US landlords grapple with thousands of store closures

Keeping properties vacant can be less risky than refusing to lower rents

Alistair Gray and Judith Evans


Vornado's decision to compromise and cut Forever 21's annual rent at its Broadway store stands out in the retail industry © FT montage / Bloomberg


When Forever 21 was struggling to pay its bills last year, the cheap chic retailer’s landlord at Times Square in Manhattan was so determined to keep the store open that it slashed the rent, making the one concession building owners try to avoid.

As part of a deal with Forever 21 after the company filed for Chapter 11 bankruptcy protection, Vornado Realty Trust more than halved the $20m in annual rent it had been demanding for the celebrated site on Broadway and another prime space in Midtown.

Vornado’s decision stands out in an industry that can be so unwilling to compromise on price that it sometimes prefers to let site incomes drop to zero as retailers vacate unprofitable stores.

Despite thousands of closures across America that have pushed vacancies in shopping malls to their highest level in at least two decades, overall retail rents are still creeping up.

“It’s a head scratcher to me why some landlords are not willing to do more in terms of rent concession to prevent companies from having to file for bankruptcy,” said Mohsin Meghji, chief executive of M-III Partners, a restructuring firm that handled the bankruptcies of Sears and Barneys.

bar line chart showing despite record-breaking vacancy rates, asking rents remain high


Real estate executives said the calculation was not always so simple. Landlords have a lot to lose by making compromises with stricken tenants and there can be sound business reasons for leaving properties empty.

Steven Soutendijk, executive managing director at real estate services group Cushman & Wakefield, said that those unfamiliar with retail real estate may “look at vacant retail stores the way they’d look at one-bedroom apartments — that if a landlord has a vacant space and cuts the rent, it would get rented within 30 days. It doesn’t work that way.”

Rent typically comprises only about a tenth of retailers’ costs, making landlords sceptical that reductions are enough to fix broken businesses. Shoe retailer Payless, for instance, filed for bankruptcy in 2017 even after securing what it described as “significant” rent concessions.

Jaime Ward, head of retail finance at Citizens Bank, said there were cases in which “it doesn’t matter what the rent is. If you lower it to zero, they’re probably still not going to make money.”

The length of retail leases, which traditionally last at least seven years, makes owners particularly reluctant to lock in tenants at depressed levels.

At higher-quality properties, landlords risk damaging the image of the mall or street if they accept the first willing replacement.

“A Dior, for example, would not want to be between a hair salon, a recruiting centre and a mini golf course,” said Vince Tibone, analyst at California-based property advisers Green Street.

Some anchor retailers have lease clauses that give them approval rights for tenancies elsewhere in the same shopping centre.

Owners also worry that accepting lower rent at one mall unit will encourage other tenants to make similar demands.

A graphic with no description


Ultimately, reducing the rent can force the owner to write down the value of the property. An empty space may be temporary but a tenant signing up at a lower rent is proof the property is worth less than it was. The cash required to take on new tenants, from brokerage commissions to store refits, also makes some pause.

While landlords insist they are not being delusional in leaving properties empty, the apparent refusal of some to be more accommodating on rents stands in contrast to the global financial crisis and its aftermath, which is the last time mall vacancy rates spiked. Asking rents fell for seven consecutive quarters after the collapse of Lehman Brothers in 2008.

At more than $45.50 per square foot the average asking rent for non-anchor mall tenants at the end of 2019 was the highest on record, according to Reis Moody’s Analytics.

Away from hard-hit malls rental costs at some sites have spiralled. Barneys New York was tipped into bankruptcy after the luxury department chain said the owner of its flagship store on Fifth Avenue demanded millions of dollars worth of additional annual rent.

The 4,450 announced store openings across the industry last year was less than half the 9,300 closures, according to Coresight.

With more retail failures on the cards property analysts are expecting more owners to buckle in the months ahead.

“It keeps the space occupied, paying rent,” Michael Franco, president of Vornado, said as he explained its decision on Forever 21 to Wall Street analysts in October. Forever 21’s lease term was also shortened as part of the agreement.

There are signs that some owners are not only reducing rents, but are being more flexible with lease terms, offering more temporary “pop-ups” or variable payments based on sales.

“Everyone is now more open to being more creative,” said Richard Johnson, a partner at Odyssey Retail Advisors.

