.
Get out in front of a potential bankruptcy. “Our main thing is determining who’s at risk from a tenant perspective. When we come to that conclusion, we start to put a plan in place. Are your rents above market rate? Are there tenants who would want the site, or are we going to be left high and dry? It’s a challenging time, but the biggest part of getting through [a tenant] bankruptcy is to know what you’re getting into.
“You’re forced to make quick decisions in bankruptcy. You find out if your lease is going to be rejected in the first couple weeks, and it’s much better if you start making decisions six or eight months ahead than if you have to do it in two weeks.”
Covid-19 has changed bankruptcy, too. “We’re telling our clients that bankruptcy is not what it was 18 months ago, where you could say, ‘Hey, you can probably restructure or sell the operations as a going concern, and you’ll still be my tenant.’ Right now, it’s not a strong option. And the courts are making decisions that are somewhat negative toward landlords.”
If your tenants are mom-and-pop shops, expect to step into the role of business consultant. “We always push for annual financials for that individual location just so we can understand how they’re doing — where the money is going, what’s being spent. It’s important to monitor that and to stay in constant contact.
“There are quite a few landlords and managers in the Tampa Bay area doing a lot of creative things, like collective marketing for tenants, so that survival is not based on their own individual ability to market. You’re in a partnership with the tenants and yes, it’s a business negotiation and relationship, but at the end of the day they are your customer. You’re selling and leasing space in your property, so treating them like a customer and helping them provide value — even if they go under, it’s a great story for re-marketing the property. It shows you’re favorable to the tenants.”
Now is not the time for hardball. “Ultimately, when you get these rent deferral and reduction requests, you still have to understand how the tenant is performing at your site and how have they been as a tenant over the years? We expect a drop in rental rates and the number of leases being signed, so if you take a hardline and they ultimately go into bankruptcy or close, you might be stuck with a vacant building.”