Starbucks Brews Up Rent Reduction of 25%: Other Retailers Follow

Discussion in 'Economics' started by ByLoSellHi, Jun 1, 2009.


    I have first hand knowledge of this having just sold a retail plaza where I was getting requests from national tenants for rent reductions.

    Because I'm ethical, the buyer (a REIT from Hoffman Estates, Illinois) was apprised of this by me, in full detail, and I even calculated NNN lease income assuming I granted an across the board rent reductions for them to see ahead of the purchase.

    This isn't just Starbucks - it's nearly every national retailer, from Great Clips to PetSmart to GameStop, and in almost every region of the nation - can you imagine if you built a retail center based on rents calculated at 15% to 25% higher, you bought the land during the peak of the bubble, and paid 30% more for construction because the trades were busy back then and the materials were in true demand, and you are being bombarded with these requests now?

    Friday, May 29, 2009

    Listen to the show
    Starbucks brews up rent reduction

    A Starbucks Coffee shop in Miami, Fla. (Joe Raedle/Getty Images)

    Starbucks is trying to cut costs, negotiating with some landlords to reduce rent for its stores by as much as 25 percent. Amy Scott reports.

    KAI RYSSDAL: One of the bright spots you keep hearing about the economy is that there's a little more wiggle room when it comes to what you pay for stuff. Everything is on sale. For Starbucks that apparently includes the rent. The coffee chain is asking landlords for a break as Marketplace's Amy Scott reports.

    AMY SCOTT: I met real estate economist Sam Chandan at a Starbucks in Soho. Starbucks hasn't been selling enough of those fruity drinks. The coffee chain has closed hundreds of stores, and plans to close more.

    SAM Chandan: What this creates is a situation where they have a very credible threat in approaching landlords and saying that for this particular location to be profitable, we need some concession on the rents that we're paying.

    Starbucks didn't reply to messages today. But Bloomberg News reports the company has been pushing landlords to cut its rents by as much as 25 percent. Chandan says in a recession, landlords have good reason to play along.

    Chandan: Even in a very busy location like this one in Soho, it would be pretty tough to find a new tenant in this market.

    Like many homeowners, commercial landlords took out huge mortgages during the boom. They count on rents to keep making those payments. An empty storefront can turn other tenants off and drive down a building's value.

    Michael Jackowitz is a real estate lawyer. He saw so much potential for negotiating, he started a business. He says he's helped a national restaurant chain, a mom and pop retailer, and a theater company lower their rents.

    MICHAEL JACKOWITZ: Rent is for the most part people's first or second largest expense and they need help addressing it.

    For those of you wondering, Jackowitz says by all means try this at home. Residential renters may not have as much clout. But many landlords may be happy to keep their units occupied, even for a smaller check.

    In New York, I'm Amy Scott for Marketplace.
  2. BLSH, in your experience, are landlords obligated to notify and offer the same reduction to all tenants? Is it a common thing to have in a lease agreement?

    BTW, a few months ago the local Arby's asked for a rent reduction when their lease expired. The landlord said FOAD. The Arby's franchisee said FOAD. Result - empty Arby's building.
  3. It depends on the specific lease, legally speaking.

    Most leases (90% - a guess?) written in the last decade have been fixed rent, but some have been tied to gross sales, or )gross sales per square foot, or some other metric that attempts to either put a floor or cap on the amount the tenant has to pay or should pay.

    If it's a fixed rent lease, then no, legally speaking, the landlord can be inflexible.

    If the tenant is weak, they may file for BK.

    If the tenant is not weak, they may still move out (unless there's a 'no go dark' provision), in which case, the landlord still gets rent but has to make reasonable attempts to re-lease the space and should (for the same money or more, if possible - not possible now), or they'll be stuck with a dark space that hurts the plaza or mall.

    Malls and plazas thrive when fully occupied. This creates 'synergies' as asshole real estate brokers call it (why can't they just say foot traffic or more intense use? - asshole brokers).