If there was any doubt that a retail apocalypse was taking place before the coronavirus-related economic shutdown, it is now impossible to deny the retail space is facing profound change.
"Things are extremely fluid right now in the retail sector as a whole, and that covers all retail property types," Tom Dobrowski, vice chairman of Newmark Knight Frank's capital markets group, told S&P Global Market Intelligence.
The nation's malls and shopping centers are beginning to reopen after a weekslong closure to stem the spread of the coronavirus, but there will be many vacant shops and department stores, and there is no telling how long it will take for foot traffic to return. The last three years have already seen plenty of retailer bankruptcies as outmoded concepts shriveled, and analysts expect many more in the coming months.
"I think it's going to be a tough couple of years," Floris van Dijkum, managing director and analyst at Compass Point, said of retail real estate in an interview. "You're going to see rising vacancies. You're going to see pressure on rents. And in a lot of centers, there's going to be a much higher structural vacancy than what you have right now."
To be sure, there are relatively attractive corners of the retail landscape, including the grocery-anchored strip centers that have served as distribution nodes for food and essential household items during the weeks of social isolation. Investors who were allocated to high-quality names in that segment suffered less dramatic losses in March's market rout. But even grocery-anchored retail real estate is ripe for structural change, as sudden shifts in consumer behavior during the pandemic morph into permanent behavioral trends.
Analysts and observers identified online grocery shopping as one of the major long-term changes in social behavior likely to come out of the pandemic, as consumers increasingly rely on pickup and delivery options. BTIG analysts Michael Gorman and James Sullivan said forward-thinking real estate investment trusts stand to benefit by retrofitting their properties with micro-fulfillment centers, or MFCs, to efficiently fulfill online orders.
"Developing cutting edge micro-fulfillment centers in their properties could fix critical gaps in online grocery fulfillment, increase store productivity, and make REIT shopping centers even more critical real estate," Gorman and Sullivan wrote in a note.
Gorman, in an interview, named Regency Centers Corp., Retail Opportunity Investments Corp. and Weingarten Realty Investors as prominent retail landlords particularly well-positioned to benefit from grocery's transition to multiple sales channels, including online and brick-and-mortar locations. Each controls high-quality retail property close to consumers and has solid grocery tenants and robust balance sheets.
"The REITs have the chance, if they can come forward and actually act as a partner, to be a part of driving this trend that would make their portfolios, or at least portions of their portfolios, even more critical and more of a cornerstone in omnichannel for the groceries," he said.
Grocery stores and the REITs that house them would benefit from asking what problem the customer is trying to solve by visiting the store, according to David Duncan, a senior partner at the consulting firm Innosight. Consumers shop to buy products and solve "functional" problems such as attaining adequate nutrition, and also for less tangible reasons such as social interaction and pleasure. The consumer "hires" certain businesses to perform the requisite "job."
Duncan said brick-and-mortar grocery stores have become local heroes during the pandemic insofar as they have stepped up to service consumers' essential needs. He expects e-commerce's share of the grocery business to accelerate in the coming quarters as it proves to be, in many instances, superior and more efficient at performing those jobs.
"Probably a lot of people are being forced to try out online delivery services really ... for the first time, and they may find that it's an unsatisfactory solution relative to some of those [emotional and social] jobs. But a lot of people are probably going to discover that it's not that bad, and there's different trade-offs," he said.
A more cooperative spirit between landlords and tenants will likely reign as retail and retail real estate players find their footing again, according to Newmark Knight Frank's Dobrowski. While some retail landlords have taken a defensive posture in recent weeks, pushing retailer tenants hard for rent payments, he said many others have taken a more collaborative approach, particularly on the private side.
Dobrowski expects a further bifurcation in the market as retailers that have prioritized online sales platforms pull further away from the set that has failed to adapt.
"I think this is a turning point, in that you'll see a material increase in the overall deterioration of a certain set of retailers," Dobrowski said of the pandemic. "There's going to be a certain demographic that is going to stick to the e-commerce platform and will fade away from ... those legacy retailers that have been suffering and have not really been able to capture any type of e-commerce traffic."