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?
I was recently on the phone with a client who owns retail properties in Florida. One particular retail property has 19 tenants. 15 are restaurants, all of which closed, and of those 15, 13 have sent letters saying they’re unable to pay rent. I imagine that’s going to be a familiar story with a lot of retail establishments.
In the United States, certainly where I am in New York, shopping malls and retail centers were already struggling to find a place in a new retail environment, and I think this might be the death blow. In places other than the big central business districts, the High Street moved out to the retail centers, and the retail centers and malls are now going to be empty. I don’t have a crystal ball, but I think that it will have long-term effects. This dislocation resulting from the COVID-19 shut down might just be the catalyst to force retailers who are just hanging on and trying to restructure their debt to make the hard choice to continue on or close up shop. Some will figure out new ways to generate revenues, like strengthening their online presence to supplement their brick and mortar presence, others will not.
Businesses that were financially weak to begin with will have to makes the decision on liquidating and bankruptcy. There are federal and state rescue packages, but I suspect they won’t be able to help many of these retailers who have been struggling pre-COVID-19 lockdown. It also depends on what type of retailers; restaurants, until recently, were doing really well, but they’ve probably had the most impact from the COVID-19 crisis. Retailers who were negotiating for new retail spaces will reconsider and probably focus only on restarting their current operations vs. expanding, even with governmental financial assistance.
Things will eventually get back to a normal, but this is going to be a major dislocation for some time. Anyone who already had financial difficulties will find it very difficult to rebuild their business.
How do we reinvent the High Street or Main Street after this kind of trauma?
Here’s the scenario. If tenants are able to pay their rents, or a portion of their rents, landlords can pay their lenders, pay their real estate taxes and pay their other operating expenses. Lenders will need to grant debt relief and / or deferral of portions of the monthly debt service. If this happens, all stakeholders will struggle a little, not make much profit, but they’ll be able to hold on. However, if tenants aren’t able to pay their rents at all, the lenders don’t offer relief on loans, and there’s no relief on real estate taxes; then you’ll have a situation where landlords are going to be squeezed – there will be defaults, foreclosures and bankruptcies. However, well-capitalised landlords who are not over-leveraged and had strong businesses prior to the effect of COVID-19 should be able to come out of this successfully.
There’s reason to be optimistic that things will turn around eventually if property owners and retailers can just hang on. Until now, the economy was doing very well, and this dislocation is just causing the economy to suddenly halt. There’s no inherent economic reason why demand should not be there once the economy opens up again.
No doubt, there will also be a lasting increase in online shopping. I’ve never personally had an Amazon account, but clearly, now it makes sense to buy on Amazon. I can’t imagine I’m alone in that. It just takes a little social isolation to increase the amount of online shopping you’re doing. This dislocation will create a number of retail vacancies; it is an inevitable part of an economic downturn – exposing the weakest businesses. The result of the economic shutdown will be to weed out those weakest retailers; that’s going to cause more vacancies and opportunities for those who are able to survive and adapt.
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?
This crisis is a sea change. As I said about my own online shopping experience, people who’ve never shopped online before will be adopting it now. Suddenly there will be a reliance on it, and more people will take advantage of the convenience. That’s where the future has been for some time, and it will continue to have a massive impact on retail rents and retail property prices. Until now, the High Street, the big malls and shopping centers have been the shopping experience where people wanted to spend their money – people want to get out and about. That need for social interaction will continue. People like being out among other people, and that hopefully will never change. I see a continued move in retail toward providing personal services and experiences you can’t achieve over the internet. You can’t dine over the internet. You can’t go to a salon or have a haircut over the internet. Retailers need to expand and differentiate the brick and mortar retail experience from internet shopping.
That, of course, will happen as this virus subsides and people come out of their homes. I only hope the first thing we all do is go straight to our favourite restaurant or bar. Hopefully there will be an explosion of activity. As the virus subsides and society emerges from the quarantine, I’m sure everything will go back to how it used to be or at least some sort of new normal.
There will be a restructuring of current retail lease deals, and landlords will likely have to change their thoughts on the value of retail real estate. Landlords must offer a product which retailers can afford. This dislocation has only sped up the timeline for the finding a new place for brick and mortar retail in the internet age.
