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Open for Business? The Retail Sector in the New Normal

May 28, 2020

Garrick Brown, Vice President of Retail Research at Cushman & Wakefield, spoke with Mike Morris, Director at EisnerAmper, about the challenges and opportunities that will play out as the economy reopens, as well as what we can anticipate in a post-pandemic world.


Michael Morris: Hello, and welcome to Breaking Ground, real estate insights from EisnerAmper. I'm your host today, Michael Morris, Director at EisnerAmper, and with us is Garrick Brown, Vice President of Retail Research at Cushman & Wakefield. Garrick is one of the leading retail real estate analysts in the United States. He speaks frequently at Industry Events and he's regularly quoted in retail matters. During today's episode, we'll be discussing the challenges and opportunities that will play out as the economy reopens as well as what we can anticipate in post pandemic world, Garrick, thanks for joining me today for the podcast.
Garrick Brown: Mike, it's a great pleasure to be back.

MM: Hey, you delivered a very informative presentation last week at our real estate principles series, and I'm greatly appreciative of it. Can you explain the current status of retail?
GB: Well, we've never seen anything even remotely close to this as far as the challenge. These are unprecedented extremely difficult times. First off I should clarify, retail is not monolithic, we've seen all the stories in the past, retail apocalypse, so forth. But really there were sectors that were doing great, there were sectors that were muddling through and there were sectors that were really quite challenged before this. The challenge of COVID certainly with the lock-downs, but what we've seen is everyone's facing a challenge, even the grocery and drug store guys, April sales came out and their numbers are a little bit down and that's what their ability to remain open.
GB: But if you are already challenged going into this, it's just like the way the disease preys on those of us who are vulnerable as far as our health circumstance, we have whole sectors that are really going to get hit hard. About 35% of apparel and department store players were already showing signs of financial distress before this. We've already started to see a slew of bankruptcies, and that's not exactly new news, it's just that this has accelerated the timeline and it took away any window of opportunity for struggling chains to pivot, to get their balance sheets in order to really try to find relevance in this new age where eCommerce is gobbling up market share as are the discounters and off price.

But I think what's really telling is that, if I had to name the two sectors where the biggest challenges are, there was apparel and department stores, no surprise there. But then on the flip side of the equation, something that was growing steadily each year, incredibly popular with consumers, and that would be food, beverage and entertainment. That vulnerability has more to do with the business model, it doesn't matter if you're Thomas Keller or if you're the Mom and Pop Pizza place, the business model for restaurants typically it's such a tight margin business that, if you have a 10% profit margin on your gross sales, you're a rock star.

The challenge going into this, the National Restaurant Association teamed with some pollsters, they asked restaurant tours themselves, "Could you survive a one month lockdown, a three month lockdown, a six month?" And at one month, 70% of the operators said, "Yeah, I'll get through it." In fact, there's about 75%. At three months, it started to move a lot closer to 50 50, and at six months, it's only 15% said they could make it through. If you're a restaurant business and you're not a fast food QSR where 70% of your sales were already a drive through window or people taking it home, fine dining for example, where less than 5% of the revenues came from that kind of activity, they're getting clobbered, and as we've reopened the issue of occupancy limits.

Your rent is based on full capacity seating, so it's one thing they have no revenues for two months, but picture no revenues for two months and say the potential of half revenues, and we don't know for how long we're on the viruses timetable for that. So, the devastation's going to be pretty dire for restaurants. That will rebuild, and that's where there'll be immense opportunities but should be an awful lot of pain beforehand. That's the hard part of where we're at.
MM: I noticed a number of cities are looking to block off streets and create large eating areas. Obviously it depends on weather conditions. So here in California, it's a lot different than Minnesota, but I thought that was a great concept. I heard it started in Seattle and it's already down the coast now in many markets.
GB:Berkeley, Portland, the cause I'm on where I get to speak to economic development or city planning types, I keep reinforcing with them, you're going to have this drastic drop off this worse than it is in tax revenues if you can't find creative ways like opening up street fair type situations while practicing social distancing, fast-tracking any zoning or permitting changes to allow restaurants to cut holes in their door or windows, so they can actually do walk-up, takeout, which not a lot of players have been able to do. I used to live in Northern California, so I know how hard it was to ever get a drive-through done in places like Marin or Napa.

But the reality is that this might be with us, if you really listen to what the scientists and doctors are saying as opposed to politicians, we're probably looking at 18 months to 24 months before, either there's herd immunity or we have an effective tested vaccine, there has been mass produce to the level where they can get it out to the public and make a difference. So it's really critical, this is one of those rare circumstances where tenants, landlords, lenders, suppliers, city government, they're all in the same boat. The ability though to work together creatively and collaboratively is what keeps me up at night because it's one thing to be forward thinking and do a rent abatement or a blend and extend, or just flat out forgiveness for a treasured tenant for two months. What happens if they come back to you and they need half rent for 18 more? That's the hard part.
MM: Yeah it is. Shifting gears, where there's pain there's opportunities. What type of retail investments do you see out there for investment groups to take advantage of or have an opportunity to look at in the market?
GB:Well, I would say there's a couple on the real estate side. We haven't seen a single class A mall trade in five years. If you wanted to buy the mall, you had to buy the operator and that's the activity that we've seen. Simon is in the process of buying Taubman. Unibail-Rodamco bought Westfield, Brookfield bought GGP. I am convinced that you are going to see class A and Trophy centers coming to market. They'll have a little hair on them simply because, before this, class A and B plus mall owners wanted to get department store space back because substantial part of it they didn't even own, it was owned by the retailer, so they would buy it, redevelop it for entertainment, food, beverage and mixed use elements from hotels to medical office to apartments.

