Commercial Investment Real Estate Summer 2020 | Page 29

A lot has to be sorted out, but until
then, uncertainty in retail real estate is elevated,
maybe as much as in hospitality. This
uncertainty is exacerbated by the acceleration
of retail bankruptcies and store closings that
had already reached record levels in 2019,
with approximately 9,000. The estimates
for this year’s closings range from 12,000
to 15,000 by retail industry insiders such as
Coresight. As of June 5, Coresight reported
15 retailer bankruptcies in 2020 and 4,000
store closings, including JCPenney (154
stores in the near future), Pier 1 (450 stores),
GameStop (320), Victoria’s Secret (238), and
The Gap (230), to name a few.
While these e-commerce and industry
pressures would suggest physical retail may
be on its last legs, there is news to the contrary
in 1Q2020 retail earnings. Walmart,
Target, Home Depot, and other big-box retailers
revealed that physical in-store sales
rose in 1Q2020, before shelter-in-place orders
took effect. Across the board, these large
retailers reported 3 percent same-store comparable
sales increases in addition to their
double-digit growth in online purchases.
The aforementioned big-box retailers
figured out how to safely handle in-store
purchases and process more “order online
and pick up” in their parking lots and frontof-store
areas that is now commonly referred
to as “click it and pick it up.” Additionally,
dollar-discount stores, like Dollar General
and Dollar Tree, which rely entirely on physical
in-store purchases, reported the largest
quarter-over-quarter, same-store comp increases
for the retail industry with 21 percent
in 1Q2020. Physical retail is not dead, but the
evolution that was underway has been accelerated
by at least three years — especially in
the category of online grocery.
Finally, another big retail question
from the pandemic is the future of
THE ONLY CONSTANT
IS CHANGE
experiential retail. Those retail spaces where
consumers were doing something rather
than buying products will face a more uncertain
future as we emerge from shelter-inplace
orders. Entities like Weight Watchers
may have given us a clue in their 1Q2020
earnings. The company noted that it was
able to pivot from a 75 percent face-to-face
experience with clientele to a 75 percent virtual/online
interaction during COVID-19.
The company experienced subscriber growth
and its highest customer satisfaction ratings
ever. Looking beyond Weight Watchers, we
see experiential can work in a digital format
without a physical store or real estate. Experiential
in a digital space can be successful,
but it needs imagination and innovation.
Some aspects will survive and thrive, like
hair salons, but others may not mesh with
new occupancy models that work against
gathering in person or high density.
INDUSTRIAL
Industrial warehouse has been the shining
star in commercial real estate during the pandemic
with metrics like 5 percent vacancy,
more than 90 percent of rent paid by tenants,
the fewest requests for rent forbearance, and
net positive absorption. These metrics are
not expected to change in 2H2020 and were
affirmed in 1Q2020 earnings by Prologis and
Monmouth MREIC where they highlighted
record throughput. However, some wrinkles
were identified in the supply chain during
1Q2020 that suggest even industrial and
warehouse will undergo changes in the wake
of COVID-19.
Just like commercial mortgage-backed
securities had to be adjusted after the Great
Recession, in what’s known as CMBS 2.0, a
similar evolution of the industrial and logistics
sector will occur after COVID-19. This
next generation of warehousing and supply
chain management will have to tackle increased
automation and a changing supply
chain model.
First, the U.S. will likely retire the
1980s Japanese model of just-in-time inventory,
which didn’t work out so well during
the onset of the pandemic. Instead, the goal
will be supply-stock inventory — ensuring
three or six months of additional inventory
is available across all industry sectors, from
automotive to personal hygiene, personal
protective equipment, and pharmaceuticals.
This system will be analogous to the national
oil reserve. But where do we put this supply
stock? It does not make sense to congest existing
throughput e-commerce warehouses
with inventory that is being held or on standby
for the next crisis; rather, it will require different
type structures and locations. Vacant
malls, closed retail stores, and underutilized
older warehouse space in secondary cities
are potential cost effective and readily available
options.
Supply stock in former retail is the
kind of adaptive reuse that is practical and
affordable. Supply stock will require we look
at these alternative buildings and secondary
locations, and local governments will be
more accepting of the zoning modifications
in use because it does not involve the same
kind of heavy truck traffic as an e-commerce
warehouse. Just such an example occurred
in May in a suburban Atlanta submarket via
the acquisition of a former Dave & Busters
and former Havertys Furniture showroom
for use as both last-mile fulfillment and
supply-stock storage.
Total Passenger Throughput at U.S. Airports
3.0
2019 2020
2.5
2.0
(in Millions)
1.5
1.0
.5
0
March April May
Source: Transportation Security Administration
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