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

Torben WelchPartner, Messner Reeves LLP

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?

Our situation is similar to what Matthew is explaining. We also have a form of a soft lockdown. People are left to their own devices when it comes to complying in Salt Lake City and Denver. What we’ve notice is that lots of people made an initial rush to buy supplies that they believed they would need. At the same time the schools shut down and most businesses closed. Restaurants, of course, closed to in-house dining and are now mainly ‘grab and go’.

Most of the retail establishments have closed, largely through stigma rather than being ordered to close. Consequently, no one is coming to retail locations and anchor store tenants have shut their doors or restricted their hours. The ‘mom and pop’ stores have been struggling, mainly because they’re not getting the footfall and they can’t afford to maintain their employees, similar to the restaurant industry. So that’s where we’re seeing a lot of the questions from both landlords and tenants related to temporary force majeure.

Most of my landlord clients have been good in keeping reserves back to satisfy the obligations to their lenders. So they have about three months where they can use those reserves. But elsewhere, for example, we have one building with 14 tenants who are shutting down and all saying they don’t intent to pay rent. We’re trying to communicate with tenants and taking a proactive approach for tenants and landlords. Advising tenants that there are financial programmes they can look at, check your business interruption insurance as that may or may not apply. So we’re trying to help our tenants at least tap into what’s going on.

And to Matthew’s point about federal and state support. A lot of it is coming down to county level, which is the real local level. There are grants and loans that are being made available to small businesses. But the amount that they’ve already set forth – we’re talking maybe $2 million for a metro area or two million people with businesses – is probably not sufficient. But I think people are taking a wait-and-see approach when it comes to packages from the federal and state governments before they actually tap into all that.

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

I think the landscape will change in the next 12-18 months. Things will look different, but I don’t think it’s necessarily going to look worse. There’s plenty of opportunity here, especially if you’re a regional chain where you have smaller ‘mom and pop’ shops. As with Lieven’s point, there are going to be class B and C locations that being consolidated into more of a major class A type location. And that’s going to leave opportunities for other chains that haven’t been able to access some of these class B locations because they’ve been tied up in long-term leases.

There’s going be a lot of work to do; where 10 years ago the landlord wanted to lease 10,000 square feet, now they’re looking more at 3-4,000. There’ll be a lot of discussions there. But I think, there’s also going to be opportunities for tenants who didn’t have certain locations available to them previously. It is also worth noting that apart from New York or LA, Americans love their cars here. They like to drive and they like going to suburban locations for shopping. It’s an experience with family and friends. So I think people are going to continue to do that. And if they can access retailers that typically have not been available in their location, I think that’s a very positive thing. So there’s going to be a lot of changes where people are going to see new types of retailers in their area that previously they’ve only been able visit online. Americans outside the metropolitan areas like to see, touch and feel things on a smaller scale. And I think that’s a very good thing for everybody.

And as it grows outside in the suburbs, people will become more opportunistic and willing to travel a little bit to see their favourite brands in smaller locations. Tenants know all this and have seen the trends in the past few years. I don’t think Covid-19 changes those plans because they’ve already been consolidating locations. So it’s something that just accelerates the trend.

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?

Technology is always changing and there’s a lot of different ways clients can change with it. They’re never going to compete with the Amazons, Alibabas and Wal-Marts, with the amount of inventory these companies have and the ability to deliver within 24 hours.

Like the other contributors have already said, you have to adjust what you’re doing and there is a benefit to making things available. You can compete even better with Amazon by offering a couple of hours for delivery. If there really is something that somebody wants and if they need their hands on it today, like trainers or a game, use technology to deliver those items in less time – or come in the store today and pick it up. You can’t do that with Amazon.

As a retailer, there are ways that they can adapt and help the customers get what they want. Retailers just have to change their mindset and that’s one way I think technology can help any size of retailer, by making sure their forward facing technology is up to date, accurate, easy to use. The user experience is going to be key. A lot of people will look at that before they even venture out to figure out what they want and there’s a way that you can control that narrative. Also important, clients are telling me that contactless payment is now becoming the norm. I know Europe is a little further ahead of where we are, but Google Pay, Apple Pay are going to make a big difference to the online and physical shopping experience. Not all retailers currently offer that.

As a result of the Covid-19 crisis this will become a huge trend. People will want clean technology solutions to make it easier to purchase products and services. Fortune favours the bold, whether it’s intentional or unintentional. Times change and you need to figure out what you can do to change with it, there’s going to be a lot of innovation that we’re going to see, not just the result of this virus but just because of the way things are going.