Those players are going to need to raise capital, and suddenly you're going to see some opportunities that we just haven't seen. The class A malls are going to feel pain like every other mall, but they're going to come back. You're going to start to see that on the market. I think you will see to a lesser degree, outdoor class A strip as well. Those landlords got between 70 and 80% of their rent for April, and the inverse was true for malls. So, outdoor centers, it's a different dynamic, you have a lot of those essential needs retailers that are generally doing okay. Then you also have retailers that can have a little bit more of a business stream using buy online pickup and store pickup curbside BOPUS.

But you're going to see the challenge really for those guys with a lot of inline space, that'll come back from smaller businesses, but all of this stress and we're already seeing the default rate skyrocket is going to create some opportunities for some really great shopping centers that might have a big spike in vacancy, but if it's a class A center and you can make those numbers work, you're going to be able to get properties that were really difficult to get before.
MM: With that in mind, and not to interrupt, but just to compliment what you're saying, what kind of innovations are you going to see in the retail space that these mall owners and these investment groups are going to come into play around retail?
GB:Well, the big challenge is whether or not retailers themselves can afford some of these innovations that they need, and the question that gets asked is, does this have legs after COVID or is this just something to get us through right now? A good example would be augmented reality, magic mirrors, which cosmetics, Ulta and Sephora were white hot, the whole sector was doing great before this. Both those players have great balance sheets, they've taken some lump sale, but they'll get through. How do you deal with allowing people to try and make up on much less in a pandemic era? There's some obvious things that are going to be horribly challenged. We've already seen buffet concept are probably never going to reopen.

We already saw Souplantation, their parent go down, but magic mirrors is a technology that already was out there, it was a cool gadgety thing. We already are seeing Ulta and Sephora start to put those in their stores, and plus the software for those they can actually put online which can create a better online shopping experience for the cosmetics folks. A lot of different technical capabilities are out there, whether it's service robots, janitorial robots, stocking robots, but in the past, these were all little experiments that the biggest could do, the Walmart’s, the Kroger’s, the Targets, that's going to be a challenge for some of the tech stuff that's coming down the pike. There is some interesting grassroots things coming up with social media. There's a new thing, that's come out of China, and it's called Squad Shopping.

There's only a few apps available in the U.S. and from what I've tried, it's just not there yet. But if you look at an app like Houseparty, and when it came along, you almost feel like this was designed for these circumstances. Imagine if you had an app like that, where you could go shopping with your friends, either during this period or after and in the post COVID world, the idea that you could take a friend from across the country shopping for their birthday gift at their favorite store virtually. This is stuff that is in its infancy, it's almost still idea stage in the States. I think you'll see a lot of investment in tech to come up with some really cool gadgetry like that. Our big challenge though is that, so many of the retailers out there that really need that innovation the most, they're the ones on my bankruptcy watch list and they are struggling.
MM: And after last week, that's a big list. Last question, how do you think it's going to affect the municipalities in the way they look at land use taxation, zoning, and most importantly, their willingness to work with our clients, the developers and re-developers that are out there?
GB:If they're not highly motivated, I can't even describe the level of an aptitude. The tax situation will become the crisis that will be front and foremost as we get out of this, the hole we've dug. The reality is everyone's going to be hurting. If it weren't for some of the problems I've seen in the cannabis industry, for example in California, finding a way to turn a profit, I would advise people to invest in that because when this is all over, I don't think you're going to have a single state that won't see the potential for that tax revenue and jump on that. I think that'll be one of the strange changes that come out of this. There's all these weird changes that come out of pandemics.

The enlightenment really was a response after the black plaque, and most of what we think of, just take for granted for, simple sanitation like sewers that came out of that. I think this will spur that, it's just hard to sound too optimistic when things are so dire, nobody wants to be a Pollyanna, it's rough and it's particularly rough for a whole lot of retail. That said, I would invest also in those categories that were killing it with consumers, that were very much driven by small businesses. That the only reason they didn't make it through this is because they didn't have deep enough pockets.

Whether we're talking of restaurants, socially driven concepts, eatertainment, Punch Bowl Social went down and that was the hottest cool concept coming up the last year and a half. All of that stuff, imagine when we get to a new normal, all those millennials and Gen Z, do you think they're going to shy away from craving even more social interaction than they wanted before? Not on your life.
MM: I'm going to join them.
GB:Yeah. So I think it's socially driven concepts, they've been handcuffed and beaten badly by this, but this is only going to increase the demand for that on the backside. The challenge is, that's going to have to be rebuilt, and that's also where I see immense opportunities, especially if someone can get in and possibly even keep some of the great concepts that we had going alive, I think that you'll see all partnership opportunities available for really well below what market would have been in any case.
MM: There'll definitely be a readjustment of value, so that's for sure, and valuations, I should say. But Garrick-
GB:Buying values too. I wouldn't bet against a couple of things happening, like renewed emphasis on family, would be a positive. I think you're going to see a lot more family friendly type concepts that in the new COVID world would do really well.
MM: Garrick, that was fantastic. Thank you for taking the time to share this information with us.
GB:Thanks for having me.
MM: And thanks to our listeners for tuning into Breaking Ground. Join us for our next podcast episode or visit Thank you.

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Michael Morris

Michael Morris is a Director of Business Development, specializing in accounting, tax, and consulting services across a broad range of industries including financial services, real estate, and family offices.

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