“Our business is a supply and demand business and anyone who doesn’t understand that is foolish,” said Jeffrey Gural, chairman of GFP Real Estate, whose portfolio includes iconic New York properties such as the Flatiron Building. “If there are a lot of vacant stores then rents should go down.”

While the headline figures indicate rents remain elevated, the overall statistics do not tell the full story.

Asking retail rents eased in almost 30 cities in the fourth quarter, according to Reis, including Detroit, Indianapolis and St Louis.

Figures from Cushman & Wakefield show they are also under pressure in some of the most prestigious addresses in Manhattan. On a stretch of Fifth Avenue between the Rockefeller Center and New York Public Library, asking rents are down about 17 per cent year on year.

The figures also capture only rental demands — not what tenants actually pay. “On the ground, actual taking rents are down substantially over the last 36 months,” said Mr Soutendijk of Cushman & Wakefield.

Research group Green Street forecasts rents at the 100 best-performing malls to increase moderately over the next five years but to dip in weaker properties. Across the US market it expects rents to decline “for the foreseeable future”.

Penalties for empty storefronts

By leaving storefronts empty, landlords are not only forgoing rental income. They are also risking a backlash from officials who regard vacant retail space as a social scourge as well as a business issue.

Arlington in Massachusetts hits them with penalties. Ali Carter, economic development co-ordinator in Arlington, said the town of about 45,000 decided to act after 17 units on a single block were left unoccupied.

While the fee is only $400 a year, she said its introduction two years ago had been an effective deterrent and there were now only three vacancies. Some landlords, she said, “really needed a stick, not a carrot”.

Matt O’Malley, a city councillor in Boston, is calling for the city to enact a similar system. “We’re not seeing enough action to address the problem.”

How housing became the world’s biggest asset class

It is only a recent phenomenon



In 1762 benjamin franklin set sail from England to Philadelphia after several years away. On his arrival he was shocked by what he saw.

“The Expence of Living is greatly advanc’d in my Absence,” he wrote to a friend. Housing, he thought, had become particularly expensive. “Rent of old Houses, and Value of Lands…are trebled in the last Six Years,” he complained.




If Franklin were alive today, he would be furious.

Over the past 70 years housing has undergone a remarkable transformation. Until the mid-20th century house prices across the rich world were fairly stable (see chart). From then on, however, they boomed both relative to the price of other goods and services and relative to incomes. Rents went up, too.

The Joint Centre for Housing Studies of Harvard University finds that the median American rent payment rose 61% in real terms between 1960 and 2016 while the median renter’s income grew by 5%. In the 18th century farmland was the world’s single-biggest asset class. In the 19th century the factories used to power the Industrial Revolution took the number-one spot. Now it is housing (see chart, below).




In capitalism’s early days house prices did see short-term booms and busts: 17th-century Amsterdam experienced a few housing bubbles, as did 19th-century America. Three main factors, however, explained long-term price stability.

First, mortgage markets were poorly developed.

Second, rapid improvements in transport meant that people could live farther away from their place of work, increasing the amount of economically useful land.

Third, there was not much land regulation, meaning that housebuilders could build when they wanted and in the way that suited them.

“For most of us history,” say Edward Glaeser of Harvard University and Joseph Gyourko of the University of Pennsylvania, “local economic booms were matched by local building booms.”

After the second world war, however, housing markets underwent a revolution. Governments across the rich world decided that they had to do more to care for their citizens—both as a thank-you for the sacrifices and to ward off the communist threat.

To this end, they vowed to boost home-ownership. A country of owner-occupiers, the thinking went, would be financially stable. People could draw down on equity in their house when they hit retirement or if they found themselves in difficulty.

In the late 1940s and the 1950s manifestos of Western political parties became more likely to identify home ownership as a policy goal, according to research by Sebastian Kohl of the Max Planck Institute for the Study of Societies. Over time, the notion that owneroccupation was superior to renting became common, even apparently self-evident.

Policies to promote owner-occupation proliferated. In America the Veterans Administration made mortgages with no down-payment available to veterans in the mid-1940s. Canada established the Central Mortgage and Housing Corporation for returning war veterans. In 1950 the Japanese government established the Government Housing Loan Corporation to provide low-interest, fixed-rate mortgages. Changes to international financial regulations also encouraged banks to issue mortgages.

