Brick-and-mortar retail leasing in the time of the pandemic

How is the tenant-landlord dynamic likely to change?
Dennis Van Staalduinen
Dennis Van Staalduinen is the executive director of the Wellington West Business Improvement Area. (Photo by Mark Holleron)
Editor's Note

This article originally appeared in the BOMA Ottawa Commercial Space Directory. Read the full publication here.

Thanks to the pandemic, retail will never be the same.

It’s easy to consider this statement only in the context of e-commerce growth. Shopify, the Canadian Internet Registration Authority and others have released plenty of data points charting the dramatic increases in online retail activity among small businesses.

But brick-and-mortar businesses are still dominant retail players, despite the challenges of 2020. Stalwart entrepreneurs continue to set up shop on traditional main streets and other high-traffic locations across the region. Consumers still want the experience of visiting a local store in-person, even if they also value the convenience of online shopping more than ever before.

What does all this mean for the relationship between a retailer and their landlord, particularly if the retail location resides in a mixed-use office building?

Many retailers will recover only after months of late rent payments and other challenges that may have strained the relationship with their landlords. Others will have had to shut down, leaving landlords with vacancies to fill. Many landlords will have found themselves limited in how much leniency they could grant struggling tenants because of their own obligations to lenders.

“I think the symbiotic relationship between property owners and tenants has become that much more obvious to everyone,” says Dennis Van Staalduinen, executive director of the Wellington West Business Improvement Area. “In the best cases, where there was a sympathetic landlord with a long-term holistic view, those relationships got stronger.”

New lease models

The flipside, of course, is that in those instances where the landlord/tenant relationship may have already been strained, the pressures of the pandemic only made it worse.

Will these experiences lead to a new model for managing lease arrangements? Perhaps one in which landlords forego fixed lease payments based on square footage in favour of taking a percentage of revenue?

In his travels, Van Staalduinen is hearing a lot of talk about alternative approaches to leasing space, but so far that’s all it is – talk.

“The idea of revenue-sharing and looking at different ways of leasing space – I would love to think that would be the case … but we are not seeing obvious examples of it yet,” he says.

Judy Lincoln, executive director of the Westboro Village BIA, agrees that it’s too soon to reliably predict how leasing conventions may change. 

“It’s too early to tell,” she says. “I think everyone is still focused on the day-to-day, not necessarily the longer term.”

The one thing that is certain for her BIA at this stage is that retail will remain a key part of future mixed-use commercial development. As 2020 drew to a close, two new office buildings were under construction in her BIA, both with ground-level retail. Two more nine-storey mixed-use commercial buildings are in the works. And while some businesses have closed, relocated or gone entirely virtual, new brick-and-mortar ventures do continue to open in the BIA. The resulting net impact to date is neutral, bordering on positive.

Mark Kaluski is chair of the Ottawa Coalition of Business Improvement Areas, as well as chair of the Vanier BIA. He does expect some specific changes in the contract clauses of how lease agreements are structured.

“We predict that leasees will ask for contract clauses that protect in the case of future pandemics, expectations around landlords applying for government programs (such as the Canada Emergency Commercial Rent Assistance program), shorter terms (with more forgiving out clauses) and certainly a reluctance to sign a personal guarantee,” Kaluski said.

Ultimately, the focus will be on mitigating risk by sharing it. Landlords will have to be more flexible and innovative to woo tenants and fill vacancies left by the pandemic.

“A percentage-of-sales (lease) model could be very appealing, in a way that it has never been before,” Kaluski says.

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