Commercial Investment Real Estate Summer 2020 | Page 15

The recovery will also be exceedingly slow, and
REIS expects vacancies to remain relatively elevated
through 2024. Several large markets are also likely to
experience continued reduction in demand, given the
shift to online purchases. Interestingly, smaller markets
might experience better performance metrics over the
next five years, given how local stores tend to have relative
dominance in a limited trade area. Therefore, as
shown in the accompanying chart, which aggregates the
top 50 largest retail markets, we expect vacancies to remain
elevated above the cyclical high from 2008-2009.
Economic distress will likely savage rents as well.
Effective rents are expected to decline by 11.1 percent
in 2020 alone, a historic dip. That is almost double the
6.1 percent total decline that the property type experienced
from 2008 through 2011.
What is next for retail? There are three predictions
that are likely to come true post-COVID-19.
First, online channels will be even more important.
If they have not done so already, retailers must
acknowledge the need to diversify away from brick-andmortar
and accelerate plans to sell their products and
services through online channels. This will likely hold
true across the spectrum, not just for consumer products
and durable goods. In late March, for example, the
horological giant Patek Philippe, whose watches retail
for a minimum of $20,000, began offering some models
for sale online via a select group of authorized dealers.
The firm, which celebrated 180 years of business last
year, had previously refused to sell any of their products
online — but the COVID-19 crisis has forced their hand.
Most analysts
expect the
shift to online
distribution
channels to
accelerate
significantly, in
the expectation
COVID-19 is
not the last
pandemic we
will encounter.
Second, the pressure on brick-and-mortar
stores will be even more intense. This follows naturally
from the first point. Simon Property Group, which
operates mall properties that perform better than the
market average, may survive the current debacle, but
it will have to think even more carefully about which
malls and outlet stores ought to remain part of their
portfolio, once battles about rent payments and defaults
are settled with the surviving tenants. Macy’s has
already begun to pursue a retail reformatting strategy,
building smaller experiential stores dispersed in offmall
properties like lifestyle centers, even as it plans to
close 125 mall locations. The COVID-19 pandemic will
just accelerate plans like these.
Finally, dense urban areas may fall out of favor.
If retail destinations favored co-location, benefiting
from an agglomeration of households that can support
sales, then any post-COVID-19 trend that prompts
households to shy away from concentrated urban areas
will influence how the retail landscape evolves. New
York, the epicenter of the COVID-19 crisis in the U.S.
in the spring, might endure a permanent demand
shock if tourism levels do not climb back to previous
volumes. A sustained outflow of households preferring
less dense suburban areas could also diminish demand.
If this demand shock persists, high rent levels commanded
by Fifth Avenue storefronts may become a
thing of the past as well.
Victor Calanog, PhD, CRE
Chief economist at Moody’s Analytics REIS
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