Retail’s Road to Recovery
Battered by COVID-19 — some more than others — retailers are looking to rebound with increased creativity, flexibility, and agility.
The figures vary, but between 12,000 to 15,000 physical retail stores closed in 2020, and many predict that figure could be higher this year. But the pandemic only accelerated a change in retailing that had already been underway — the U.S. had 9,300 store closings in 2019, up from 5,800 the year before. E-commerce sales were already steadily rising when homebound COVID-19 shoppers gave them a powerful push. Colliers' spring 2021 retail report, “Retail Moving Forward,” noted “four years of e-commerce growth compressed into a single quarter, as nearly 150 million people shopped online for the first time.”
This year, as spring flowers bloomed, so did signs of optimism. Millions of people got vaccinated and were eager to return to some sense of normalcy, including shopping in stores. They had money to spend as well, thanks to stimulus checks and a sharp increase in personal savings that weren't spent during the pandemic.
But as recovery continues, the retail industry and CRE professionals who work in it are using lessons learned during the pandemic and looking ahead to navigate an altered playing field.
Nimble retailers instituted a wide variety of COVID-related practices that are likely to carry through in some form during recovery. “Retailers that were able to continue to serve their customers through options like delivery, curbside pickup, and connection via social media are likely to benefit the most as economies open up,” says Scott Crossman, CCIM, founder and CEO of Crossman & Company in Orlando. “Some consumers have adapted to the limited in-person experience and will continue to use these alternatives in the future, but others will be anxious to return to a more open shopping experience. Smart retailers will be prepared with sufficient inventory to meet this demand and appropriate staffing to maintain a high level of customer service.”
Retailers and landlords alike also learned to be flexible, developing creative solutions to keep the doors open. Examples abound. Restaurants shifted to selling premade meal kits; specialty retailers started subscription services featuring local products; shopping center landlords rented out their empty parking lots for drive-in movies or graduation parades. Jennifer Ott, CCIM, executive vice-president of ROI Commercial Real Estate in Las Vegas, says that in one of her leasing projects, a doughnut shop got permission from the landlord to stay open late to make pizzas after the doughnut trade tapered off. Another shopping center tenant couldn't do outdoor service at lunch because of traffic, but they received permission to set up outdoor pods for the dinner hour, once other stores in the center had closed.
Businesses learned the fine art of partnership as well. Ott points to one franchise owner who started working with local vendors to determine ways to save costs, whether it was adjusting payment schedules or working with other franchisees to order items in bulk. “He thinks now he can operate with fewer employees than he did before because of the changes he made, and he thinks he'll be more efficient and successful because of what he learned,” she says.
And paradoxically, considering the wave of store closings, Ott adds that she's actually seen more entrepreneurs looking to start a small business over the last year. “I think there's been a really big push in the franchise sector, with more and more people buying franchise concepts,” she says. But she's also seen more inquiry calls from people who are simply working on business plans and are asking questions about how retail leasing works. She speculates that some would-be business owners may have lost jobs in the pandemic and want to assert more control over their occupations.
In Touch With Tenants
The drop in retail sales, though, produced ongoing anxiety for landlords and tenants. Crossman's firm leases or manages more the 360 shopping centers — primarily grocery-anchored — across the Southeast. The pandemic's disruption, he says, “has underscored the importance of a healthy landlord-tenant relationship. Retail landlords who stayed in communication with their tenants through capable property managers and knowledgeable leasing agents have fared much better at mitigating the effects of the pandemic.”
Still, he adds, some businesses — particularly those that heavily rely on in-person services — have been slower to recover. In these instances, planning and communication have been especially important. Tenants were urged to develop recovery plans in exchange for rent reduction. “We recognize that for a tenant to regain the business, they need to be spending some money on advertising and promotion,” Crossman says. “As we look at their plan, we may reduce the rent, but encourage them to put the money toward trying to get business back.” To help measure tenants' recovery, Crossman & Co. uses Placer.ai, a platform that measures foot traffic and patterns. “It helps us understand who needs the help, and we try to focus our assistance.
“Our tenants, as a whole, have substantially recovered. We have done very well with our accounts receivable and our occupancy levels — all our metrics are doing well right now.”
Going forward, he says, “expect to see new lease language around force majeure and more detail surrounding business interruption and its impact on tenant obligations. Savvy landlords may opt to require tenant sales reports and monitor tenant foot traffic activity. Savvy tenants will want to have a plan for any future shutdowns.”
Ott notes that while the southern Nevada market was hit hard with its dependence on tourism, “we really didn't lose a lot of tenants. Our vacancy topped out [at] about 7 percent.”
“I'm optimistic,” she says. “My hope is that landlords and tenants have figured out how to better work together. We're seeing all these pushes for force majeure clauses in leases that we didn't have before. We're starting to see a little more that they're fair to both parties — one party is not penalized more than the other for something that's outside of their control. I'm hoping we can see more of that.”
