One of the biggest hurdles throughout this pandemic has been rent. When COVID 19 hit, the market was high and so were rents. Many franchise concepts strained their financial models to pay the rents demanded in the top centers.
Thanks to government relief packages and retooled business models, most franchisees held on. Smart operators and franchisors negotiated with landlords, many of whom were willing to defer or prorate rents. But it was not a great outcome for everyone and as the virus spikes, many consumers are again withdrawing and not shopping.
According to research from Engagious, the stressors of 1) contracting COVID-19, 2) uncertainty about personal finances and 3) the general pressure on American society have severely cut down activities. Participation in retail is down to 56% on the high end and movie attendance is at 4% on the low end. Location-based franchises feel the decrease in sales and the property owners are losing tenants.
But there is a silver lining. Rents are coming down.
In their report, “Under Pressure: Rents in Retail are Going Down,” Keyser, the retail real estate specialists report, retail rental rates will be driven lower than in other recessions by a weaker economy, continued growth in e-commerce, increased social distancing practices and elevated vacancy rates. In early April, 11% of 4,000 restaurant owners surveyed by the National Restaurant Association anticipated closing permanently. Major retailers are filing for bankruptcy. This recession is different because most small businesses do not have the cash to survive the crisis if it is prolonged. General research is showing that the recovery might be slower than anticipated as the virus refuses to slow down.
These are stressors on landlords which can be a silver linings for your franchisees.
Change your focus – stop referring to the individual and talk about the product – income property. These sites exist for one reason – to generate income for the owner(s). Every day that a property sits empty defeats the purpose of income property and those losses, including fixed costs such as taxes and insurance, are rarely recovered. Businesses fail when they don’t have the reserves to pay back rent, so suing them for it is not effective for the landlord. They must get that space filled quickly.
So how is this a boon to your system?
Every system has one or more sites that are tired. When it opened, it was probably an “A” site, but trends and traffic patterns change and after a full term and a few renewals you have to ask, “Is that site still optimal for the brand?” If a franchisee brought it to you today, would you approve it? If not, consider using this time to relocate.
What To Do Next
Review all the leases in the system.
All the major franchise management software platforms have a compliance module that does this or look at specialists such as Leasecake. Whatever you use, gather data now!
Look for leases in locations that are tired or lost the anchor tenant; where the franchisee is due to renovate and has already depreciated the original tenant improvements. Now weigh those factors against the individual performance and approach the franchisee with the idea. It could result in a refreshed brand in a great location at an affordable rate.
- Approach your top performers who might be in a position to expand the brand’s footprint with a great deal.
- Work with a great real estate resource such as Keyser who can identify and vet these deals before they disappear. Even if your top producing franchise is seeing revenue declines, know that many in smaller and/or newer brands also struggled and may have already defaulted. Look for their existing locations across the country and be aggressive. Landlords are always looking to upgrade their tenants to more successful brands.
- Negotiate well. The landlords realize that every recession has a recovery and they will want to recapture rent quickly. Be prepared with statistics and trend lines to negotiate the lowest rents for the longest time. Negotiate aggressively for generous Tenant Improvements.
- Close deals! Franchise development lead flow is up, keep the momentum going by identifying suitable properties with new, favorable lease terms in your markets in advance. This can greatly improve your development ramp.
This is an opportunity to create value as a franchisor. I have said in previous articles that this pandemic has presented a special opportunity to build value into the franchisor and continuing fees through your leadership, reconfiguration of the model, marketing and messaging … now, add value by being the resource for the best real estate deals.
You can do this with little strain on you and your resources. This is a great time to engage third party experts who can do this for you. People such as Ty Brewster at Keyser are great resources because they are tied into a huge network of developers, owners, landlords and rental agents. They may know about rent deals before they hit the market. If you or your large multi-unit franchisees need assistance managing and tracking all the leases and details of the properties, then reach out to Taj Adhav at Leasecake for more information.
Whatever your tactic, this is a new strategy for growth and saving money in an unprecedented time. Show leadership, develop value and grow the brand. It’s a tough time, but you want to be on the leading edge of the upward curve.