Managing Director, AI at Leverton, An MRI Software Company. Helping companies get smarter using AI for Data Extraction & Contract Analytics.
Working for a global provider of real estate technology, I’ve seen many industries profoundly tested by the Covid-19 crisis in recent months, as hardly anyone first grasped the fundamental impact the pandemic was having on commercial properties. Few sectors have faced the challenges retail has in this area, with both retailers and their landlords facing tough questions about their lease portfolios. We have seen a 40%-plus rise in requests for software from clients of both types to review their leases.
There is good reason for this. Businesses in the retail sector must leverage data if they hope to maintain the strength that they need to come out of the coronavirus crisis and remain in a healthy position. Whether a company is a retailer leasing space for stores, warehousing and distribution, or a landlord leasing out property in malls, main streets and industrial parks, its leaders need to understand what is in their portfolio of leases and other key legal documents.
Retail has moved rapidly into full-on crisis mode. Those businesses in the retail sector with the right information to guide them through this upheaval — and the technology they need to navigate large amounts of data — are the ones that will survive in the first instance and then come out ahead when we settle into the new long-term trading climate that emerges as the lockdown begins to lift and the spread of the virus comes under control. Everyone in the sector is scrambling to capture and analyze their data to fully gauge their circumstances and take effective action.
Looking at exactly what’s in your lease portfolio
For landlords, the imperative is to find ways of abstracting data from their leases so they know exactly how at-risk they are and what options they have — especially with some retail tenants facing bankruptcy and others rationalizing their operations by closing unprofitable and marginal stores or seeking new lease terms in light of market conditions.
This capability is essential to determining the health of a property portfolio as an aggregate. Knowing how many and which leases have force majeure clauses and contain clauses indicating right to review rents or terminate agreements early or otherwise alter the deal is essential.
There is other data that retail landlords need as well. For instance, are they able to find the email contact details they need to take action for tenants that are defaulting? Even basic information like names and addresses is often hard to find in time-sensitive, legal situations.
Steering clear of the retail apocalypse
For retail occupiers, the stakes are equally high, and getting a grip on the data from their leases and other documents is just as important. Many are facing unprecedented financial pressures and bankruptcy; others are simply looking for ways to rationalize the business to ensure they stay lean and mean.
In the U.S. alone, 20,000 to 25,000 stores are projected to close in 2020, according to Coresight Research, which specializes in the intersection of retail and technology. The closure of brick-and-mortar operations is not new, as the figures from Coresight Research show, with 9,800 stores closed last year, but it has been massively accelerated by Covid-19.
With leases representing the biggest overhead cost for most retailers, many need a detailed view of their legal responsibilities, along with a full understanding of their options for negotiating new terms. Potential questions include: What are the notice periods? What are the potential penalties for breaking a lease? What happens if they fall in arrears in rent payments?
Assembling the whole picture
There are other legal documents besides leases that both retailers and landlords need to be able to access and understand to get a complete picture of what their rights and obligations are: insurance, supplier and vendor contracts, credit agreements and even utility plans. The shakeout from Covid will reverberate through the whole retail supply chain.
A retailer looking at whether it needs to shut stores before things get worse needs to understand not just which stores are most profitable and have the best potential to stay that way but what the cost of closing each location would be in terms of legal obligations and factor this information into the decision process.
Both landlords and retail tenants face a major challenge in pulling together the data they need, even when they have the information somewhere. Going through digital and paper contracts and manually assembling all the data in a form in which it can be assessed would be an arduous task at best for a company with hundreds of leases to comb through and next to impossible for many firms facing a tight timeframe for legal action.
A retailer looking to close locations or renegotiate terms on hundreds of store locations, for instance, might only have a matter of weeks to get a read on notice, break clauses and other options. Likewise, a retail landlord with a number of tenants looking to make temporary closures permanent or default on rents needs to know any and all specifics across its lease portfolio on what recourse it has (e.g., a clause stipulating whether it could seize assets left on a property).
Finding a way
To gain a full and accurate picture of their rights, responsibilities and options in often tight timelines, both the owners of retail properties and the companies renting from them will need to rely increasingly on PropTech — preferably with machine learning and AI capabilities.
The fact is too many retail industry firms simply don’t have easy access to what should be fundamental, basic information. The long-term impact of Covid-19 remains an open question, and the only way for retailers and landlords to find the answers they need is to make sure they can and do tap into all the relevant data.
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