In a research paper Òscar Jordà, Alan Taylor and Moritz Schularick describe the second half of the 20th century as “the great mortgaging”. In 1940-2000 mortgage credit as a share of gdp across the rich world more than doubled. More people clambered onto the “housing ladder”. America’s home-ownership rate rose from around 45% to 70%; Britain’s went from 30% to 70%.

In previous centuries, a rise in demand for housing did not translate into structurally higher house prices. What had changed in the second half of the 20th century? One factor was transport speeds, which continued to improve but more slowly: trains and cars got only a bit better. So instead of moving farther and farther out to find accommodation, more people needed to look for somewhere to live closer to work. Land prices rose, and that fed into costlier housing.

The price of preservation

In the 1950s and 1960s governments constructed large amounts of public housing, in part to rebuild their cities after the devastation of the second world war. Yet at the same time many of them tightened land regulation, gradually constraining private builders.

In the 1940s and 1950s, for instance, Britain passed legislation to prevent urban sprawl. It provided for “green belts”, areas encircling cities where permission to build would be hard to obtain. Around the same time cities elsewhere, including Sydney and Christchurch, explored similar plans. From the 1960s American builders, too, began to have serious difficulty obtaining approval for building new homes.




According to calculations by The Economist, the rate of housing construction in the rich world is half what it was in the 1960s (see chart).

It has become particularly hard to build in high-demand areas.

Manhattan saw permission given to 13,000 new housing units in 1960 alone, whereas for the whole of the 1990s only 21,000 new units were approved.

A recent paper from Knut Are Aastveit, Bruno Albuquerque and André Anundsen finds that American housing “supply elasticities”—ie, the extent to which construction responds to higher demand—have fallen since the pre-crisis housing boom.

Why did the rich world turn against new construction? The post-war rise in home ownership may have had something to do with it. In 2001 William Fischel of Dartmouth College proposed his “homevoter hypothesis”.

The thinking runs that owner-occupiers have an incentive to resist development in their local area, since doing so helps preserve the value of their property. As home ownership rises, therefore, housing construction might be expected to fall.

Research supports that idea. One paper studies a ballot in 1988 in San Diego, finding that precincts with a larger share of homeowners had more votes cast in favour of growth controls. Another finds that parts of New York City with high home-ownership rates were more likely to implement measures which made development more difficult.

There is little doubt that the rich world is a less friendly place to build than it once was.

But to what extent is land regulation responsible for today’s sky-high prices?


Did China's Tencent Accidentally Leak The True Terrifying Coronavirus Statistics

by Tyler Durden


Ten days ago, shortly after China first started reporting the cases and deaths associated with the coronavirus epidemic, a UK researcher predicted that over 250,000 Chinese would be infected with the virus by February 4.

And while according to official Chinese data, the number of infections has indeed soared in the past two weeks, at just under 25,000 (and roughly 500 deaths), it is a far cry from this dismal prediction, about ten times below that predicted by the epidemiologists.




Is this discrepancy possible? Is the epidemic truly far less serious than conventional epidemiological models predicted? Or is China merely hiding the full extent of the problem?

After all, it the WSJ itself reported in late January , China was explicitly manipulating the casualty number by listing pneumonia as the cause of death instead of coronavirus. Subsequent reports that Wuhan officials were rushing to cremate coronavirus casualties before they could be counted did not add to the credibility of the official data.

But the biggest hit to the narrative and China's officially reported epidemic numbers came overnight, when a slip up in China's TenCent may have revealed the true extent of the coronavirus epidemic on the mainland. And it is nothing short than terrifying.

As the Taiwan Times reports, over the weekend, "Tencent seems to have inadvertently released what is potentially the actual number of infections and deaths, which were astronomically higher than official figures", and were far closer to the catastrophic epidemic projections made by Jonathan Read.

According to the report, late on Saturday evening, Tencent, on its webpage titled "Epidemic Situation Tracker", showed confirmed cases of novel coronavirus (2019nCoV) in China as standing at 154,023, 10 times the official figure at the time. It listed the number of suspected cases as 79,808, four times the official figure.

And while the number of cured cases was only 269, well below the official number that day of 300, most ominously, the death toll listed was 24,589, vastly higher than the 300 officially listed that day.




