Pandemic’s effect on retail real estate
By: J. David Chapman/April 30, 2020
Real estate is being affected by the coronavirus pandemic. We are about to see the degree as the economy opens back up and employees decide to go back to work, or not, and customers decide to venture back out, or not.
We consider two scenarios. The first is a V-shaped recovery where the economy comes back very quickly. The second is a U-shaped recovery that assumes the country will take a little longer to solve the health issues and therefore employees and customers do not return to the marketplace as quickly. Even under the best-case scenario of a V-shaped recovery, there will be significant disruption to all aspects of real estate. Specifically, I want to consider behavior changes in retail space.
Most real estate gurus nationwide agree that retail real estate markets have suffered the most adverse effect due to the coronavirus pandemic. Included in this category are strip centers, malls, big-box stores, grocery stores, restaurants and convenience stores. The effects on retail development are obvious in the near term. Restaurants and stores are unable to generate anything more than a fraction of their normal revenue. Magnifying this is a ripple effect through the economy as landlords brace themselves for a flood of requests for rent relief from their tenants. It is unclear how much leniency or relief landlords themselves are getting from lenders. The longer-term effects are less obvious. It is conceivable that after the virus runs its course, the retail sector will snap back, and the effect on future retail and entertainment-related development will be minor in the long run. The key to this is low long social distancing will be in effect.
Malls are the most worrisome in the retail category. They were not healthy going into the pandemic, and this will only exacerbate an already bad situation for large malls around the country. During the shelter-at-home order, even the least tech-savvy consumers have adopted some online ordering capability. The brick-and-mortar stores that develop and build out online-ordered store pickup will do best.
Grocery stores and supermarkets have benefited from people staying in rather than dining out. Look for continued innovation in internet-ordered grocery pickup to continue and expand. As you can see, the coronavirus simply accelerated the trends we have been witnessing in retail.
J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).