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COVID-19: Where the retail real estate industry is headed

March 25, 2020

The shopping center industry has never faced a crisis like the global COVID-19 pandemic, and the situation is changing so fast that stakeholders can point to few, if any, hard-and-fast guidelines.

Experts say three imperatives do stand out, however: Do everything you can to keep your people safe; make sure internal and external lines of communication stay open; and collaborate with each other to the greatest extent possible.

Economists are still trying to grasp the scope and scale of the crisis, but forecasts for retail real estate are extremely grim. Kevin Thorpe, Cushman & Wakefield’s chief economist and head of global research, gave an overview in a March 23 webinar on the effects of the pandemic. “Human interaction is the key ingredient for just a normal, healthy, functioning global economy,” he said. Yet the pandemic has forced the closures of offices, bars, restaurants, malls, family entertainment centers and, in many parts of the country, all but the most essential retail stores. “Any type of real estate that depends on daily human interaction is getting hit the hardest, so hotels and retail are most obviously impacted right away,” Thorpe said.

When the numbers are in on the second quarter, at the end of June, they will be “brutal,” said Thorpe. “Oxford Economics is calling for a 10.8 percent decline in U.S. GDP in Q2, and that is even with all of the fiscal monetary stimulus included,” he said during the webinar. “It would be the largest one-quarter decline basically on record. You’d have to go all the way back to the Great Depression of the 1930s to actually find a bigger negative.”

“The intent here is to keep the occupancy and, when it’s safe to do so again, get everything open for business”

This stark reality is factoring into forecasts about aggregate retailer results, said Deborah Weinswig, CEO and founder of Coresight Research, a global advisory and research firm specializing in retail and technology. “We are seeing projections of Q2 earnings down 50 to 70 percent, depending on the percent of business online and how they fulfill.”

Retailers and landlords, in particular, now face the difficult task of trying to identify and defend their own financial interests on the one hand and to avoid making the situation worse on the other. “We are seeing tenants begin conversations with landlords, especially if the store is under construction or set to open this year,” Weinswig said. “From a landlord perspective, any help in terms of rent abatement has been very well received by retailers.”

Most stakeholders in retail real estate understand the gravity of the situation and want to collaborate to mitigate the damage, said Andy Graiser, co-president of A&G Real Estate Partners. “No matter what, everyone wants the mall to get open with the tenants in place,” he said. “At the end of the day, the intent here is to keep the occupancy and, when it’s safe to do so again, get everything open for business.”

Nonetheless, tensions between landlords and retailers are inevitable. Owners can expect to be inundated with requests for rent relief, Graiser said. And tenants, for their part, should not be surprised to receive legal communications in which landlords lay claim to their rights under the lease. But it would be short-sighted for either side to try to take advantage of the crisis to further its position, Graiser argues. “The rights are there on both sides, but you have to put all of that aside,” he said. “Otherwise, you’re talking about massive litigation, and people don’t want that.”

Now what?

Given the constraints this crisis has created, the options for constructive action are limited, experts say. According to Weinswig, one thing that omnichannel retailers can do is press on despite the heavy strain on their e-commerce infrastructure amid the huge spike in online orders from consumers. “In the case of retailers not being able to ship, we suggest they accept online orders now and deliver later,” she said. “Everyone will understand. In addition, there are opportunities to offer more-customized-and-personalized products, for which customers would anyway have expected to wait.”

Retailers can also make a game plan of different recovery scenarios so that they are ready to hit the ground running when the time comes, says Graiser. “As retailers are going through this triage, they need to start preparing themselves for what the chain could potentially look like two, three or four months from now,” he advised.

During the Cushman & Wakefield webinar, Thorpe cited a few reasons for optimism in the possibility of a recovery, though he offered those with a strong caveat: “I cannot emphasize enough [that] the timing is all predicated on the path of the virus itself,” he said. “In my view the most important data point really to watch is the one that all of you are watching: When will the new infections start to slow sharply?”

