Starbucks Seeks Landlord Concessions for Pandemic Recovery
Property Owners Hash Out Rent Modifications With Several Big Chains

By Lou Hirsh
CoStar Group
Published: May 16, 2020

Coffee chain Starbucks is demanding rent breaks that would last at least a year, a sign that landlords of nationwide restaurants could feel the financial fallout from coronavirus-spurred closings long after their tenants return to business.

The Seattle-based coffee giant this month sent a letter to some of its landlords asking for rent breaks and other concessions, a day after announcing plans to reopen 90% of its 8,900 company-owned U.S. stores by early June, according to brokers and a news report. The company recently estimated that it lost $915 million in sales in its second quarter because of the temporary shutdowns of a large portion of its 32,000 stores worldwide.

"Effective June 1 and for at least a period of 12 consecutive months, Starbucks will require concessions to support modified operations and adjustments to lease terms and base rent structures," said a letter signed by Starbucks Chief Operating Officer Roz Brewer that was sent to landlords May 5, according to the Seattle Times.

Starbucks spokesman Jory Mendes declined to comment on the concessions and letter. During the company's second-quarter earnings call last month, Chief Financial Officer Pat Grismer said the company was "proud" that it "remained current on all of our rent payments" but he acknowledged the company was having "ongoing conversations with our landlords in various markets regarding what may be commercially reasonable lease concessions in the current environment."

Brokers who handle retail property transactions note that Starbucks' moves reflect a larger trend of major restaurant chains seeking pandemic-related relief, especially those that closed their dining rooms and weren't able to deploy drive-thru or carryout services to deflect major sales declines at most locations.

Steve Avoyer, president of the retail-focused brokerage Flocke & Avoyer Commercial Real Estate in San Diego, said he has heard from several owners of more than 100 properties that have a Starbucks store that have received the letter from the coffee chain requesting concessions, and he expects those negotiations to be hashed out over the next several weeks.

As other national chains have traditionally done, Starbucks is seeking to capitalize on its size and existing relationships with property owners to help it through the post-pandemic recovery period. What Starbucks specifically asks from landlords and what those property owners actually grant could vary significantly based on location and how financially motivated the landlord is to modify lease terms.

"Just because you ask everyone for certain concessions, doesn't mean you're going to get them," Avoyer told CoStar News. He is advising his landlord clients not to commit to significant lease modifications for at least the next 45 days, to make sure they don't get unduly locked into long-term concessions that may not be necessary, depending on how the post-pandemic retail recovery shakes out.

Mike Moser, partner in brokerage firm Retail Insite, said several national restaurant chains have either stopped paying rent or sought deferrals from landlords during the pandemic, including Cheesecake Factory, Red Lobster, Olive Garden and Buffalo Wild Wings.

Rents are not expected to be forgiven, and deferral deals could take several possible forms as the chains navigate factors including operating costs to reopen and the speed at which sales volumes return to normal. Some chains, for instance, may seek deferral of owed rents to a later period within current leases, and some may seek to pay rent based on a percentage of sales going forward.

"It likely won't make any sense to commit to long-term concessions now, and many tenants are making overreaching proposals that are not reasonable," Moser said, adding it may take 30 to 60 days for landlords and tenants to assess pandemic damage and decide on equitable concession arrangements.

Avoyer said landlords hosting Starbucks drive-thru locations, most of which have remained open and busy during the pandemic, will generally be in a good position to resist major concessions. The same holds true for retail center owners with long lists of national coffee purveyors, such as Pete's Coffee and Coffee Bean & Tea Leaf, ready to take over prime locations if Starbucks exits.

Starbucks could be in a stronger position in many locations where an in-line store has traditionally been a major generator of traffic for other tenants, and it has also helped landlords in second-tier locations keep centers leased at near full capacity in the absence of other similar retail draws.

While Starbucks is generally dealing from a position of strength with landlords, recent weeks have shown it's not invincible as stores have remained closed and consumers cut back on discretionary purchases including $5 coffees.

Earlier this month, the financial services firm Fitch Ratings downgraded Starbucks' default-risk status from BBB+ to BBB, in relation to a pending issuance of $3 billion in new unsecured notes that Starbucks plans to use to support near-term liquidity.

"The negative outlook reflects the significant business interruption from the coronavirus pandemic and the implications of a downturn in discretionary spending that Fitch expects could extend well into 2021," the ratings agency said in a May 4 statement.

Fitch expects Starbucks' revenue to decline around 14% in fiscal year 2020, after the company reported same-store sales down 3% in the U.S. and 10% worldwide from a year ago for its second quarter ended March 29.

Starbucks' outlook, however, generally remains positive. In a May 4 posting on the Starbucks corporate website, CEO Kevin Johnson said the coffee chain expects to not only survive recent temporary shutdowns its 32,000 stores worldwide, "but with adaptations and new routines, it will thrive."