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There should always be a “plan B” – Retail property owners should always be prepared (2019)

In the 30 years since the Domino company was founded, today’s inner-city retail situation in Germany has changed dramatically from that of 1989. Most mayors can now only dream of the once undisputed ranking of the traditional pedestrian zone as a magnetizing promenade with powers of attraction that extended far beyond their own city limits.

If the increasing franchising of the retail trade (due to the striving after economies of scale) was bemoaned at the start as the main reason for the emerging ennui, growing online trade has now helped intensify the crisis in many places. The consequence has been a loss of diversification within the industry, partly also combined with lowered quality of what is being offered, making the traditional prime inner-city location increasingly less attractive and leading to a reduction in footfall in the area. In turn, this has increased vacancy rates and sparked a spiralling decline of importance in many places.

The bad news for inner-city retailing also continues this year. Some economically threatened retailers like Gerry Weber have been able to rescue themselves for the time being – albeit with a significantly decreased number of stores. Others, however, have been taken over by competitors or integrated into brand families. The names of particularly hopeless cases have now disappeared from storefront windows for ever. The textile and shoe retail trade is currently the hardest hit, but other segments are now increasingly coming under pressure. What does this development in general, and the omnipresent announcements of a consolidation of the branch networks in particular, mean for the owners of commercial properties in the prime locations of pedestrian zones? Although active municipal economic support can influence specific decisions regarding urban development to be made in the town hall, they have no effect on the gradual changes in consumer behaviour. Nowadays, consumers spend their money on different things than they did several years ago. The clothing and shoes sector must compete today for the favour of the customer with, for example, the cult of the latest smartphone, subscribing to streaming services, and various “healthcare” offers. The oversaturation of too many – and often generic – goods in retail trade, together with shoppers’ increasing desire for individualisation, is leading to a polarisation of the offering: “Cheap” or “very special” is the brief, with the consequence that retail trade is losing out substantially in the middle price segment and that those prime stores that have concentrated on this type of store stock are threatened. It has now become almost impossible to earn enough to pay the rents that were once agreed in many places.

It has therefore now become common practice for representatives of retail companies or their external consultants to request a significant reduction in their rent or contract period, generally just before the deadline for extending their contract. The distance from commercially reasonable wishes to unfair demands can sometimes be quite short in this respect, especially considering that it is almost impossible to get realistic alternative offers within a few weeks. Where retail property owners were once able to sit back and relax after concluding a rental contract generally for a fixed 10-year term, today they must deal with new contracts with fixed terms of usually around 3-5 years. And even those rental incomes under current contracts that should actually be protected are no longer sacrosanct. The threatening sword of Damocles of a possible insolvency is automatically associated with the option of extraordinary termination of existing contracts by an insolvency administrator during such a procedure.

Unprepared landlords can then make mistakes. Either they react only once a tenant announces a meeting or, at the very latest, when the tenant’s notice of termination has already landed on the table. In both cases there is the risk of unexpectedly losing a lot of money. If a retail chain announces the closure of stores, many owners still continue to hope that this will not affect the branches in their property since, in their view, it is the best location. Many continue to feel secure because of their contracts and often allow themselves to be consoled by their longstanding tenants right up to the end – or they capitulate to their demands immediately, without checking the situation. This is very often done in the hope that concessions will now provide long-term peace of mind. The example of Strauss Innovation demonstrates that this is often not the case: Some building owners had to go through a particularly tragic economic experience with their former tenants, who were operating 80 branches of concept stores. Of these, 19 were closed during the first insolvency protection proceedings in 2014. In autumn 2015, an application was made to re-open an insolvency procedure with reference to financial problems associated with the winter collection, which was repeated in September 2016, this time conclusively. The textile retailer Elanza then opened as successor at 13 locations, including Dusseldorf, Cologne and Ratingen, and also became insolvent after just a few months. A similar scenario played out for the landlords of the Swiss fashion retailer Charles Vögele. After its bankruptcy, the clothing chain Miller & Monroe moved into 200 locations as the next tenant and, like their predecessors, also filed for insolvency in March 2019. The total amount of rent reduction granted by the building owners as their contribution to the rescue mission during this period is not known.

Just a case of bad luck or also (at least in part) the landlord’s fault? There had been early warning signs for almost all the latest insolvencies in retail trade, and in the case of Straus Innovation, these went back several years. Several months before the deadline for exercising an option or at the first suspicion of possible economic problems for their tenants, landlords should therefore try to get their hands on meaningful information to let them reliably assess the situation and decide how to proceed. Who else could be a better partner than experts who have kept abreast of the situation for 30 years and who have an understanding of the respective expansion or retraction behaviour of, currently, almost 1,000 retail businesses? The expertise of Domino, with their focus on around 400 city locations across Germany, is an extremely effective “early warning system” and can answer many questions, such as: Which of the approximately 500 larger, particularly creditworthy retail companies are still renting or want to change their location in the city or region or reduce the number of their branches overall? Which new players on the market are not just innovative but also have a promising perspective in the current retail environment over the long term? With an internal target of an average of 5-10 new openings per year across Germany, many companies nowadays do not necessarily define the location for this. The priorities of a company often change through direct discussions or over the course of concrete negotiations if it comes down to “either or”, as nowadays the overall package is often decisive. The results of such a professional overall view can then certainly lead to the conclusion that it makes sense, when there is a lack of more creditworthy alternatives at that point in time, to extend the contract with the existing tenant. Or “Plan B” is successfully put into action and then, well prepared, if there is a potential new and solvent tenant, further developments can be awaited. New contracts negotiated with foresight generally begin with sentences such as: “This rental contract is conditional on the termination of the rental contract with the existing tenant up until …” Early action prior to the “worst case” allows landlords to sleep easier. And it can minimize losses when an option is exercised; when a tenant requests a change during the term, or also if the current “still-sitting” tenant should become insolvent. Because forewarned is forearmed.