The time between a retail lease signing and the first rent payment has grown to accommodate pandemic hurdles like delays in delivery of construction material, backlogged city planning and permitting departments, and apprehension over further COVID-19 restrictions on commerce. Prior to the pandemic, apparel and hard goods tenants typically had 60 to 90 days to obtain permits and complete tenant improvements between signing leases and the start of rent payment, while restaurants often received 90 to 120 days. Today, however, many tenants and landlords are agreeing to extend that grace period, or “lag time,” by an additional 30 to 90 days.
“This has always been a carefully negotiated point, even pre-pandemic,” said Scott Burns, a managing director and retail brokerage lead with JLL in Los Angeles. “Landlords want to get rent started as quickly as possible and retailers want to get open as soon as possible, but these days, it is being addressed with more caution because of obvious challenges.”
The extent to which tenants do secure additional lag time depends on their size and credit rating — or lack thereof — their type of operation, the type of retail center and other variables. Every deal is different, brokers say. Some landlords still may be able to demand rent payments beginning 90 days after a lease is signed, regardless of whether a buildout is complete or the tenant is open, and others may provide free rent beyond the initial grace period.
Shortages and delayed deliveries of construction materials form the biggest driver of time extensions at the moment, said Barry Moore, a partner with College Station, Texas-based brokerage Stafford Barrett. But he also noted retailers are concerned that a new round of COVID-related restrictions could delay construction work and opening dates.
“Tenants want to give themselves as much time as possible on executing a buildout,” added Moore, who primarily represents landlords. “They just don’t know what the future might hold.”
Amid frenetic leasing activity, the fast-growing region of College Station and nearby Bryan, Texas, saw lag time widen from 90 days before COVID to 120 days. Landlords today generally collect rent when the tenant opens or five months after the lease is signed, whichever is earlier, Moore said. But large tenants and those with good credit profiles can push it to six months.
Lag times for national retailers often depend on how many new stores they want to open in a specific time period, noted Adam Cummings, a senior vice president with CBRE and a practice leader for its Mall Tenant Representation practice. Many retailers pursuing deals now are looking to take possession of the space in the first or second quarter of 2022, he added.
For mall tenants, much of that lag time stems from the approval process. A tenant first must submit its plans and designs to the landlord for an OK before taking it to the city. At that point, it can take four weeks at best for a city to issue building permits. In some municipalities, it can take 10 to 12 weeks, said Cummings.
Like Moore, however, Cummings noted that tenants still are concerned about COVID. The lockdown in 2020 prevented some retailers from taking possession of space, he said, and they had to ask landlords to push back the due date of the first month’s rent. “Timing is definitely a conversation that’s taking place because the last thing tenants want to do is sign a lease that says they start paying rent on X date and then COVID shuts them down again,” Cummings said. “Building in flexibility is the key.”
Delays in plan approvals, construction permits and inspections are fueling negotiations for more time, as well. After being interrupted in 2020, for example, restaurant and retail leasing velocity accelerated in the first half of 2021. Openings now exceed 2019 activity, Burns said. That has created a backlog of applications that cities need to work through.
Additionally, several big municipalities in California like Los Angeles and San Francisco closed their own physical doors when the virus struck and moved to digital application systems, pointed out David Glassman, senior project manager for Glassman Planning Associates, which helps tenants expedite the permit process. Previously, Glassman would review plans in person with building and safety, electrical, mechanical and other city officials, and the parties often could remedy whatever issues needed to be corrected then and there. That process typically delivered a tenant improvement permit in about two months, he added, but today it can take four months or longer.
Indeed, San Francisco returned to in-person plan checks in July, largely as a result of software glitches and bottlenecks that impeded the delivery of permits, Glassman reported. Los Angeles remains shuttered. “Going digital has caused a huge disruption for tenant improvement permits, which were fairly easy to get,” Glassman explained. “People today are just further removed from the process.”
Andrew Kahn, an executive managing director of retail services for Cushman & Wakefield in New York, downplayed the extent to which construction material delays impact the lag time between lease signings and openings. Getting people in position to sign deals is another matter, he said. “Everything in this environment is taking longer.
The big factor in getting things done is really the logistics of people traveling and inspecting sites, getting decision makers followed by design teams into properties. And international travel restrictions are still in place and some restrictions on corporate travel are still in place. That’s a big issue right now.”