In a move for self-preservation, retailers are demanding that their landlords withhold or slash rent in the coming months as stores have closed to slow the spread of the coronavirus. Even before the onset of the virus, retail was already experiencing bankruptcies and store closures as consumers migrated to the web.
There is no guarantee that American shoppers will pick up where they left off once the virus is contained.
Now, with social distancing and self-quarantines the norm, retail has suffered a one-two punch as consumer spending at brick-and-mortar sites has all but stopped.
Early on in the fight against the virus, retail landlords felt pressure, especially those with significant exposure to tenants that don’t lend themselves well to social distancing: theaters, restaurants and gyms. Retail investors had embraced these tenants as big box stores fell out of favor and experiential retail gained favor as a strategy.
At the same time, investors with significant exposure to grocery, convenience and drug stores are anxiously waiting to see if their bets are enough to keep them afloat during an extended closure of other “non-essential” retail.
Landlords are realizing that they have a vested interest in their tenants’ survival and have provided relief through rent abatement periods, repayment options without interest and even waivers of rent for a period of time. Chains with large real estate footprints including Mattress Firm and Subway are asking their landlords to take action in the form of rent suspensions.
The current U.S. relief packages considered in Washington don’t directly address the issue of rents, leaving landlords wondering if they will be able to weather the next storm. While specific relief hasn’t been granted, the Federal Reserve has given banks the ability to defer mortgage payments, which is helpful.
Short-term impact
- Uptick in e-commerce, supermarkets, grocery spend for food, drinks, sanitary supplies and daily necessities
- Downward pressure based on reduced foot traffic
- Discretionary spending hurt, especially in cosmetics, apparel and luxury goods
Long-term impact
- Review of debt agreements, deferral of mortgage payments
- Properties with tight cash flows should stress test financial health
- Further correction in the sector could occur, widening divide between performing and nonperforming retail assets
- Potential increased speed of transition to e-commerce
- Greater adoptions of cloud-based gatherings in fitness, entertainment, banking and telehealth
- Consumer behavior slower to shift back to pre-virus status
The takeaway
In the end, there is no guarantee that American shoppers will pick up where they left off once the virus is contained. People may ease away from social distancing only when they feel safe enough — and if China is any indication, that may take a while.
