Commercial Investment Real Estate Summer 2020 | Page 14

BY THE NUMBERS WITH
By Victor Calanog, PhD, CRE
COVID-19 AND THE
RETAIL DEBACLE
The global public health and economic crises have exacerbated
pressures that retailers have faced for years.
Driven by shutdown policies related to
containing the spread of COVID-19,
the U.S. economy is likely to go
through its worst economic downturn since
the Great Depression. Moody’s Analytics
forecasts that U.S. GDP will decline by 6.6
percent in 2020 — a figure that is 1.7 times
as bad as the Great Recession of ’07-’09.
Compared to that financial meltdown, which
took place over six quarters, this recession
will move at light speed, with most of the
distress happening in the middle of this year.
Retail Construction, Absorption, and Vacancies
(Top 50 Markets from 1984-2024)
Square Feet (in Millions)
75
60
45
30
15
0
-15
-30
-45
1984 1988
Source: Moody’s Analytics REIS
The retail property sector, in particular,
is expected to experience significant
distress. Already under pressure from the
rise of online commerce over the last 20
years, the sector entered the current downturn
in a position of relative weakness. Mall
vacancies were at 9.7 percent at the end of
2019, a historic high — higher than the 9.4
percent level at which vacancies peaked in
2011 during the last downturn. Since the
pandemic’s effect on the economy escalated
significantly in mid-March, major retailers
Completions Net Absorption Vacancy Percent
Forecast
1992 1996 2000 2004 2008 2012 2016 2020 2024
16%
14%
12%
10%
8%
6%
4%
2%
0%
Vacancy Rate
like J.Crew, Neiman Marcus, and JCPenney
have already announced plans to enter
bankruptcy. Large operators like Macy’s and
REITs like Simon Property Group preemptively
closed their stores in mid- to late-
March as precautionary measures; they have
since encountered challenges attempting to
reopen a handful of locations.
But we need to be nuanced with the
analysis. Not every retailer was asked to shut
down given shelter-in-place policies. Groceries
and pharmacies remained open, having
been deemed essential activities. One of the
handful of job categories that actually posted
gains in the April jobs report, released by the
Bureau of Labor Statistics on May 8, was the
category that covers warehouse clubs (which
posted a job gain figure of 93,000). Not every
retailer found it difficult to make rent
payments for May or June, although all retailers
have incentives to ask their landlords
for some form of rent relief.
With that said, because the current
crisis is expected to hit the retail property
sector both in the immediate term as well as
over the long run, most analysts expect the
shift to online distribution channels to accelerate
significantly, in the expectation that
COVID-19 is not the last pandemic we will
encounter. REIS’s forecasts are, in general,
historically grim. REIS expects that neighborhood
and community center vacancies
will rise from 10.2 percent pre-pandemic to
a record high of 13.3 percent in 2021, before
slowly recovering.
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
SUMMER 2020