She also says she sees more openness — on both sides — to shorter terms. “That can be good and bad,” she says. For tenants, a shorter term could lessen risk, but the market could improve, and they could face higher rents. For landlords, a three-year lease could affect valuation if they're looking to sell or refinance.
The pandemic created some changes in stores' physical appearances and layouts. Some of those will stay in place with additional changes ahead, particularly as retailers large and small incorporate more e-commerce into their business model. The Colliers report predicts that over the next three years, nearly 80 percent of brick-and-mortar stores will modify their footprints in some way as they “add or extend their service to include an online collection and ship-from-store feature,” and more than 60 percent say they will test or open new store configurations to address changing consumer habits.
“Everybody thinks they need a drive-thru,” Ott says. It's an expensive feature, though — they use up space, they require additional permitting, and “from a new development standpoint, it's challenging, because it affects the rents,” according to Ott. Crossman adds that such obstacles could slow the trend, “but no question — we do have tenants who are willing to pay the premium for a drive-thru, and so we're looking for ways to accommodate that.” One trend that will also likely remain: Additional short-term parking spaces dedicated to curbside or parking lot pickup. A recent report from Digital Commerce 360 found that by early 2021, more than 50 percent of top 1,000 retailers offered curbside pickup.
Malls, already staggering from department store bankruptcies, took a further blow during COVID-19, particularly those that included tenants offering in-person elements such as entertainment and restaurants. The Colliers report, however, pointed out that among surveyed consumers, almost 70 percent said they weren't visiting entertainment-oriented malls because of health concerns — and a majority said they'd be willing to visit again after pandemic protocols are loosened. Fitness features, in particular, seemed to hold promise in attracting younger visitors. Ott says that she's seen several instances in the last year of fitness users moving into a mall and repositioning the space to include an exterior entrance to accommodate the facility's increased hours of operation. Other malls have experimented with immersive entertainment; one Houston mall opened a 40,000-sf interactive art museum in a vacant housewares store, and a mall in suburban Chicago offered an interactive tour of Sistine Chapel frescos in an empty Sears.
There's also been interest in using excess vacant mall space for fulfillment centers. While this has been tried in some empty freestanding big-box stores, mall retailers are less enthusiastic, and an October report from Barclay's posited that such a move could reduce the value of the property from 60 to 90 percent.
There's no question that e-commerce will continue to challenge brick-and-mortar retailers, but the initial surge during COVID may decline slightly, according to Cushman & Wakefield's “U.S. Retail Market Outlook,” published in March. The report notes that core internet sales will continue to rise, but likely slower than they have in the past 10 years. At the same time, the report forecasts an annual retail sales growth rate of 3.7 percent over the next five years — identical to the five years before the pandemic. Sectors that showed particular promise for growth include smaller-format or specialized groceries, fast food, dollar stores, and thrift stores.
Retailers may also need to recognize that some consumer habits die hard. “Retail consumers are social creatures by nature, and most will embrace a return to their routines, including interactive retail experiences,” Crossman says. “At the same time, consumers have adapted to online and social media-driven communications to inform their purchasing, so retailers should benefit from maintaining these channels with their customers.”
Customers will be at the core of retail recovery, but that's not news. “What I think retailers need to do right now is get back to basics — to the fundamentals that they've always needed to focus on,” says Ott. “They need to have quality employees, people who are educated about their products and services and who care about the customers. You need to provide a quality customer experience and make sure people know you exist.”
Crossman agrees. “If you're competing solely on price in a world with Amazon and others who can provide product at a low price, that's problematic,” he says. “As we look at high service, we see that as the competitive edge for the space we work in. Going forward, we're looking at tenants who are doing that, and we see that those tenants are thriving more in our centers. So, as we look to who we're going to lease to, we have a preference to those who we think meet that standard.”
Commercial real estate professionals will need to focus on the basics as well. “Stay connected with your peers in the business, become a student of your customers — your tenants — and remember that relationships transcend transactions,” Crossman says. “Technology is your ally, as new software and communication methods provide an ever-increasing ability to the monitor, measure, and project market trends.”
“It's important to continue to educate yourself. Not only to hone your skill set, but also to know the political and financial environment,” says Ott. “Understand what the trends are — what landlords and tenants are doing and which investors are active and why. Always find those resources and be able to add value to your clients.”
pandemic created some changes in stores’ physical appearances and layouts. Some
of those will stay in place with additional changes ahead.
“There are so many unknowns right now,” she adds. “There's opportunity and a reason to have optimism, but it also affects our communities, so that makes it challenging to advise clients. All you can do is find the best information that you can and make sure they understand the potential effects of their decisions.
“And be open to change — that's probably the hardest. Be adaptable. Be willing to try new things.”
more on retail in the wake of the pandemic, check out CCIM Institute's
"Troubled Assets and Opportunities in the Age of COVID-19" course.