Joshua Watkins participates in the IR Global Real Estate Virtual Series – Weathering The Crisis: What Future For Real Estate?

Foreward by Andrew Chilvers

Real Estate across the globe has taken a huge hit by the Covid-19 crisis as businesses and retailers close indefinitely, while customers are locked in their homes.

In the US and UK, the ‘brick-and-mortar’ retail sector has been in a sensitive state for some time as people have been deserting the high street and opting for online shopping. Even the new hyper-malls that had focused on the out-of-town shopping experience have closed during lockdowns imposed by governments around the world. Add to this the closure of all restaurants, pubs and hotels, and thousands of small and medium-sized businesses are now struggling to survive for month to month.

Consequently, real estate investment businesses are finding it difficult to collect rents. In London, Intu, a property investment trust, claimed it received less than 30% of the rent due to the company in Q2. This compared with almost 80% in the corresponding period the year previously. Elsewhere, Hammerson, an out-of-town retail parks developer in the UK, said it had only received 35% of Q2 rent from clients.

On the UK high street retailers such as BrightHouse and Debenham’s filed for administration along with Italian restaurant chain Carluccio’s. These were only the big names, many more smaller businesses followed.

Such horror stories were echoed across North America, Europe and Australia as real estate was hit worldwide. As with London, the sectors hit hardest in different jurisdictions were hotels, restaurants, bars and general entertainment outlets followed by retail and housing (particularly second-homes).

How this plays in the coming months and years is difficult to predict. But all real estate analysts agree there will be a sea change in the medium term at least as home owners, retailers, landlords and investors rethink their rental and investment strategies.

Can you tell us about the impact COVID-19 will have on the retail sector, short and long term?

In the UK all ‘non-essential’ retailers are banned from opening their stores for at least three weeks effective from 24th March 2020. Some retailers who are permitted to remain open have opted to close their doors too, to safeguard staff and to help insulate against a huge reduction in footfall. In the short term it will therefore be critical for retailers to do as much as they can to maintain, and improve, their online presence and to provide delivery and/or pre-order services at a greater scale than ever required before.

E-commerce has already led to a significant reduction in high street stores during the past 10 years in particular. With the current ban in place, e-commerce has already become the norm for the majority of shopping – even for goods that can be bought in stores that are permitted to remain open. It appears that the public are only going to the shops as a last resort.

We may see e-commerce take an even stronger hold on the way we shop as a result of a) the investment in retailers’ online systems, which could make it easier than ever to shop remotely, and b) sadly, a more conscious society who have the health risks associated with public gatherings at the very forefront of their minds, for the foreseeable future.

Many UK commercial leases include an obligation to remain open subject to force majeure events (which the coronavirus should fit, on the basis that the tenant will have a duty to protect the health of their staff). Landlords could offer partial or full deferred rental payments or encourage their tenants to seek out one of the guaranteed business loans offered by the government as part of a bail-out package.

How do we reinvent the High Street or Main Street after this kind of trauma?

The retail sector may have to focus on experiences that simply cannot be made available online. This may include testing or trials of products instore, discounts only available instore, and the use of technology to enable immediate assistance to all customers who are looking for help or guidance which is typically not immediately available from a human in the conventional sense.

Retailers may also look to harness the use of augmented reality (AR) to create a truly immersive experience instore. It will be important for retailers to harness technology rather than fight against it, and if they do so in the right way, they should be able to create an experience for consumers that utilises a blend of reality and technology. In doing so, they should be able to create a deeper understanding of their consumers and create a connection with them that goes far beyond what is currently experienced.

Surplus regional shopping malls could be used as additional space for the healthcare system to use in the time of crisis. While not a shopping mall, in the UK the London Excel centre is now being used as the NHS Nightingale hospital. Similar projects are underway on at both Birmingham’s NEC Arena, and at an exhibition centre in Manchester. Given the average size of shopping malls, they could be fit for conversion of such a use in the future.

We have already seen a great deal of conversion of buildings on industrial estates in the UK, to residential units. The conversion of shopping malls for the same use is therefore plausible, and there is precedent for large scale conversion for residential use.

Locations outside of populated centres but near distribution centres may work best to minimise costs while still reaching customers.

In response to Covid-19, will there now be a huge rise of online shopping? In the future can brick-and-mortarretailers also use technology to attract the right kind of customer?

Maintaining both an online and offline presence is challenging but both will reach different markets.

A retailer must decide whether there is a need for each brick-andmortar store they run. Would in-store customers be able to find the businesses’ online presence after the store closes? It may require an assessment of brand loyalty of the customer base.

If it established that both an online and offline service is suitable, then it makes sense for the services to be aligned to offer the customer the best overall experience which can be used interchangeably.

Customer data can allow a retailer to offer targeted discounts or vouchers based on a customer’s purchasing history. It is important that these discounts are offered at the right time, if they are released in store it should be immediately after paying while the customer has the wallet/purse in hand. Any coupons released will normally be stored in the wallet as a reminder of what to shop for next time.

Should the customer agree to being emailed then targeted emails can be sent to the customer at opportune times during the week to prompt them to shop with that business. E.g. if a customer is a known bulk weekend shopper, sending marketing material on the Thursday or Friday will immediately put your store in the customer’s list of where they want to buy from.

Speed and convenience is key to accommodating Millennials and Gen Z. Millennials/Gen Z are more likely to use price comparison websites, social media, and anywhere that offers free shipping. Apps are much more likely to be successful if the customer is able to obtain discounts or offers using them, which can then only be redeemed instore. The apps provide immediate access to the discount or offer, and the fact that it can only be redeemed instore will draw the customer in. Ultimately, if the discount or offer is significant enough to outweigh making the purchase online, the customer will often make the effort to go in-store.

Contributing Advisors

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