According to Thorpe, most forecasts assume that the rate of new infections will slow down after April. Those projections are based on timetables coming out of Asia. “After China implemented its strict self-isolation measures, 10 to 14 days later the number of new cases started to come down,” he said. “Eight weeks later it goes to zero, and in Singapore and South Korea, there was a similar timeline. That is an important data point.” Based on this logic, the consensus among forecasters is that “most of the economic pain will be front-loaded in the first half of this year,” said Thorpe, “so this is not looking anything like the trajectory of the great financial crisis [of 2007–2008], which was deep and long-lasting. That recession lasted 18 months and was followed by a very anemic recovery.”

“We have increased our projection for 2020 store closures from 8,000 to 15,000, with smaller companies representing much of the anticipated increase”

Indeed, Oxford Economics is calling for a staggering 14.5 percent increase in U.S. GDP in the fourth quarter of 2020. “I almost fell out of my chair when I saw that,” Thorpe said. “So at least some are modeling a V-shaped recovery.”

But in addition to the trajectory of the virus, government policy could be a huge factor in the shape of any post-crisis economic recovery, sources said. Last year, major retailers closed about 7,500 stores closed in the U.S., according to Coresight Research. Those numbers do not account for openings.

As Weinswig sees it, that number could be much higher at the end of 2020 without substantial federal and local support for small business owners. “We have increased our projection for 2020 store closures from 8,000 to 15,000, with smaller companies representing much of the anticipated increase,” she said.

“We need to get a backstop for rental-interruption insurance so the pressure to collect rents and the pressure to pay our lenders is handled until this crisis is over”

Gregory M. Tannor, an executive managing director and a principal in the New York City office of Lee & Associates, for one, sees the wisdom in a national pause on any financial obligations that could hurt landlords, retailers, shoppers and workers. That could mean that local governments stop collecting property taxes, that lenders cease collecting mortgage payments from landlords and that landlords desist from aggressively pursuing rents. “That just puts people out of work,” Tannor said. “They wouldn’t be able to recover.” A&G Real Estate’s Graiser supports the notion as well. “A pause would be great for everything,” Graiser said, “and there are some who would like to see that happen even with the stock market.”

According to Sanford D. Sigal, president and CEO of NewMark Merrill Cos., the retail real estate industry needs to work with the government to back small businesses and ensure that they have access to capital. “We need to get a backstop for rental-interruption insurance so the pressure to collect rents and the pressure to pay our lenders is handled until this crisis is over,” he said. “Property-tax relief would also be a good thing, as property taxes are a huge expense relative to income, and we need to defer those until tenants can afford to pay them.”

“While some companies may have third-party insurance, the current crisis is not covered by those policies”

ICSC, for its part, is urging the federal government to guarantee or directly pay for business-interruption coverage for retailers, restaurants and other tenants, as well as for landlords. “While some companies may have third-party insurance, the current crisis is not covered by those policies,” said ICSC President and CEO Tom McGee. “This will allow these businesses to continue to pay their employees and suppliers. Most importantly, the nearly $400 billion of state and local taxes the shopping center industry generates to support local communities will continue.”

The stakes are high. According to ICSC, the majority of the estimated $6.7 trillion of consumer activity generated by the retail, food-and-beverage, entertainment and consumer-service industries occurs within U.S. shopping centers. Nearly 1 of 4 American jobs are retail-related, and nearly 70 percent of shopping center tenants are small businesses that employ fewer than 10 people.

Without a stable tenant base, McGee underscores, repayment of up to $1 trillion of secured and unsecured debt underlying the shopping center industry will be at risk. “This will jeopardize the entire industry and cause long-term damage to financial markets, rampant unemployment and irreparable harm to communities across our country,” he noted. “As the ramifications of the crisis become clearer in the near term, the industry will require further federal support associated with outstanding debt obligations, as well as tax and regulatory relief.”

By Joel Groover

Contributor, Commerce + Communities Today