Filter by All

May 31, 2021 – Back to the Future: A look back at retail 1 year after COVID

Arrow pointing to the left Back


It’s now May 31, 2021–one year after the highest and hardest hurdles during the COVID-19 pandemic and when most major cities in the United States reopened their economies and stores for business.


Looking back to January 2020, which now seems like a lifetime ago, I remember the optimism in the industry and across the country as retail sales and consumer spending were at all-time highs.


Vacancy rates in almost every market except New York were at all-time lows and market rents were at historical highs. Land prices were aggressively steep, especially in denser markets, prompting developers to go vertical and develop mixed-use projects as a solution.


There were many new concepts popping up in the retail, restaurant, and entertainment worlds with expansion and experiential retail causing a lot of buzz in the industry.


Our 2020 outlook at TSCG was strong. We were very bullish on the economy and were looking at a record year in consumer spending, household income, and employment. There was excitement in the air.


A trifecta of dynamic forces was changing our landscape, and many thought for the better. We had a convergence of new consumer shopping habits, the coming of age of Amazon from online e-tailer to retail industry lion, and the weight of retail dinosaurs carrying too much debt and old ways of doing business that they just couldn’t shake. Many thought it was time for them to go.


Agility mattered in the evolving retail landscape as operators were shifting from clicks-to-bricks and bricks-to-clicks. This omichanneling trend was being spearheaded by the big operators such as Walmart, Target, and Amazon on the retail side, and Panera Bread, Starbucks, and Chipotle, among others, on the restaurant end. Smaller, more nimble players were also making omnichanneling moves creating a space for themselves in the industry.


This rapid evolution was causing some legacy retailers to lose their way, take on more debt or be weighed down by existing debt, and fumble as they struggled to craft a new identity that resonated with consumers and the new experience-driven economy.


Icons such as Barneys New York, Fred’s, and Sears had filed for bankruptcy joining fast-fashion favorite Forever 21, home goods purveyor Pier 1 Imports, and footwear discounter Payless ShoeSource. Other legacy tenants such as Macy’s, Lord & Taylor, JCPenney, and Neiman Marcus were struggling as well with too much competition and too many oversized stores in the department store sector. While the media hyped this as the retail apocalypse, it really was an evolution of an industry that had changed very little in decades with many operators still running on outdated concepts and practices.


Private equity purchases were everywhere in the retail and restaurant world as stumbles and successes were creating opportunities. Investors were being very aggressive with risk-taking and money as they eyed the record earnings for a lot of companies. There were buyouts at many multiples such as that of Fox Restaurant Concepts by Cheesecake Factory and Barteca Restaurant Group by Del Frisco’s Restaurant Group as everyone looked forward to a banner year.


And then the coronavirus struck and time stood still.


Many retailers across the country closed anywhere from two to four months. Restaurants were limited to take-out/delivery/drive-thru only. Entertainment retailers were closed completely.  The closures were painful, agonizing, and completely debilitated the businesses.


Depending on the market, businesses began reopening in May or June of last year to a new retail reality and a different world.



A New Reality

As consumers returned to once-familiar stores, they found themselves in stores that seemed similar but looked and shopped differently.


To limit physical contact, the aisles are now wider to offer more space around shoppers, and grocery and various soft goods stores only allow one-way foot traffic. There are sanitizer stations located throughout the various retail spaces and restaurants are making greater use of larger outdoor patios. More stores now have self-checkouts which was a pre-pandemic trend that has permeated the market and further reduced the need for labor as fewer clerks are required.


Other pre-pandemic trends that are now standards are:


  • Omnichanneling

Businesses and workers across all types of retail operations have had to adapt and be retrained on new processes and ways to engage customers and deliver goods.


Technology has been a key component in this new landscape. During the pandemic, people became accustomed to ordering online or on their phones using a variety of apps. Email, social media, and direct to consumer marketing efforts became commonplace.


