The Future of Retail in a COVID-19 World

David Stern, Founder & President, Townhouse Partners

The COVID-19 crisis has significantly intensified the challenges for brick-and-mortar retail and given an advance view of a world with fewer stores. The lockdown has also served as a barometer of which categories are likely to emerge from the situation in relatively good shape and which face sharp decline.

Restaurants: A Mixed Picture

Despite the easing of restrictions in recent weeks, many restaurants will have a hard time surviving. The National Restaurant Federation noted a loss of $120 billion in sales through May, and projected a $240 billion decline in sales by year-end. Hundreds of independent, nonchain restaurants are not reopening, and many others do not expect to make a profit until almost 2021.

Potentially permanent trends including working from home, an exodus from cities, and job losses will continue to hurt restaurants dependent on office traffic. However, stifled demand could soften the fear of venturing out, and induce a return to revenue growth.

Quick service restaurants have been surprisingly resilient. In May, chains serving pizza, chicken, and burgers saw same-store sales growth of 15 percent, 4 percent and 2 percent, respectively, derived from a shift to carryout, drive-through, curbside pickup and home delivery service. Panda Express has plans to hire approximately 30,000 people nationwide, and other chains including Taco Bell and Dunkin Donuts also plan to hire thousands of new workers. In addition, Pizza Hut has seen record carryout and delivery sales growth of 15 percent in the second quarter of 2020.  

Physical Retail on the Decline

Of course, the decline of retail stores started well before COVID-19. Coresight Research reported 9,548 store closings in 2019, and forecasts upwards of 25,000 closings for this year. Chains with limited or nonexistent online platforms, such as Tuesday Morning, were weakened by having to close all its stores. Per Datex, 58.6 percent of retail rents were paid in May, with many tenants seeking rent relief, and smaller tenants worse off. Grocery-anchored shopping centers collected approximately 65 percent of rent from March to May, with 50 percent or less for those without grocers. Public net lease retail REITs received roughly 70 percent of rents in April, and up to 90 percent for some with portfolios of essential, credit-rated tenants. Theaters, gyms and large restaurants are facing potential new business models. While closures will likely result in lower rents, some chains will continue to exist online only, and may even prosper.

Retail beneficiaries of COVID-19 include discounters such as the TJX Companies, dollar stores, home improvement stores, convenience stores, drugstores, urgent care facilities and groceries. Supermarket chains such as Aldi and Lidl are expanding, which will assist the recovery. Shoppers have come to expect discounts, and Fitch Ratings estimated discretionary retail spending could decline 40 to 50 percent in the first half of 2020. Geography will factor in, as states dependent on tourism, travel, energy and manufacturing are expected to see a slower rebound. COVID-19 has spurred significant e-commerce growth, which is up 31 percent from a year ago.  In a recent report, CBRE estimated the need for another 500 million square feet of industrial space from increases in online demand.  

Malls at the Epicenter

Malls are at the center of the retail sector’s erosion. Department stores including Nordstrom, Neiman Marcus, Macy’s, J.C. Penney, Lord & Taylor and Sears have filed bankruptcy, will not reopen, or are shutting more locations. Some are laden with debt from private equity acquisitions, with their prospects dependent on current liquidity. Green Street Advisors projects just over half of future store closings will occur in malls.

U.S. consumers say they are least likely to return to department stores, with 71 percent advising they will not shop there or at malls, according to CouponFollow. Some failed malls are being converted for last-mile logistics distribution with robotics, as the industrial sector sizzles from the rise of e-commerce. In another telling sign, Facebook is reportedly in talks with Related Cos. to take over the Neiman Marcus retail space at Hudson Yards.

One operator to watch is IKEA, now Ingka Group, which plans to bring its Ingka Centre mall concept to the U.S. The company operates 45 Ingka Centres in Europe, China and Russia under the LIVAT and MEGA brands. The malls total approximately 43 million square feet combined, draw 480 million visitors per year, and generated $7.2 billion in sales for 2019. Ingka targets dense, urban locales in concert with digitally native and emerging brands. The company is seeking existing or defunct malls, department stores, or old post offices in major U.S. cities. Future centers are planned to be mixed-use meeting places with a wide range of facilities and services including health care, education, festivals, events and leisure activities. Although the COVID-19 threat affords Ingka an opportunity to acquire assets cheaply, the pandemic will be a challenge to this format.

The Way Forward

While May retail sales were up 17.7 percent from April per the U.S. Department of Commerce —the largest monthly increase ever—they were down 6.1 percent year-over-year. The short-term boost derived from reopening stores, favorable weather, tax refunds, unmet demand and the $3 trillion federal stimulus. However, whether this spike can be sustained will depend on future levels of reemployment, virus containment, and shoppers’ adaptation to store constraints for social distancing. Either way, it looks to be a bumpy ride.

David Stern is the founder & president of Townhouse Partners, a leading due diligence firm serving the nation’s commercial real estate industry. With a strong focus on value-added and innovative data-driven solutions, Townhouse enables lenders and investors to make successful investment decisions with confidence.