May 20, 2020
By Dennis Kaiser
A common refrain heard across the commercial real estate industry lately is “Retail isn’t dead yet.” In fact, that positive proclamation came across loud and clear on Marcus & Millichap Retail Trends 2020 webinar this week. Commercial real estate industry leaders and retail property investment experts looked at the retail real estate investment market and discussed how the economy and retail real estate will look after the global health crisis.
The discussion included Marcus & Millichap’s President and Chief Executive Officer Hessam Nadji; Scott Holmes, Senior Vice President, National Director, Retail, Marcus & Millichap; and CRE industry leaders Kimco Realty Corp.’s Conor Flynn; DLC Management Corp.’s Chris Ressa; and VEREIT, Inc.’s Brett Sheets.
Panelists were optimistic about the future of retail post-pandemic. “We need cheerleaders for retail,” Kimco’s Flynn said. “There’s lots of naysayers out there. We need to make sure to recognize that retail is not dead. It is going to be totally reinvented again.” Though he pointed out the challenges facing the industry, which they already had been monitoring, are likely to be around for the “long haul,” even as the pandemic accelerated them.
To that point Nadji said, “Don’t bet against the United States.” He expects a “rebirth for retail after the current crisis plays out.”
To be sure, retail has always been about adaptation and innovation, and he noted the economy and industry was in a very healthy “liquid” position going into this COVID19 pandemic. “We are experiencing incredible amount of pent-up demand,” Nadji notes now, though the building blocks of a recovery depend on mitigating a second wave of the infections. The retail sector’s supply and demand were in balance, and as Nadji pointed out, fallout from the health crisis could diminish supply, which could be considered as a positive factor for a retail industry many considered over-supplied before. That should give the market a chance to reinvent and reposition, Nadji said.
The seeds of retail’s rebirth are being sown in a rapidly-advancing environment, propelled along by the adjustments people are being forced to make because of the pandemic and stay-home orders. For instance, the adoption of online shopping is reaching deeper and wider into consumer segments never tested before. “One thing we do know is the health crisis has essentially expedited an evolution for retail that was already playing out,” Nadji said. That translates to the “age of ecommerce becoming more of a mainstay now,” he notes, and it is happening faster than it may otherwise have. “Many people who hadn’t shopped online are now shopping online. These will have implications that are maybe negative in the short term but will be positive in the long term,” Nadji added.
Those changes layer on top of positive market fundamentals leading up to the crisis, as well as subsequent government stimulus designed to help bridge the gap. Nadji points out that the intrinsic value in brick-n-mortar retail remains. “The underlying strength in retail sales, in median household income growth and household balance sheets had all been strong or well cleaned up compared to the last time we went through a shock. This will come into play at some point. Also, the stimulus will play a role in retail’s recovery.”
There are uncertainties regarding occupancies and other fundamentals, which must play out as the months roll along, notes Nadji. On one hand, stronger tenants were in a better position to pay rent so far, though lower tier or weaker retailers haven’t fared as well.
Actions landlords take now to collaborate with tenants will impact the post-pandemic retail landscape, too. For example, DLC Management’s Chris Ressa reported that the company collected more than 71% of its rents for April. While Kimco Realty CEO Conor Flynn’s notes they collected roughly 60% of rents. The leaders point out those percentages are moving targets because tenants continue to make payments throughout the month and there are active negotiations underway with retailers.
Among the ways, landlords are working with tenants is in the area rent relief, if possible. Those accommodations are of course dependent upon variables such as the market and property, tenant situation and what the owner can work out under its terms as a borrower with the lender.
VEREIT’s Sheets noted that typically tenants have been seeking between two and four months of rent deferment on average. He said, the process during the health crisis is “about being completely transparent with each other and communicating on a regular basis. We want to help every tenant because every tenant needs some help through this.”
In the case of the rent forbearance requests received by DLC Management, Ressa indicated: “We have been empathetic to the scenario and just like everyone have had our challenges, and we’re understanding to what is going on.” That means adopting an approach focused on finding solutions, but also looking at the totality of the circumstances in the coming months, as well as in the future.
“We are making a lot of progress with those who are willing to look at the totality of circumstances and come to a negotiation and deal with those groups. The ones that aren’t, we’ve been challenged and are working through some of those,” Ressa said.
For comments, questions or concerns, please contact Dennis Kaiser