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  • Writer's pictureCommCap Advisors

Builders Weathering the Storm

Updated: Mar 15, 2022

The future of retail arrived with an unexpected, massive thunderclap this spring. Now retailers, shopping center developers and real estate brokers who specialize in commercial properties are looking over a landscape dramatically changed by the COVID-19 pandemic, identifying winners and losers and making predictions about the future of retail as it continues to unfold. Nobody should underestimate the impact on retailers of the pandemic and the shutdowns ordered in an attempt to slow its spread. On March 30, the day in which retail sales hit their pandemic-related low, business in Nevada was down 38.4 percent from January levels, according to an analysis by Harvard-based Opportunity Insights drawn from credit-card data. By mid-June, the decline from January’s figures stood at 11.6 percent. Nikki Columbo, the senior vice president of national accounts who handles leasing of The Summit Reno for Bayer Properties, said the pandemic accelerated a correction in the retail industry that was unfolding well before the arrival of COVID-19. “For years, the United States has struggled with being over-retailed,” she said, noting that the country has five times more retail space per capita than Europe. The Hits The future didn’t fall equally hard on all retailers. “It seems that if a brand or a category was on a declining trajectory, the pandemic just advanced that by a few years,” explained Chris Richardson, a director at Logic Commercial Real Estate in Las Vegas. He says some restaurant chains, such as Macaroni Grill, Millers Ale House and Sweet Tomatoes decided against re-opening some locations after the pandemic shutdown. So did some larger tenants, such as 24-Hour Fitness, which filed for reorganization under Chapter 11 bankruptcy. Pandemic-related restrictions hit hard, too, at smaller boutique fitness centers, says Michael Maloney, senior associate for retail services with Colliers International in Reno. A specialty fitness operation might be profitable paying one teacher to lead a class of 20 students but won’t make money if it’s required to cut class sizes in half and double the number of instructors. Food retailers appear to be doing relatively well, says Frank S. Volk, a managing principal with SRS Real Estate Partners in Las Vegas. So are discount and off-price stores. And, luxury goods retailers are holding their own. Some mid-market retailers, however, are having trouble finding their footing, and the verdict is still out on soft goods. The biggest struggles are those faced by fine-dining restaurants and the retailers that cater to the tourist markets that have been slower to rebound. But for all the headlines about retailers forced to close by the pandemic and related restrictions, ever-changing consumer tastes always have resulted in churn among retailers, said Volk. “The shutdown will usher some operators who were on the bubble out the door more quickly than had the shutdown not happened. But the strong operators will remain strong, and perhaps even get stronger,” he said. “This can be viewed as a compression of a normal market cycle.” Adapt Even though declining sales forced some stores to close their doors, retailers and restaurant operators that were able to adapt quickly — say, by enhancing drive-through service — continue to expand aggressively, Richardson said. As a general rule, retailers that moved quickly to adapt to the new reality have been the most successful, Columbo said. Among key tactics: Curbside pickup, sales through social media and buy online, pickup in-store, or “BOPIS”, is the trendy new acronym. Retailers whose offerings can’t be easily replicated online, such as grocery stores, hair salons and restaurants, also bounced back quickly after pandemic closures, Columbo says. That’s supported by a survey undertaken by Texas-based Amplify Relations on behalf of the Retail Association of Nevada. The survey found that consumers were anxious to return to hair salons and medical offices but more cautious about visits to shopping malls when the restrictions were lifted, said Bryan Wachter, the association’s senior vice president of government and public affairs. Even at that, two-thirds of the survey respondents expected to return to malls within a couple of months. But they’ll be returning to a different retail experience. Retailers that continue to focus on the basics — excellent customer service, excellent customer experiences — have established a solid base for themselves, Volk said. New focus on the safety of customers and guests allow them to build on that base. “I think the unique challenge tenants are facing is keeping current with fast-changing mandated guidelines, and effectively getting that message out to customers,” he said. “The logistics of the in-store or dining room experience will certainly be changing, in the short term and perhaps the long term. Navigating those changes for both the consumer and the retailer or restaurateur will be an ever-evolving model.” Many traditional retailers gained even more appreciation of omnichannel relationships with their customers. Richardson expects to see greater emphasis on development of app-based and online relationships with customers, curbside and drive-through delivery. Quickserve restaurants have been leaders among traditional retailers and restaurants in development of omnichannel relationships, but other retailers aren’t far behind. “Social distancing is probably here to stay to some extent. I think we’ll experience long-lasting ripples from this in our consumer and retail experiences,” Richardson said. Some of the changes that retailers launched to deal with the pandemic appear likely to remain even as the COVID clouds lift, Maloney said. The furniture