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Some cases see developers taking over properties and reclassifying the completely. Other scenarios see retailers repurposing the space they have to be used in ways more conducive to the current environment.
This is especially true now that many retail spaces are vacant due to the COVID-10 outbreak.
The severity of this pandemic and the associated response has severely disrupted the broader economic and societal norms that preceded it just a few, but seemingly distant, months ago.
The abruptness of this change is really the first of its kind, and has dramatically contracted business activity and is rapidly changing consumer behavior.
COVID-19’s Impact on Retail Real Estate
This pandemic and crisis have caused a lot of concern around the continued profitability of many retailers within the “new normal.“
Owner-occupiers of retail space are focused on adapting business models to survive, while retail space owners who are leasing their space are concerned about their tenants’ financial capacity to weather this storm.
Missed debt payments appearing in the CMBS market shows signs of retailers’ pain.
We have been hearing and reading about how retailers have been suspending payments to vendors, as well as conversations around lease restructuring.
COVID-19 has played a huge role in accelerating existing trends as well.
Department store closures have accelerated:
In 2017, there were many closures. JCP, Macy’s, and Sears announced over 250 store closures:
- JCP: 138 closures
- Macy’s: 100 closures
- Sears: 42 closures
In 2020, we are seeing a new round of announced bankruptcies, including:
- True Religion (April 13)
- Modell’s Sporting Goods (March 11)
- Art Van Furniture (March 9)
- Bluestem Brands (March 9)
- Pier 1 (Feb. 17)
- SFP Franchise Corp (Jan. 23)
Repurposing & Readapting Retail Space
To some extent, retailers are starting to repurpose spaces and adapt to the times. Focusing more on digital, increasing pick up space, or moving to “ghost kitchens.”
- Big box retailers like Bed, Bath & Beyond are using dark space as regional fulfillment centers.
- Many large mall owners have made their properties available for governmental and community organizational use (Seritage, Washington Prime, GGP portfolio within Brookfield) and restaurants are shifting to grocery delivery and pick up (Panera, JustSalad).
This is a temporary, but effective, use of these spaces.
When non-essential space, which otherwise would be closed, is able to be repurposed and serve as surge capacity to help fulfill essential needs and help combat this pandemic, it is beneficial for all within that community and is an effective use of the space.
Retailers Trying New Things
Amazon introduces a waitlist given the unprecedented surge in demand for online grocery pickup and delivery services:
- AMZN increased order capacity by >60%, but still expects challenges when securing delivery windows due to elevated demand and limited capacity.
- To help alleviate, Amazon announced that it will have new customers that sign up for AmazonFresh and Whole Foods Market to join the waitlist.
Bed, Bath, and Beyond repurposing vacant space for temporary use:
- Bed, Bath, and Beyond temporarily closed all but 170 of its stores (leaving open some buybuy Baby and Harmon locations) and it’s 4 e-commerce fulfillment centers.
- They’ve converted approximately 25% of Bed Bath & Beyond and buybuy Baby stores into regional fulfillment centers.
- The company has seen digital business surge and will be introducing more buy-online-pick-up-in-store options.
Many restaurants shifting to grocery:
- Panera Bread is selling bread, baked goods, and dairy directly to consumers.
- Just Salad, a New York-based salad chain, has launched a robust delivery program that incorporates not only produce and proteins, but also everything from meal kits to toilet paper.
- The operators of Taiyaki and the Dough Club, two New York-based establishments that specialize in Japanese desserts, have introduced an online grocery, Konveny.com, devoted strictly to Japanese products, from rice crackers to red-bean ice-cream bars.
So, what next?
Until there is a clear path forward, many of these retailers and property owners will be in crisis mode, trying to stay afloat by adapting to the new environment, exploring alternatives, and testing and adopting change.
Retailers and retail space owners have all had to adjust their expectations for the future. Many have had to make difficult decisions, though there are certainly more difficult decisions to come.
It is impossible to tell when the pain will stop and the recovery will begin. There are still so many unknowns, and the situation continues to change daily.
That said, retail is not going to disappear, it’s just changing dramatically. Many retailers are not going to make it through this crisis, but Americans will continue to consume.
This period might just end up looking like a retail reset—the changing of power from the established big retailers of the past (department stores, for example), to some newer, more diversified sales channels.
Will the changes stick?
While retailer business plans will largely remain unchanged compared to pre-COVID business plans, we do expect to see the newly established sales channels during this crisis stick around longer going forward.
For example, greater online ordering processes (pick up and delivery) are likely to remain intact.
Perhaps we’ll see more flexible retail space in the future, but so long as we can assume the COVID-19 crisis is temporary, we can’t assume permanent change to retail space across-the-boards is likely.
For more retail real estate insights amidst COVID-19, visit our Research page.