Blog March 26, 2020

The impact of COVID-19 on commercial real estate: Part 1 – the future of retail

By MRI

COVID-19 is dominating the news agenda, and while the immediate effects are clear, the long-term impact is still very much an unknown – and that’s giving everyone in the commercial real estate industry reason to consider both the near- and long-term future.

While under the current circumstance it’s difficult to predict what the commercial real estate market will be like next week, never mind in six months’ time, there are steps investors, owners and corporate occupiers can take to prepare for likely eventualities. With the right planning and technology support they can help protect themselves and, just as vitally, their industry from some of the impact from this rapidly evolving health crisis.

In this, the first of two-part series looking at the impact of the coronavirus, we look at how the uncertainty caused by the pandemic is affecting a retail sector already in crisis – and what retail landlords and occupiers need to keep in mind as they navigate the accompanying business challenges.

The surge in home shopping

It’s no secret that retailers in shopping malls and main street alike have been facing intense pressure in recent years. Online only retailers, like Amazon, have leveraged the ease and convenience of technology to empower consumers to browse and purchase goods without having to leave their house. Already we are seeing ramping up to meet new home shopping demand spurred by the crisis, with the company hiring thousands in markets such as the UK and up to 100,000 in the US.

Coronavirus, which has spread across the world at unprecedented speed, is an additional challenge that retailers do not need. The need for “social distancing” and in some cases “self-isolation” is not only reinforcing shop-at-home habits but is spurring some people who’ve so far resisted online buying to try it – if only out of caution. What’s more, major brands such as Apple, Calvin Klein, Nike and Zara have closed stores worldwide temporarily.

The immediate impact of this is a significant loss of revenues, which in the longer term could lead to some staff being laid off and some physical stores being closed permanently, leaving more empty shop space. These are also popular brands that draw consumers to shopping malls and busy commercial centers in towns and cities, so those retailers that don’t close may suffer even more when popular neighbors close shop.

Taking action to reinforce retail on the ground

For now, retail occupiers will need to take stock of their situations – part of which will be assessing their leases to understand their options and restrictions. Are there clauses for breaks or rent holidays or tying rents to turnover they might need to be aware of and leverage? They may also need to take a deeper dive into their data to assess where they can manage with fewer staff, where they might close stores temporarily for now and where they might want to focus efforts when we eventually come out of the current crisis.

And for their part, what can landlords do? Those that want to keep their tenants in place will need to work with retailers to come up with creative solutions that will allow tenants to maintain operations and survive the current crisis. Landlord also have to understand their own property and lease portfolios and be aware of which clauses tenants might invoke and what they as owners and operators need to do to ensure they comply with all their obligations.

Flexibility on the landlord’s side may be crucial, as retailers will likely be looking for lower rents and longer payment periods to help offset the long-term effects of coronavirus. However, landlords could negotiate arrangements that allow them to recoup some lost rent when the economy rebounds — this can be through an agreement to peg rent to a percentage of revenue or a profit-based approach.

No matter what retail property owners, operators and occupiers do on their own, the situation is likely to require unprecedented cooperation between all parties to ensure a they recover to see a brighter future – as all sides want to see their sites survive and eventually thrive again. Working together to ensure this is really the only way forward at this point.

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