February 14, 2021

Retail Vs. Covid: Winners And Losers

In the retail world there have been those who were crushed by Covid, and those who have actually benefited; this is the natural product of a capitalist economy. It’s interesting, though, to look at who tends to fall on either side of that divide. Hint: The impact has not been equal across all segments of our society.

Everyone in commercial real estate is assessing the same things: who was hit the hardest, who’s surviving (and how), and what’s on the horizon?

Here’s a partial answer to the first question: From a social point of view, Covid’s impacts have essentially mirrored the inequities in our country. Many white-collar workers were able to transition to working safely from home, without reduced income; their homes have increased in value, as have their stock portfolios. But blue-collar workers with jobs in factories, distribution centers and food-processing facilities have had to show up at work and be at a higher risk for Covid. People of color are dying from Covid more than other parts of our society, and poor citizens are dying at a greater rate than the affluent.

These are sobering realizations, and they play out in retail commercial real estate as well.

Restaurants are definitely suffering – unless they have a drive-through, like national chains. Smaller local sit-down restaurants have increased pick-up and delivery operations, but it’s typically not enough to make up for the lack of seating. Urban restaurants have struggled even more, due to the lack of office workers in downtown office buildings, plus protests, homelessness and boarded-up businesses.

For many retail tenants, Covid has accelerated the trend to online shopping – mostly to the benefit of Amazon. And other tenant categories have been decimated by Covid. Among the hardest hit are athletic clubs; 24-Hour Fitness is in bankruptcy, and they’ve closed all their B Fit locations in the Portland area.

Tenants in the entertainment sector are also struggling. Customers cannot safely go to theaters, bowling alleys or other venues, and many are closed by governmental orders. The hospitality industry has been equally devastated by the inability to safely gather in large groups.

Children are staying at home, so schools, daycares and play spaces are closed or operating at reduced capacity. Businesses that tutor kids, teach them martial arts and cut their hair are suffering. Even business for a national lice-treatment company is down 60%; lice can’t spread if kids aren’t playing together.

Taken together, these difficulties impact a disproportionate number of lower-income workers and people of color who work in food service, small-retail, hospitality and child care; either their jobs are gone, or they have to work at risk of contracting the coronavirus.

The second question: Who’s surviving?

This is strangely arbitrary; it’s often simply a matter of category. Home-improvement tenants are thriving – Home Depot, Lowe’s and other hardware stores are doing well. Affluent citizens are not taking vacations; instead they’re spending those funds to improve the homes they’re stuck in.

Other tenant segments show growth: A local mattress-store chain is having one of their best years. The wait to get a new hot tub can be 12 weeks. Finding a new bike can be a goose chase from shop to shop. Liquor stores and marijuana operations have seen large increases in their volume.

Grocery-store volume jumped early in the pandemic, and has remained strong as people cook more meals at home. The pet supply and veterinary business has been strong as people have adopted a record number of pets. In the travel industry, value-oriented and extended-stay hotels as well as motels have enjoyed high occupancy levels.

And there are great stories of innovation – businesses in challenging categories have successfully shifted their approach to address new realities and continued paying their rent.

Savvy retailers with creative marketing skills and loyal customer bases have pivoted to online sales. One local fashion designer stayed afloat by crafting protective masks, using her family as models to strengthen customers’ personal connection to her brand.

An adult-education organization translated their in-person curriculum to an online-conferencing format and drew increased attendance; it turns out people like learning from home more than traveling to a classroom.

And now the third question: What does the future look like in commercial real estate?

Landlords must navigate a new environment moving forward. First of all, they should accept that tenant requests for concessions may be entirely reasonable. How property owners respond and structure changes can vary; strategies will be different for each property and each tenant.

NAI Elliott’s property managers are working with our landlords and tenants to facilitate conversations about how to work together for mutually positive outcomes. Here are some things I suggest for landlords to consider:

1. Look at the tenant’s track record before Covid. What were their sales? Did they pay rent on time? Are they in a declining industry impacted by giant online retailers or societal changes?

2. How has Covid impacted the tenant? Covid may have been a benefit or a detriment; it’s good to know the specific effects.

3. Is the tenant maintaining regular communication? If they’re upfront about their situation, the owner can feel better discussing accommodations.

4. What changes has the tenant made in response to Covid? Are they updating their sales model or structure? Did they apply for governmental relief? Owners can expect a tenant to proactively take steps to survive.

5. How leasable is the space if the current tenant moves out? This can impact an owner’s willingness to offer concessions or adjustments. A leased space with less revenue is still superior to an empty space.

As vaccines bring infection rates down and governmental restrictions are relaxed, the economy will recover, but each sector of the economy will progress at a different rate. Landlords need to keep their properties occupied and economically viable; this will require prudent compromises with tenants and lenders. They have a continuum of options, from leaving the tenant in place with a temporary rent adjustment or suspension to terminating the lease and looking for a new tenant.

As you consider your own strategy moving forward, I urge you to factor in the issue of inequity; consider the impact of your decisions down to the level of workers and families who are in a precarious position.

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© 2020 NAI Elliott - All Rights Reserved

© 2020 NAI Elliott - All Rights Reserved

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