Meanwhile, many concepts realized that without their brick-and-mortar stores, they didn’t have a storefront or a true personal brand connection with the customer. As a result, the push toward online storefronts and omnichanneling by physical-first retailers has been universal.


  • Delivery & Pick-Up

These pre-COVID trends are now major components of our new retail economy. While we’ve seen consumers go out to shop and dine more there is still some lingering reluctance to spend entire sit-down meals at restaurants. As a result, almost all restaurants and stores now have delivery and pick-up options.


Many have changed their layouts to accommodate the change in habits with MOPIS (mobile order pickup shelves) or BOPIS (buy online pick up in-store) counters just off the entrance. These are typically attended to by a customer service team member and an inventory specialist ready to assist in the pickup process.


In addition, we’re seeing a much faster supply chain in place with a lot of stores understanding the need to respond to consumer demand quickly and either outsourcing or developing their own delivery infrastructure.


Some operators chose to permanently convert underperforming brick-and-mortar locations into fulfillment and logistics centers for supply chain management.


  • Ghost kitchens

Ghost kitchens started to pop-up pre-COVID and are now an important part of our restaurant landscape.


We’re seeing 40,000-50,000 square foot industrial spaces hosting 20-30 kitchens where they just cook, box, and deliver the orders. This has provided cheaper real estate with less upfit costs allowing restaurants to stay nimble and still serve their customers.


  • Entertainment

On the entertainment side, movie theaters and other venues have adopted a variety of different configurations with more space between patrons.


When you go into a Dave & Busters, IFLY, The Void, or a TopGolf now, you see employees constantly sanitizing food stations, arcade games, tables, chairs, headsets, and clubs.


At-home entertainment has boomed over the last year with new movies simultaneously releasing in movie theaters and at home via streaming at $19.99 a pop.


Benefiting from their socially-distant and contactless nature, virtual (VR) and augmented reality (AR) have accelerated their fledgling pre-COVID growth into full-fledged members of the mainstream consumer entertainment landscape both in-home and in specialized entertainment venues.



The CRE Landscape

Over the last year, we’ve seen the CRE Landscape evolve with drastic adjustments in every aspect from vacancies and rental rates to tenants and landlord delinquencies.



Pre-COVID, we were looking at an average of around sub-5%. Currently, vacancies are anywhere between 15-25% with the northeast taking the hardest hit, especially New York City. .


The Big Apple was dealing with vacancy issues before the pandemic and their traditionally higher rents haven’t helped. Manhattan restaurants and retailers are still having a tough time because travel and tourism haven’t returned and that was such a big component of the New York experience.


After the holiday season, we had another wave of closings and bankruptcies across the country. Many retailers tried to make a go of it post-COVID but just couldn’t generate enough sales performance to justify keeping their doors open.


Rental Rates

Rental rates are interesting because they are so characteristic of the individual market. In many cases, we’re seeing a barbell-shaped trend line. The concepts that were able to remain functional during the pandemic grew their customer base and built loyalty at a time that new habits were being formed.


As a result, we’re seeing a real dichotomy in rents. Healthy retailers are still paying their pre-COVID contract rates while tenants that had a harder time are paying less than contract and/or are still working through landlord discussions trying to reestablish a credible position. Many are still on different abatement and deferment schedules.


For new construction that’s coming out of the ground and new leases, we’re seeing 10-20% less rent than what maximum rental rates were pre-COVID. It’s a market-by-market case and there are a lot of scenarios where the rent adjustment is not being reported because the tenant has worked out a side agreement with the landlord for reduced rent or reduced rent plus a percentage of sales.


Meanwhile, construction, labor, and land prices have also decreased year-over-year.



Over the past year, landlords have done what they could to work with tenants since the number of operators to backfill space has declined. We have seen many creative solutions between the two parties and applaud those landlords that have done their part to keep their tenants in place. Each center and its tenant mix are unique and requires all parties to work together to find a solution.


