With the global pandemic battering a retail industry that already was struggling, many small businesses and familiar national brands are shutting their doors, shrinking the ranks of tenants for shopping centers, and driving down occupancy and rents.
But even as conditions worsen, people still are purchasing the majority of their retail products and services in stores, meaning some of the current setbacks are temporary once it is safe to shop, socialize, and recreate, according to the Urban Land Institute’s (ULI) recent Emerging Trends in Real Estate report.
Jon Weisiger, senior vice president at CBRE, said that while many retailers continue to operate their storefronts, consumers’ shift to shopping on ecommerce platforms helps keep them afloat.
“They all had varying stages of omnichannel presence and were doing part of their business online,” Weisiger said. “They’ve really accelerated their use of online.”
Non-store retailers posted their highest year-over-year sales growth in the third quarter — up by 23%, according to CBRE’s Q3 2020 US Retail Figures report. Total retail sales exceeded pre-pandemic levels in the third quarter, increasing 3.5% year-over-year, driven by in-store spending with the reopening of brick-and-mortar stores and increased consumer sentiment.
It’s Not All Rosy
According to the ULI report, retail sales are likely to fall as various federal income support programs that had been propping up consumer spending expire. Coupled with historic unemployment rates and the loss of income that millions of gig workers have experienced, the end of the year could be bleak for retailers.
“Though overall retail sales this summer have returned to their pre-pandemic levels, that spending cannot be sustained absent additional government interventions,” the report states. “In any case, sales in physical stores are still well below prior levels.”
But some retail categories have taken a bigger hit than others, and some companies are cutting the number of physical stores they have. Apparel and sit-down restaurants are struggling more than grocery, home improvement, furniture stores, and sporting goods stores, Weisiger said.
“We’re seeing a few retailers that either had too many locations and are now cutting back or we’re seeing some bankruptcies,” he said. “They’re thinning the herd of underperforming stores. Pier One Imports and others have folded, but others are recalibrating how many stores they need to optimize their portfolios.”
Despite sales growth, retailers are suffering because landlords have increased the triple net cost of their space, said Michael Staenberg, president of the St. Louis-based development company The Staenberg Group.
“Now tenants are looking at what’s the gross occupancy cost,” he said. “There’s going to be a tremendous shakeout. The only thing keeping people in business today are low interest rates. When that changes, watch out world.”
Landlords Can Help
Tenants are also increasingly selective about the locations they’re choosing to open or keep open, said Darcy Rutzen, vice president of retail property management at Chicago-based M&J Wilkow, who buys and redevelops commercial real estate nationally.
“Now more than ever, the partnership between tenant and landlord is critical to our collective success,” Rutzen said. “Retailers want to be at shopping centers with landlords who go above and beyond to provide support and resources to help them succeed. Being in open-air environments is becoming increasingly important to tenants, not only because of the safety component, but because centers like Southlands (located in Aurora, CO) offer such a unique visitor experience that can’t be duplicated in indoor shopping environments. Savvy retailers are forward-looking and know that our current situation is temporary. They want to position themselves at the best retail locations as they look toward the future of retail in a post-pandemic world.”
M&J Wilkow has been helping tenants at its shopping centers with increased strategic marketing efforts, greater communication with customers via social media channels, and new services like its Retail To Go program. It has also expanded outdoor patios for restaurants and added outdoor amenities like the new Town Square and Guest Services at Southlands.
Retail real estate fundamentals weakened during the third quarter, with the total availability rate increasing by 20 basis points to 6.6%, according to the CBRE report. The availability rate is the ratio of available space to total rentable space, calculated by dividing the total available square feet by the total rentable square feet.
“Despite tailwinds from a relatively strong economy over the last several years, retailers have been failing or otherwise closing stores at rates normally seen only during recessions,” according to the ULI report. “Shopping center owners have been forced to demolish or convert vacant space to non-retail uses. All these issues predate the pandemic, but the disease and resulting economic fallout have magnified these problems.”
Experienced-based retail, including full-service restaurants, fitness centers, and movie theaters, remained particularly hard hit by the pandemic as many states limit in-person gatherings — industries that were perhaps the best performing in the retail sector in recent years.
That’s not deterring Staenberg from moving forward with The Factory. This 52,000-square-foot event space will have the capacity for up to 3,000 guests for national touring concerts, plus a diverse calendar of other events. The Factory will anchor The District, The Staenberg Group development formerly known as the Chesterfield Outlets.
“The only thing that’s going to hurt me is COVID[-19],” Staenberg said. “I own the land, I own the parking lot and I can build it.”
Margaret is an award-winning journalist who spent nearly 25 years in the newspaper industry. She has covered a variety of business topics, including residential and commercial real estate, technology, telecommunications, and cannabis.