Retail’s Reversal of Fortune – Feb. 5, 2024
A not-so-nostalgic stroll among Memory Lane—specifically, the stretch that takes you through COVID-era commercial real estate—provides an eye-opening contrast between then and now. Office, hospitality, brick-and-mortar retail and student housing all appeared to be on the ropes at the height of the pandemic.
Returning to the CRE world as of 2024’s first quarter, we see that hospitality has made a remarkable comeback, although the business travel segment has not quite returned to pre-pandemic levels. Student housing has reached record highs for pre-leasing, at least among the Yardi 200 roster of leading universities, and even office has notched a few sizable leasing transactions of late, although the sector is in a state of flux and owners are often hard-pressed to retain tenants.
As for retail, a recent piece in the Wall Street Journal describes owners’ reversal of fortune compared to four years ago:
“Many landlords slashed rent prices as they struggled to fill empty storefronts during the first year of the pandemic. Some felt compelled to accept a portion of monthly sales instead of a fixed rent amount from tenants whose businesses collapsed because of government-mandated closures and social distancing.
“These arrangements helped retailers stay afloat, and prevented landlords from losing valued tenants.
“Now, landlords are having a much easier time filling prime retail space and are far less likely to agree to these concessions, said Ed Coury, senior managing director at retail-brokerage firm RCS Real Estate Advisors.
“‘They’ll just say, ‘COVID’s over; those days are done,’” he said.”
Retail’s tribulations didn’t begin with the steep economic downturn resulting from the pandemic. Bankruptcies made the headlines during and after the pandemic, but they’d been occurring for years prior. As a case in point, I think of a strip center in my area, owned by a major retail REIT, that went dark following the 2008 financial crisis and the bankruptcies of its big-box tenants. It wasn’t re-tenanted until more than 10 years later.
Changing shopping habits and the rise of e-commerce also did their share of damage to retailers’ sales, and therefore their occupancy levels. Against this backdrop, the WSJ reported, “Percentage-of-sales agreements proliferated in 2020 as landlords sought to keep restaurants and other retailers from going out of business. Enclosed malls, which experienced prolonged closures during the pandemic, saw revenue from percentage-of-sales rent agreements jump in 2021, according to data firm Green Street. At one point, these arrangements looked like they would outlast the dog days of the pandemic.
“Nearly four years later, in-person dining and shopping are booming, and landlords are loath to sign leases that leave rent collection subject to the unpredictable ebbs and flows of their tenants’ monthly sales,” reported the WSJ.
Store openings in 2023 exceeded closings for the second consecutive year, the WSJ reported, citing research firm Coresight Research. And Cushman & Wakefield charted record-low vacancy at U.S. shopping centers in Q4 2023: 5.3%.
“Consumer spending remained resilient last year despite high inflation and recession concerns, and Americans’ views on the economy are improving at the start of 2024,” the WSJ reported. “This, coupled with scant new construction of retail real estate, leaves landlords optimistic that retailers will be vying for limited available space for the foreseeable future.”
It’s not all blue skies and sunshine for retail. Older, declining properties continue to have a tough time drawing tenants, bankruptcies continue and Coresight also recently reported that we may see softer sales figures to start the year. Still, the contrast between 2020 and today is striking.