A new report by commercial real estate firm Colliers suggests retail tenants are facing rising operating costs of about 25 percent compared to their costs prior to the COVID-19 pandemic.
PPE & Cleaning Responsible for 24% of Increased Costs
The report, Retail Recovery: Sales, Traffic, and Changes to Retail Space, said tenants indicated cleaning costs and Personal Protective Equipment (PPE) are responsible for about 24 percent of the increases.
“This increase varied across different retailers as QSR restaurants and personal care saw their costs increase the most at 35 percent, while professional services experienced an increase of 21 percent. Interestingly, it appears operating costs are remaining steady, even as more consumers return to in-store shopping,” said the report.
“This pattern is consistent across different industries, with the exception of sit-down restaurants and clothing and apparel. Sit-down restaurants have seen a significant cost hike, with inventory costs behind 22 percent of the increases, likely due to the cost of expired goods that were never used. Wage increases are another driving factor, as employers top-up wages to compete with the Canadian Emergency Response Benefit (CERB) program, add “hazard pay” or hire additional staff. Extra security and changes to store layouts are behind the 11 percent increase in costs for clothing and apparel.”
Jane Domenico, SVP & National Lead, Retail Services | Canada for Colliers, said a line item increase has to be managed in some way either through revenue or managing other costs.
The report, she said, highlights the difference in increased costs based on the different industries involved.
“We truly hope that this will be helpful to both our retailer community and our landlord community,” she said.
The report by Colliers found that 44 percent of tenants surveyed plan to apply for the federal government’s new Canada Emergency Rent Subsidy while 28 percent won’t apply, 21 percent are not sure if they will, and seven percent were not aware of the program.
“The 44 percent of respondents who indicated they would apply for the program are primarily the same tenants who received landlord or government aid from March to September. During this time, 81 percent of this 44 percent received relief through landlord-initiated programs, 39 percent received relief through the Canada Emergency Commercial Rent Assistance (CECRA) program, 25 percent received abatements, and 17 percent received deferrals,” it said.
Colliers Report 20% Increase in Customer Spending From May to September
Colliers said retailers have seen a 20 percent increase in consumer spending from May to September, although overall spending is still down 49 percent compared to the same time last year.
“I’ve been saying since the beginning of this that consumer confidence is the key,” said Domenico. “We came off this great high in August and we did see an improvement by the end of October.”
But this is something to monitor as the COVID situation is changing by the day in the country and in various regions of the country.
The report asked tenants whether they would like to change the retail space they currently lease and 62 percent indicated their space needs are roughly the same, 26 percent said they need less space, and 12 percent said they need more space than what they currently lease.
“The respondents who indicated they would like to decrease their space want to do so by about 35 percent on average, while those who are looking to increase their space want to do so by 40 percent on average. Tenant size was not a predictor of whether tenants’ space needs are changing, with small and large tenants as likely to indicate that their space requirements are evolving,” said Colliers.
“The pandemic has impacted the various categories of tenants differently, which can be seen in the changing space requirements of different retailers. 60 percent of sit-down restaurants and 50 percent of QSR indicated they need less space. The opposite is true of supermarkets, 50 percent of which want more space.
“For those who indicated they are looking to downsize, 44 percent indicated they would like to do so because of increasing operating costs, 40 percent because of lack of consumer traffic, and 16 percent because of online sales. This is an indicator that while online sales could be set to take a larger portion of total retail sales, only 16 percent of tenants feel that e-commerce can replace their physical stores.”
Colliers Report Indicated 9% of Participants Planning to Permanently Close Businesses
The report said nine percent of respondents indicated they are working on plans to permanently close their businesses.
Here are some of the key takeaways for owners from the Colliers report:
- Retail shopping trends are likely to be very regionalized and local strategies are needed: COVID-19 is impacting regions across the country differently. Some provinces and cities are experiencing a second wave and are facing the threat of another lockdown, while others have managed to contain the virus. We expect discretionary shopping to be stronger in places with fewer new cases, while essential shopping will dominate in regions that impose more stringent COVID-19 restrictions.
- Retailers will try to cut costs wherever they can: A 25 percent increase in operating costs is not sustainable for most retailers. This could mean hiring freezes, an increased need to alter supplier contracts, and potential downward pressure on rents.
- Governing bodies need to find a way to keep consumer confidence positive: Our analysis indicates that public policy has a greater impact on consumer confidence than the number of new COVID-19 cases and consumer confidence has a direct effect on spending and traffic.
- Retailers and landlords need to cooperate to deliver omnichannel solutions ahead of the holiday season: The holiday shopping season will be very different this year. Retailers won’t be able to accommodate the same volume of customers in their stores as they normally would. As a result, parking lot pick-up programs, extended sales and promotions, delivery services, and robust e-commerce platforms could be the defining factor in making or breaking the holidays for many retailers.
- Retailers and landlords need to work together to create the best customer experience possible: Cleaning protocols, social distancing, and masks are of paramount importance. Customers will be cautious about where they shop and all efforts that make customers feel at ease will help increase stay time, traffic and ultimately sales.