Business is coming back for retailers, but landlords say they won't offer any more rent discounts.

During the first year of the pandemic, many landlords struggled to fill vacant storefronts and reduced rents. Some felt they had no choice but to receive a portion of monthly sales in lieu of fixed rent from tenants whose businesses have collapsed due to government-mandated closures and social distancing measures.

These arrangements allowed retailers to stay in business and landlords to avoid losing valued tenants.

Ed Cooley, senior managing director at retail brokerage firm RCS Real Estate Advisors, said landlords now have a much easier time filling retail space in prime locations and are much less likely to agree to such concessions. He said that it has become.

“They'll just say, 'Coronavirus is over.' Those days are over,” he said.

The increasing influence of landlords is another sign of recent strength in retail real estate. According to research firm Coresight Research, after years of net closings, store openings exceeded closings for the second year in a row in 2023.

Despite concerns about high inflation and a recession, consumer spending remained resilient last year, and Americans' economic outlook is improving in early 2024. This, combined with a lack of new retail real estate construction, has left landlords optimistic that retailers will compete for the limited space. Space available in the near future.

The U.S. shopping center vacancy rate fell to 5.3% in the fourth quarter, the lowest level since real estate firm Cushman & Wakefield began tracking this metric in 2007. Average asking rents rose to $23.70 per square foot, currently nearly 17% above 2019 levels. .

“This is the highest occupancy rate I've seen in my 17 years with Time Equities,” said Ami Ziff, managing director of a private real estate investment company that owns retail space in 29 states. . -From air shopping center to closed mall. “Significant, significant rent increases.”

Retail's strong position stands in contrast to the office sector, where managers are struggling with oversupply and reduced demand due to remote working. To seal a lease, office landlords are increasing concessions to tenants, such as months of free rent or cash gifts.

This is the latest development for retail real estate, which has long struggled with store bankruptcies, changing shopping habits and the rise of e-commerce. The pandemic was a short-lived but severe blow, and retailers that renewed leases or opened new stores during this period were often able to secure favorable lease terms.

Percentage of sales agreements surged in 2020 as landlords tried to keep restaurants and other retailers from going out of business. Enclosed malls that experienced long closures due to the pandemic saw a surge in revenue from sales-based rental contracts in 2021, according to data firm GreenStreet. At one point, it looked like these arrangements would outlast the tumultuous period of the pandemic.

Nearly four years later, in-person dining and shopping are booming, and landlords are loath to sign leases where rent collection depends on the unpredictable ebb and flow of a tenant's monthly sales.

Paragon Commercial Group, which owns retail properties on the West Coast, primarily grocery stores, agreed to take a cut of sales from less than 5% of its tenants early in the pandemic, said co-founder Jim Dellavou. Told. However, these arrangements required retailers to repay the entire rent within one to five years. All of Paragon's tenants survived and have repaid their outstanding rent.

“As a long-term tenant, I would strongly prefer a fixed-base rent structure,” Mr. Dilavou said. The company has since partnered with Dallas-based Lincoln Property Company to operate commercial properties on the West Coast.

One reason is that percentage-of-sales arrangements can lead to “uncomfortable conversations” if tenants don't believe the landlord is doing everything in their power to maximize sales and, therefore, maximize rent payments. That's because it's a possibility, Dilavou said.

More importantly, lenders don't like these rent structures, making it more difficult for landlords to finance commercial properties or refinance loans with percentage-of-sale arrangements.

A retailer's bargaining power is not absolute. Older, dilapidated properties still have to offer concessions and accept lower rents to attract tenants, Cooley said. Most landlords are still spending to renovate or build new retail space for new tenants, and these costs are rising along with construction prices.

Additionally, sales-based arrangements are more common now than they used to be, but most often take the form of the tenant paying a base rent and then paying a portion of the sales once a certain threshold is reached. is. So when restaurants and other retailers have a good year, landlords collect this so-called excess rent.

These arrangements open new windows into the retail industry's current strengths. Even enclosed mall owners who have traditionally been tolerant of percentage-of-sales agreements are reluctant to convert leases to fixed-rent structures with excess rents, said Vince Tiborn, head of U.S. retail and industry research at GreenStreet. It is said that progress is underway.

Kite Realty Group Trust, which owns outdoor shopping centres, saw a 44% increase in revenue from excess rent last year compared to 2022.

“Retailers are doing very well,” Chief Executive John Kite said. “We're seeing some upside.”

Email Kate King at kate.king@wsj.com.