Tencent screengrab as of late Feb 1, showing far higher infections.

Moments later, Tencent updated the numbers to reflect the government's "official" numbers that day.



Screengrab showing higher numbers (left), chart showing "official" numbers (right). (Internet image)

This was not the first time Tencent has done this: as Taiwan Times notes, Chinese netizens have noticed that Tencent has on at least three occasions posted extremely high numbers, only to quickly lower them to government-approved statistics.

This is where it gets even more bizarre: contrary to claiming that this was just a "fat finger" mistyping of data, observant Chinese netizens also noticed that each time the screen with the large numbers appears, it shows a comparison with the previous day's data which demonstrates a "reasonable" incremental increase, much like comparisons of official numbers.

This led many in the mainland to speculate that Tencent has two sets of data, the real data and "processed" data.

In short, two camps have emerged: one, the more optimistic, speculates that a coding problem could be causing the real "internal" data to accidentally appear. The other, far more pessimistically inclined, believes that someone behind the scenes is trying to leak the real numbers, as "the "internal" data held by Beijing may not reflect the true extent of the epidemic."

Indeed, as repeatedly pointed out here and according to multiple sources in Wuhan, many coronavirus patients are unable to receive treatment and die outside of hospitals. Furthermore, a severe shortage of test kits also leads to a lower number of diagnosed cases of infection and death. In addition, there have been many reports of doctors being ordered to list other forms of death instead of coronavirus to keep the death toll artificially low.

What is the truth?

We leave it up to readers, but keep this in mind: on Jan 29, Zeng Guang, the chief scientist of epidemiology at China’s CDC, made a rare candid admission about why Chinese officials cannot tell people the truth in an interview with the state-run tabloid Global Times: "The officials need to think about the political angle and social stability in order to keep their positions."

And then, on Monday, none other than China Xi's called on all officials to quickly work together to contain the Coronavirus at a rare meeting of top leaders, saying the outcome would "directly impact social stability in the country."

Well, if China is mostly concerned about social stability - as it should be for a nation of 1.4 billion - it is easy to comprehend why the entire political apparatus in China would be geared to presenting numbers which seem somewhat credible - in light of the barrage of videos of people dying on the street - but not so terrifying as to cause a countrywide panic.

Then again, if China indeed had over 154,000 cases and almost 25,000 deaths as of 5 days ago, then no attempts to mask the full extent and true severity of the pandemic have any hope of "containing" the truth.

The French Banks Rivaling JPMorgan and Citigroup

Crédit Agricole and BNP Paribas have delivered top returns despite the many challenges facing European banks

By Rochelle Toplensky




France has more to offer investors than striking workers.

Its banks have produced shareholder returns to rival those of JPMorgan Chase JPM 0.69%▲ and Citigroup, C 0.15%▲ and there is no reason why the trend can’t continue.

U.S. bank stocks have generated average total returns of 17.1% over the past year, more than three times the 5.5% delivered by European peers.

Two big French lenders, however, are outliers.

Crédit Agricole shareholders have made a total return of 32% over one year, while BNP Paribas BNPQY -0.16%▲ investors have gained 27.8%—in the range of the largest U.S. banks.

Europe’s banking sector is unloved among investors. Banks are smaller than their U.S. rivals, as the regulatory patchwork in the European Union holds back cross-border consolidation.

Lenders face ultralow and even negative interest rates; anemic economic growth; trade tensions; increasing regulation; and competition from nimble financial-technology startups as well as much better funded U.S. rivals.

Last summer, regulators estimated that the banks would need €134 billion ($149 billion) in extra capital by 2027, though recent comments byAndrea Enria, chair of the European Central Bank’s supervisory board, have raised hopes that the figure might be much smaller.



However, the French economy has performed better than most of its European peers, putting the country’s lenders in a stronger position, while a competitive domestic market has kept bank executives on their toes.

This has allowed BNP Paribas and Crédit Agricole to maintain stable, investor-friendly business models: growing revenue, trimming costs, building capital and paying dividends.

As Europe’s third largest bank by market value, BNP has the scale many of its peers lack.

It has kept revenue and profit steady by focusing on servicing companies from the European Union that go abroad and foreign companies coming into Europe.

