Power Shifts as COVID-19 Closures Affect Commercial Rental Markets

Los Angeles has long been the home of a major power imbalance between renters and tenants. For the past couple decades, there simply has not been enough supply to match demand. Los Angeles has a red-hot job market, the weather is phenomenal, and because we almost never experience any downward trends, much of the real estate supply is gobbled up by investors before even reaching “mom and pop” buyers. These factors have emboldened landlords to charge ever-increasing rents to their tenants because there is almost always someone willing to take on high costs in order to live or work in such a desirable metropolis.

But with the COVID-19 response forcing the extended closure of thousands and thousands of commercial properties, there may be a serious shift of power on the horizon. Earlier this month, the venerable Starbucks coffee chain sent a form letter to 9,000 of its commercial landlords with a simple but provocative message:

“Effective June 1 and for a period of 12 consecutive months, Starbucks will require concessions to support modified operations and adjustments to lease terms and base rent structures, so we can withstand this uncertainty together.”

Without coming right out and saying it, Starbucks is essentially demanding a decrease in rent and opening the door to essentially re-writing the leases that they had previously agreed to. The letter does not go into specifics, but it does posit that “it is clear that the value of commercial real estate has changed.”

The letter ends with, “We will be in touch soon” and is signed by Roz Brewer, the company’s COO and Group President of the Americas.

In sending this letter, Starbucks appears to be initiating a rather bold negotiation tactic and is seizing the opportunity to re-calibrate the power dynamic between its stores and its landlords. Starbucks is essentially betting that the commercial rental markets will be so impacted by COVID-19 that landlords will have little choice but to accept less in rent and on less favorable terms.

Starbucks is probably not wrong. In the wake of this pandemic, we can only wonder how long brick-and-mortar industries will suffer. One can easily imagine that certain types of businesses will simply never come back. Further, how many citizens are going to bet on a new business and open up a new retail/restaurant business in such uncertain times? Answers and estimations are hard to come by. But Starbucks is not going anywhere. The brand has been ubiquitous for decades and their offerings of caffeine and sugar continue to delight its loyal customers (not to mention the fact that hot coffee is not suited for home delivery).

Starbucks is uniquely positioned to test the waters on the commercial rent issue. Will landlords gamble on alienating Starbucks when there may not be a potential replacement tenant if Starbucks picks up and leaves? It is likely that some landlords will make concessions to Starbucks (by lowering rents, lengthening, or shortening the lease terms, or deferring rent beyond what local officials currently require), but many may not. It is a risk that Starbucks can take because, well, they are Starbucks.

Can smaller tenants expect to be able to renegotiate their commercial leases? It seems likely. After all, a lease is just a contract—and if both parties to the contract agree to changing the terms of the contract, they are free to do so. And there is no denying that taking in less rent is more favorable to taking in no rent at all.

While most businesses do not have as much bargaining power and capital at their fingertips as Starbucks does, the fact remains that the law of supply and demand controls the rental market. With demand dropping and supply rising in commercial markets, it may be wise to use this rare shift in the Southern California landlord-tenant power dynamic to seek amore favorable lease.

If you have any questions about your lease or how best to renegotiate it, do not hesitate to contact Shenon Law Group for a consultation. Shenon Law Group is a full-service law firm able to protect your business and help you take advantage of rare opportunities as they arise.