The retail sector vs. COVID-19

by Kasi Johnston26 Mar 2020

As restrictions continue to tighten, and fears continue to mount surrounding the spread of coronavirus, retailers are under immense strain. Many have temporarily closed their doors, either voluntarily or mandated by the government in efforts to help reduce the spread.

The World Health Organization declared coronavirus a pandemic on March 11. Total retail traffic in early March fell 9.1%, while retail traffic saw a dip by 3.9% and luxury retail took the deepest dive with a decline of almost 15%, according to Morgan Stanley analysts.

While this pandemic is certainly impacting retail in a big way, it’s also acting as a catalyst of broader trends that have already been happening. “Retail was undergoing fundamental change regardless of coronavirus. The virus is going to accelerate all the trends we’ve been seeing since the global financial crisis, namely brick and mortar retail disappearing in favour of online purchases,” said Tim Savage, clinical assistant professor of real estate at New York University’s Schack Institute of Real Estate.

The limiting factor in the scaling of e-commerce revolves around delivery mechanisms and the product itself, he added. E-commerce players are spending a lot of time and resources trying to solve the last-mile problem. This week, Instacart, an online grocery delivery service, announced its plans to hire 300,000 full-service shoppers over the next three months. Amazon and Walmart also recently said they intend to hire 100,000 drivers and warehouse workers to keep up with demand.

Despite e-commerce making up for some losses, a growing number of small businesses who may not have a strong online presence are uncertain about their survival and are looking to landlords for flexibility. Some landlords, if able, are opting to grant temporary moratoriums on rent.

“Maintaining positive tenant relationships and working with tenants who have bona fide needs will allow landlords to adopt successful relief strategies that provide tenants with sufficient relief for the tenant to remain viable, and ultimately return to full health at a cost the landlord can afford,” Sean Southard, partner at commercial real estate law firm, Crosbie Gliner Schiffman Southard & Swanson told GlobeSt.com.

Landlords can also consider opting to allow deferred rent payments for a specified amount of time, setting up a payment plan to allow for lower amounts, or allowing tenants to tack payment on to the end of their leases. Both landlords and tenants should review lease agreements carefully to help mitigate risk in whatever ways possible.

Looking at the commercial real estate industry in its entirety, lodging and entertainment have been the first and most affected by the virus. Brick and mortar retail will also be adversely affected in the short run, but office space also stands to see some accelerated innovation.

“We are going to see another reimagining of what the workspace looks like. If we all can work remotely from our apartments, the need for liquid co-working space changes, and places like WeWork become less relevant,” said Savage. Instead, interest in office space for a day or an hour might grow. Either way, the movement away from a traditional 10-year lease will continue, he added. Industrial real estate stands to benefit the most because of said continued reliance on e-commerce.

Fundamentally, Savage said it is a mistake to think of this through the same lens as the 2007/2008 financial crisis. Instead, it should be considered a natural disaster, and in the face of that, traditional monetary policy like lowering interest rates is effectively useless.

Savage suggests the Federal Reserve, Bank of Canada and other nations’ central banks should act as a lender of last resort and provide extremely low interest loans to credible businesses.

“They need to provide liquidity where it doesn’t otherwise exist. Their role is to prevent illiquidity from becoming a solvency issue, so lowering rates is not the solution; providing liquidity to markets is.

Tom Barrack, CEO of Colony Capital and a prominent real estate investor, believes this situation requires urgent action, according to a whitepaper he recently posted on Medium. Barrack said the US commercial mortgage market is on the brink of collapse, as revenues fall, layoffs continue, and consumption evaporates.

“Depressed revenues will increasingly depress, and when combined with hiccups in the credit markets, borrowing costs will continue to skyrocket, further compounding the inability of businesses to support jobs,” he said. “Without jobs, Americans will be unable to make payments on their mortgages, rent, credit cards, and automobiles.”