The bank reported a return on tangible equity of 10.3% for the three quarters through September and a respectable 12% Tier 1 capital ratio at the period end.

Crédit Agricole is roughly half the size of BNP. It offers traditional banking services but also insurance and mutual funds; it even owns the EU’s largest asset manager, Amundi.

This financial-platform business model somewhat insulates it from the region’s ultralow interest rates, and profit and revenue have grown modestly over the past few years.

At the end of September, the lender had an 11.7% Tier 1 capital ratio.

Europe’s banking environment isn’t getting any easier, and protests against French President Emmanuel Macron’s reforms could trip up the domestic economy.

Cost cutting is therefore likely the main lever for French banks to improve returns from here. France’s employment rules make this expensive and complex, yet there is fat to cut. BNP has a high cost-to-income ratio of 70%, while Crédit Agricole sits at a leaner 60%.

The past doesn’t predict the future, yet both banks do have a record of delivering strong returns through trying times.

BNP stock appears particularly cheap on 0.72 times tangible book value and a dividend yield of 6.3%. Crédit Agricole shares have risen to trade at roughly 0.95 times, with a yield of 5.6%.

JPMorgan said Monday that it is expanding in France by buying a piece of BNP Paribas—some of the bank’s former offices near the Louvre in central Paris.

U.S. investors might want to follow suit.

The Geopolitical Consequences of Australia’s Wildfires

By: Allison Fedirka


Bushfires have been raging across Australia for the better part of four months. High temperatures and smoke-filled skies have enveloped a swath of land bigger than some countries, threatening countless species of plants and animals. (I admit I checked in daily on the recovery prospects for Lewis the Koala. RIP little guy.)

The tragedy has been well documented, but its potential ramifications have not. With that in mind, we’ll take a look at how the fires could affect Australia’s military, economy and political landscape and its behavior on the global stage.

Australia Fires Since November 2019


Natural disasters are a fact of life, of course, and tend to be unique to certain regions. The Caribbean has hurricane season. India has monsoons. Australia has bushfire season.

Conditions this year were unfortunately well suited for the outbreak. Australia’s eastern states have been in a drought since early 2017.

The first few months of 2019 were the driest on record. And much of the native flora, including eucalyptus trees, are naturally highly flammable to begin with. In other words, the area was a tinder box surrounded by an endless supply of fuel.

High winds, some clocking in at 70 kilometers (44 miles) per hour, spread the fires more rapidly. As a result, the current bushfire season started earlier than normal, while temperature and precipitation relief won’t come until mid-March.

It’s difficult (and perhaps somewhat gauche) to quantify how much worse the current fires are to past ones, but comparing the affected areas, deaths and property damage is instructive.

This season, some 10 million hectares have been affected, surpassing the affected area of any previous season on record.

So far, the fires are less deadly than in previous years, with just under 30 people killed. (This excludes the loss of wildlife, which some say is in the billions. Historical data for animal death is hard to come by.) In terms of property damage – which can be measured through insurance claims, buildings burned and loss of livestock – the current fires are disastrous.

Estimated damages are 2 billion Australian dollars ($1.4 billion) and growing; the previous record was about AU$ 4.4 billion in 2009.

Damages and Deaths from Australian Fires


Strategy and Security

Australia’s most strategically sensitive military installations include naval bases along the northern coast, which are far removed from the bushfires. Installations nearer to the fires are reportedly intact. The fires have not interrupted military operations overseas or domestically. In fact, the armed forces have played a critical role in evacuation missions and supporting firefighting efforts.

Of course, national security involves more than just military equipment – it also entails strategic resources necessary to sustain it. Australia boasts an abundance of rare earth mineral deposits and production. These minerals are relatively scarce and play a critical role in the supply chain for technology, aerospace and telecommunications.

China holds a near-monopoly on the world’s supply of rare earths, which is a problem for the U.S. and allies such as Australia. The deposits are therefore a necessary step in their shared efforts to mitigate supply chain risk by building an alternative sourcing network for rare earth minerals. But here, too, the fires appear to be negligible, since producing mines are located away from the deposits and associated infrastructure.

Notably, Australia is also a global leader in the export of coal and liquefied natural gas, which are also relatively unaffected by the fires. The real challenges facing the mining industry are maintaining water supplies critical to operations despite the drought and weathering the political storm being stirred up.

