With considerable costs and new protocols, landlords and tenants will have to work together to adapt in order to bring shoppers back, says a new report by the Altus Group.
And it says the opportunity exists now for landlords to either rethink current assets, perhaps by considering more mixed-use space, or focus on rent restructuring in order to keep their retail tenants at least for the short term.
Bolstering consumer confidence to draw consumers back into stores will be a key initiative for the retail industry as it struggles with the economic fallout of the COVID-19 pandemic.
COVID-19 HAS ACCELERATED LANDLORD DECISIONS REGARDING RETAIL STRATEGIES
Ray Wong, Vice President of Data Operations for the Altus Group, said changes in how landlords look at their properties have really been in play for the last number of years due to the challenges in brick and mortar retail.
“It’s an on-going strategy for the landlord. But what the pandemic has done is it’s accelerated a lot of their decisions and strategy or instead of delaying strategies they’re forced to implement a lot of the changes more quickly,” said Wong.
“The key is to be able to get a certain mix of retailers that can draw a crowd, the ability to make the property attractive to bring people in for tenants to survive.
“What the pandemic has done especially with the closures is added to that urgency.”
Wong said the data indicates that retail brick and mortar is struggling but the positive sign is that overall retail sales from April to May have increased by close to 19 percent. However, they remain down from February, pre-COVID, numbers by 20 percent.
“There’s a bit of a pent-up demand where people want to get back into shopping again and they want to get out of their houses. That’s why we’re seeing a bit of an increase,” said Wong.
“But saying that, I think landlords and tenants continue to suffer based on the number of limitations and protocols in place that are limiting some of the consumers getting back into restaurants and retail stores.”
KEEPING TENANTS OPERATING IS OF HIGH PRIORITY FOR LANDLORDS
Wong said it’s important at this time that landlords take a closer look at their leases and what can be done to keep tenants operating, be able to pay rent and to stay on site.
“It’s more important than ever,” he said.
“With retail because of the closures, tenants have been asking for deferment of rent. That’s actually increased from initially two months and now they’re looking at asking for three months because they think it’s going to take longer for people to come back into stores and longer for people to spend.
“The economy is getting a little bit better but it still continues to suffer. Owners are focusing very closely on tenants to find out what is a solution to bring in more confidence in retailers. That could be protocols with COVID-19 with making sure that people feel safe going back into a mall. And there is a difference between outdoor and indoor. I think outdoor, people feel a little bit more safe but landlords in malls they’ve spent a lot of money with protocols with HVAC making sure there’s good air circulation and for people being a lot more comfortable coming back into the mall.”
Wong said retail has always been an opportunity and a risk for investors. But owners are feeling that rents will continue to soften on the retail side.
“But we’re also seeing a little bit more confidence from the investor’s side. They’re getting back into the market,” he said. “The more we get into this year and with a little more confidence and more certainly, we’re going to look at a very slow and gradual recovery. The important thing is it’s starting to be a little bit more positive but again at a slower rate.”
According to a recent blog on the Altus Group website by Erika Siegert, Senior Analyst, and Kruti Desai, Manager of National Research, said Altus Group’s recent Key Assumptions Survey indicated that the vast majority of retail landlords have implemented a deferred payment relief program structure to maintain operations. Still, 43 percent of retail landlords surveyed collected less than 70 percent of rent in April, and even less in May.
“Food-anchored retail, particularly with necessity-based grocery retailers, are expected to perform very well and have gained a spot as one of the top 4 preferred asset classes, according to Altus Group’s Q2 2020 Investment Trends Survey property type barometer. Having remained open throughout the pandemic, landlords with essential retailer tenants, such as grocery stores, pharmacies and even dollar stores, have had more time to adjust to the “new normal”, and to develop physical distancing and safety protocols that work for them,” said the report.