Two of the leading retail categories that landlords were seeking for their mix between 2015-2019 were restaurants and specialty fitness centers. Unfortunately, those were two of the categories that got hit the hardest during the pandemic with many of those concepts simply not making it through the crisis. We will continue to see some weakness in those sectors throughout the remainder of 2021 as they adjust to a decrease in demand.


Landlord Delinquencies

In general, we haven’t seen as much loan delinquency as we thought would occur. This has not been because the loans are fully functioning. Instead, we’ve seen a willingness by lenders to execute workouts with landlords to kick the proverbial can down the road. In turn, landlords have been able to work out agreements with tenants to move the relevant parties toward a common goal.


While there has been a lot of holding hands between tenants, landlords, and lenders there have also been situations that have gotten more complex.


Of note are the bigger centers that have co-tenancy language that has been triggered because of the big box vacancies which were never backfilled. This has put other covenants and rent contracts in jeopardy. Also, scenarios involving CMBS loans have been very tricky due to their strict language. Excessive vacancies are pushing many of these into workouts, or deed in lieu of foreclosure sales.


The mall sector was hit pretty hard with many centers closed for months exacerbating the shuttering trend in C and D markets with smaller trade areas taking the brunt. There’s also been a marked move toward demalling as big boxes (mainly department stores) that were struggling before the crisis closed turning some already hard-hit malls into ghost towns.


Some centers have been adapted for other uses such as distribution centers, entertainment venues, healthcare facilities, or distance learning facilities for universities. In other cases, highest and best use called for tear-down or redevelopment to outparceling or mixed-use.


The mall category is also undergoing a lot of mergers and bankruptcies among retailers and REITs, especially those that were already overburdened with debt.


Why This Is Different Than 2008

This recession has been different from the 2008 recession for a number of reasons.


In March of last year, the Fed took numerous unprecedented actions aimed at maintaining liquidity in the markets from cutting rates and reserve requirements to buying commercial paper. These actions were accompanied by an extraordinary $2.3 trillion stimulus program.


While the rate cuts were criticized initially, it eventually gave the markets confidence that banks were in a much better position with their Tier 1 capital ratios as the crisis deepened.


In addition, money came flowing out of the markets into the banks so they were actually more liquid than they ever were in 2008. This put banks in a better spot to work with landlords on solutions such as loan deferments, loan forgiveness, and interest-only options. Also, they were able to extend favorable credit lines, borrowing terms to existing tenants, and SBA loans for entrepreneurs to start new concepts.


The Positives

While the pandemic was devastating, changing lives, families, and legacies forever, there have been some positive trends that we have seen emerge in the industry.


  • Better omnichanneling options

More retailers have adopted omnichanneling while deploying much better digital and mobile platforms. This has helped make the process of shopping and dining more seamless, efficient, and location-independent.


  • Better store layouts

Even though consumers are undoubtedly transacting more online, you want them to have a personal connection with your brand. Retailers know that one of the best ways to do that is to have a visual brand representation and a great experience in a brick-and-mortar store.


Before reopening, many retailers took the opportunity to redesign their stores not only to accommodate more space and new protective measures, but to also create better customer experiences that will continue to bring shoppers back into stores.


  • Continuing to evolve

Twelve months may seem like a long time but after the crisis it took people a while to be confident enough to resume some of their former activities like eating out, shopping in stores, going to movie theaters, and traveling. We’re not yet back to what we were pre-COVID in terms of traffic counts or retail sales, but we’re on our way.



While the past year has been a roller coaster, this unprecedented event revealed our true spirit.

We’ve seen people and the industry work together in ways we never could have imagined.

Landlords, tenants, lenders, community organizations, non-profits, and ordinary citizens have all joined forces to do extraordinary things. The forces of capitalism and cooperation have all been in full display as everyone has worked together to reopen American retailers and restaurants across the country and make our industry even stronger than it was before.


Original article here

Scroll to the Top