Australia's Rare Earths


Economic Damage

The damages and material losses due to the bushfires do not impact Australia’s economy evenly.

Some areas are directly affected, some damages come from secondary or delayed effects, and still some parts may actually benefit once the fires are put out.

The first casualties, potential or real, are the insurance, agriculture and tourism sectors, of which agriculture is the most geopolitically relevant. (Insurance is domestic and 75 percent of tourists are domestic.)

Australia is a major global supplier of beef and dairy. Its dairy industry, valued at AU$3.3 billion, ranks fourth in the world for exports and is a leading supplier to Asian markets.

The fires threaten 12 percent of the national sheep flock and 9 percent of the national herd. The Federal Agriculture Ministry anticipates livestock losses of more than 100,000 head. Supply disruptions have already been reported.

Another key agriculture sector, wheat, has not been directly affected because the harvest was completed before the fires came into full effect. Even so, the fires threaten grain stocks, livestock feed and future crop yields. Exposure to intense fire usually decreases the nutrient pool in soil and the capacity to retain water, making it more difficult to grow crops in the future.

The wildfires have aggravated an already troubled agriculture industry. Dairy and wheat production were already in decline, thanks to the ongoing drought. Australia’s milk production reached a 22-year low. Wheat production was so low that it had to start importing in mid-2019.

Early estimates suggest production could decline by another 8 percent in 2019-2020.

Consumers will start to see the impact of the fires in the supply and pricing of related basic goods. Domestically, this will manifest itself on the political front (more on that below). Importers will also experience price hikes.

Buyers have already sought out alternative suppliers as they offset Australia’s production decline. Some countries will be more able to absorb the price increases than others.

Consider China, which is very sensitive to even small food price fluctuations. The trade war and the swine flu have inflated food prices already, and though Beijing has found alternative suppliers in Brazil and Argentina, other drivers pushing up food prices will make food less affordable for consumers and increase pressure on the government to keep them low.

SGS Economics and Planning estimates that fire-related losses this fiscal year will run AU$1.1 billion-AU$1.9 billion. This includes indirectly affected areas such as Sydney, which is losing as much as AU$50 million per day because of changes in worker and consumer habits.

Economists at AMP Capital suggest Australia could lose the equivalent of 1 percent of its national economic output. Yet, the government has already authorized AU$2 billion over the next two years for reconstruction – a modest disbursement for a country with a gross domestic product of about $1.38 trillion.

On a purely macroeconomic level, Australia should be able to weather the firestorm.

Political Implications

Any emergency or natural disaster puts political management under the microscope – and Australia is certainly no exception. But the timing is particularly bad for the government in Canberra, which has experienced a lot of turnover in the past decade. The fires have renewed public debate over the mining industry and have raised questions over the government’s ability to respond to Australia’s needs.

Though mining is one of Australia’s globally significant activities, the future of this industry is a rather divisive issue. Mining accounts for about 10 percent of Australia’s GDP and employs tens of thousands of people. The country also ranks as one of the world’s leading coal and LNG exporters.

The prime minister and his party have strongly supported the country’s extractive industry, but the fires have emboldened the industry’s critics, giving them some momentum in debates over reducing Australia’s carbon footprint.

To be clear, Australia isn’t about to suspend its extractive activities. But political battles matter, and for now, the ruling party is on the defensive.

At the same time, the cost of the fires has called into question the government’s general economic management. While the country’s national GDP has grown for nearly three decades, consumers have on several occasions experienced recession-like scenarios, leading to declines in per capita GDP. Wage growth has all but stalled.

Consumers are understandably angry about rising prices of basic goods. And there’s only so much the government can do to jumpstart the economy through interest rates. The Central Bank had reportedly planned to cut interest rates early this year; the fires will only mitigate whatever effects may have come from the policy.

Australia Real GDP Per Capita Growth Rate



Which is all to say that the fires didn’t start Australia’s political problems but certainly aren't helping them.

The country has become fairly adept at churning out new leaders, so even if the pressure builds to a point that the public wants a new prime minister or party, the global impact will be minimal. Australia’s two most important relationships – its alliance with the United States and its wary approach to China – will be largely unphased. Australia's current security and economic needs keep this dynamic in place even under the most dire natural disasters.