After Coronavirus, Retail Real Estate Owners Will Face Extraordinary Challenges

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By now, it almost seems pointless to further belabor the impacts of COVID-19. Countries around the world are locked down and in America 270 million people are being asked to stay at home. The latest figures indicate 100,000 to 240,000 Americans will lose their lives to the outbreak, and that’s with a continuation of the social distancing policies and shutdowns that are currently so impacting the economy and daily life.

There is no denying that the new coronavirus and the disease it causes represents an unprecedented disaster. But as history shows, even tremendous disasters like the 2010 earthquake in Haiti (over 300,000 dead) and even conflicts like WWII (a little over 400,000 U.S. military deaths, a tiny portion of the total death toll) cannot stop humans, and our systems, from progressing.

For countries and their health agencies, that means sweeping changes to the way outbreaks are prepared for. For the people of the world, collectively, it means a new level of understanding and a new readiness to beat global pandemics. When the next outbreak rolls around, be it in five years or 30, it won’t be our first rodeo.

Indeed, COVID-19 will eventually pass into the rearview mirror. It’s scope, though, will keep it at the front of our minds. In CRE-land, post-coronavirus adaptations might not be so quite so grand in scale as countries and hospitals. Our business is inherently local, and so too will our adaptations be. For people outside the industry, it may be hard to see how we’re responding, but respond we will.

What those responses post-coronavirus look like is a major theme of our newest research report, Retail Property Risk and Opportunity in the Age of the Outbreak. In this report, we investigated what retail owners are doing right now and what they’re concerned about as the virus ravages their tenants everywhere. What tenants will pay rent and which will skip a month or more? How will owners themselves be able to make their tax and debt obligations, and given the flurry of stimulus injections and moratoriums, do they even need to?

While it’s important to understand how landlords are responding to the crisis right now (in this case, an often case-by-case approach offering free or delayed rent payments and other charges to tenants, particularly for smaller businesses), understanding what comes next is just as important.

We also spent a lot of time considering how practical matters of retail ownership, like tenant type and tenant mix, can be optimized to ward off future outbreak-borne disruptions. We found that some businesses are poised for success much better than others. Retailers that focus on groceries and essential items have been hard-pressed or unable to keep up with demand, which has kept their rent payments secure. Some businesses which focus on totally non-essential items have such well-established omnichannel distribution models that they’ve been able to keep the ship afloat. And other retailers have capitalized on the situation, expanding their footprint with pop-up locations in busy areas.

These observations have implications for the real estate world going forward. Owners could consider whether it is appropriate to increase the number of tenants in these more insulated categories in their centers, for instance. We found that retail owners should expect other changes, too. Stores themselves are adapting in various ways, from increased staff on the floor performing high-visibility cleaning to installing transparent panels in checkout lines, to protect both staff and customers from coughs and sneezes. With time, retailers may begin to expect their landlords to make or pay for adaptations such as these.

William Wamble, one of our interviewees for this report, is First Vice President for SRS Real Estate Partners’ National Net Lease Group. He told us that going forward, “We’re optimistic investment activity will pick up on the other side of this, but I think we will see people underwriting more reserves, vacancy factors or added emphasis on higher-credit tenants.” This could make it harder for smaller retailers, particularly those in non-essential niches, to find the best space. In turn, these prospective occupants may wind up offering greater rent payments than before this crisis.

We found that investing in retail will undergo deep change, as well. For one thing, tax-deferred exchanges are going to be hit by the long-term impacts of the outbreak. “1031 exchanges are going to face some challenges in Q2 and Q3,” Mr. Wamble said. “Listing activity is understandably down today so there will likely be less 1031 activity later in the year unless deadlines are extended. Those who are actively in exchanges are still looking for deals but are likely looking for higher credit tenants.” Beyond just 1031 deals, single-tenant properties may take a hit as investments, since they have no ability to defray the risk of an outbreak-related shutdown, and consequent lost rent, across multiple tenants.

The COVID-19 crisis is still far from over, even according to the most optimistic models. However, the day will come when new cases start to burn out and governments begin to relax their rules. It’s not enough to adapt to what is happening right now. The coronavirus outbreak represents a turning point in the way much of the world does business, goes out and about, and plans for the worst. Retail owners who can afford to play the long game—and there may not be many of them—will find themselves reevaluating their portfolios and risk exposure when the current crisis subsides.

Explore Propmodo’s COVID-19 coverage

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