retailers who added shopping by appointment during the darkest days of the pandemic shutdown are keeping the service — at least for now. Delivery services for groceries and restaurant foods appear to have rooted themselves firmly into consumer lifestyles. And, Maloney expects those changes will be reflected in newly developed retail spaces. Pickup windows, for instance, may become more common, even among retailers who never gave drive-through a second thought in the past. Traffic flow through shopping centers may be redesigned to better address curbside pickup. Changing shopping habits are going to be a further headache for enclosed malls, already rocked by the loss of major department store anchors in recent years, and now facing additional challenges in an environment in which consumers prefer fresh air and open spaces. “I think they’re going to be hit really hard,” said Maloney. Even in the short term, managers of big malls face challenges, said Volk. “An era of cleanliness not seen before is now taking place in public spaces of properties,” he added. “Until social distancing and capacity caps are gone, malls have to plan for queuing in the common areas of the malls around popular stores.” The big-box retailers that have been leasing smaller spaces in recent years, meanwhile, are likely to accelerate their move into more efficient spaces to control costs. Smaller footprints, in turn, present their own challenge. “Since the average store size has decreased, several tenants across the industry are now challenged with accommodating social-distancing guidelines to make customers feel safe and in control of their environment,” said Columbo. Some changes, Maloney noted, will require fresh thinking on the part of the city planners whose regulations establish templates for commercial development. But, the challenges for retailers and landlords alike is navigation of the choppy seas between today and tomorrow. Staying Afloat Some retailers managed to keep afloat through loans through the federal Payroll Protection Program (PPP), Richardson said. Borrowers who hoped to qualify to convert the loans into grants had to devote at least 60 percent of the loan proceeds to payroll expenses. But, they could use the other 40 percent for other fixed costs such as rent. “This is such an unprecedented event, and it seems like landlords vary wildly in their ability to help tenants,” explained Richardson. “It seems that there are no two tenant requests that are alike. Sometimes, a landlord is able to assist a tenant, and other times not.” Even if they want to help struggling tenants, some landlords are unable to offer assistance because of the terms of their loans, added Richardson. But, if their lending agreements don’t allow them to give a break to a tenant, property owners also face the possibility of entirely vacant space that doesn’t generate any rent at all. As Maloney puts it, “Landlords have bills to pay, too.” Sometimes, landlords offered help beyond cash. Bayer Properties, for instance, created a resource guide that helped tenants find their way through federal assistance programs. A task force created by the company provided operational and marketing assistance to tenants and educated them about steps to remain profitable. Restaurants learned how to handle curbside delivery; retailers learned how to keep customers engaged virtually. A digital advertising campaign and social media kept the center in front of consumers and promoted individual tenants. At least for the moment, the lion’s share of retailers and restaurants in northern Nevada have been able to pay their rent — sometimes slowly. “More tenants have been paying rent than people might think,” said Maloney. At the same time, most landlords are trying to find ways to help tenants weather the storm, maybe through rent forbearance or deals in which the landlord suspends rent payments and the tenant pays only the costs of maintenance, insurance and taxes until it’s back on its feet and able to repay back rent. “As long as there is good communication, people have been able to work through this,” Maloney said. But, he wonders what will happen if tenants aren’t able to generate sufficient sales to pay the rent once government-aid programs wind down. Already he notes that unemployment seems to be spreading as business reopen with smaller staffs than they employed pre-COVID. Vacancy rates won’t necessarily be rising across the board, says Volk. If landlords see the possibility of attracting a better tenant — or maybe a better paying tenant — they are less likely to be interested in negotiating concession with a current tenant, Volk said. In fact, top-quality retail space that’s become vacant as the result of the pandemic is finding new tenants pretty quickly. “I see landlords and their property managers taking the steps to evaluate a tenant’s business. Was it healthy before the shutdown? Was it not? If help is extended, will it be enough? Honest conversations are taking place between landlords and tenants about future prospects,” said Volk. As part of those honest conversations, retailers are putting to use the hard lessons of 2020. Some seek to include pandemic-related language into their leases, providing greater assurance that they’ll be able to stay in business if COVID-19 surges, Richardson said. Much depends on the ability of Nevada’s economy to bounce back to its strengths at the start of the year, a seemingly long-ago era when retail vacancies were low and the best locations were snapped up quickly. Now retailers and landlords alike hope government assistance will serve as bridge financing, helping them hold things together until business bounces back. But, as Richardson noted, no one knows when business will get back to pre-COVID levels. Added Volk, “The dust hasn’t settled.”

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