It’s Black Friday week and the holiday season is officially upon us. In a normal year this is the season when retailers make their largest profits and commercial real estate shows its true worth. However, this is not a normal year. While online retail supplanting brick and mortar stores is not a new trend, the COVID-19 pandemic has exacerbated it and hastened the demise of malls and main streets across America.
In this unusual year, MPA spoke with Pauline Hale, advisory manager at Altus Group and a longstanding analyst in the commercial real estate space. She talked through what this year has done to change the shape of US retail, how retailers are surviving, and how the growing need for “last-mile” warehouse space could at least stop the bleeding for malls in America.
“The story this year has been mixed for commercial landlords,” Hale explained. “If you had a grocery store as your anchor, you’re still in pretty good shape. If you had more outdoor space or ample parking you also had opportunities for retailers and especially restaurants to stay afloat. Rumors in August of Amazon talking to Simon Properties about buying up dead anchor space is driving some near-term positivity.”
Hale said that with the huge uptick in e-commerce comes an even greater need for space. Anecdotally, she estimates an online retailer needs three times the warehouse and distribution fulfillment space as a brick and mortar. Those retailers, Amazon chief among them, have a huge need for regional distribution centers in that “last mile” and many of them are eyeing disused malls to meet that need.
We shouldn’t declare “last mile” warehousing as the salvation of retail real estate, Hale stressed. For one, municipal interests may not want to see their past hubs of commerce and community turned into fulfillment hubs. As well, Hale expects a post-pandemic bounceback in demand for brick and mortar retail as people stuck indoors for months on end seek tactile shopping experiences and human interaction. The long-term value of the property, too, would drop if it goes from mall to warehouse.
Nevertheless, in the short-term, Hale believes the last-mile fix can help hard-hit mall owners and other retail real estate investors through this busy holiday season. She sees, as well, a hybridized model for some retail spaces functioning almost as rural Sears stores did back in the days of the catalogue. Amazon and its ilk still struggle with a returns problem and the more difficult logistics of taking things back - using smaller centers as points where returns can be conducted, Hale said, can alleviate some of that strain while providing anchor tenants in retail locations.
Hale emphasized that even when the pandemic goes, we will not return completely back to normal. Baby boomers, arguably the most intransigent demographic when it comes to online retail, have adopted Amazon and may not be going back to brick and mortar en masse. As well, she expects an increased level of disease awareness in the general population, even after a potential vaccine is implemented. Spaces like food courts may still strike a level of fear that they didn’t before the pandemic.
In a fast-shifting landscape, Hale said that commercial mortgage professionals need to stay nimble and look for opportunities, but they must also focus on what has remained stable - those big box grocers, hardware stores, and hobby stores that have performed with real strength through the pandemic, while other spaces, like large fitness centers, may never return as they were before.
Hale says that mortgage professionals should bifurcate their cashflow between the short-term winners and the consistent performers in any space - last-mile centers and grocery stores respectively.
Hale also sees a vision for a new combined retail/housing/warehousing space rising from the ashes of the dead malls. Sacrificing vast parking lots for housing development, keeping mall storefronts open for retail, and turning the back of the mall into an Amazon fulfillment center, she said, could keep these spaces relevant commercially and culturally.
“Retail was struggling to find itself before the pandemic and there were certainly some B, C and D class spaces that I don’t think any mortgage lenders would have underwritten as retail ever again,” Hale said. “But if they are revitalized as housing, or distribution, or a combination, at least in part, there’s a chance for them. Are they going to be back to the glory days? No. But, I think it provides some clear income stream for some of these spaces to survive.”