The winter of 2009 was bleak for the retail real estate industry. A near 40% decline in attendees at the December 2008 New York regional ICSC was the in-person embodiment of what most of us had witnessed throughout the fall. Circuit City, Linens ‘N Things and Borders were among those for whom registers rang for the final time, and many others limped off with them. Despite warning signals from a slowdown in the housing market the year prior, brokers, lenders, tenants, landlords, and investors were generally unprepared.
As hard as it is to assess the impact as it happens, the Covid crash is proving to be a steeper and deeper descent. Still, lessons from the dozen years between these “once in a lifetime” events are instructive as we prepare for recovery.
The Great Recession swept away many retailers but gave others space to grow.
Through its history retail has behaved in a Darwinian manner with mutations and enhancements pushing new concepts ahead of the prior market leaders they had chased down. During the Great Recession we witnessed external economic forces hasten this evolutionary process. Concepts that had wheezed their way along were quickly put out of their misery while innovative leaders like Best Buy, Target, and Starbucks not only survived but improved.
Looking back, however, we see another key development. The void left by the abrupt crash provided oxygen for entrepreneurs. Of the quality fast casual, fitness, and discounters we have today, many rose from the ashes of 2008-2010. Shake Shack, Tatte Bakery, Orangetheory, Launch, Edge Fitness, HomeSense and many more found fertile growth opportunities in space, both literal and figurative, vacated by the last generation of operators. Similarly, an aging population and available real estate opportunities facilitated the entry of urgent care, physical therapy, and other medical services users who were able to reach new customers and markets. E-commerce also seized the moment to further establish itself with the American consumer and grew more than 17% from 2009 to 2010.
The Covid crash will reveal similar patterns.
The unfortunate result of this historically steep descent is that it undermines many of those terrific placemaking categories that have grown out of the past decade — fitness, restaurant, and entertainment concepts. This will likely wash out many good concepts along with others whose time was up. Yet, if you look through the lens of the last recession, you can see the foundational pieces for recovery. The most agile established chains will adjust concept and strategy to be ready for the next iteration of retail real estate. More importantly, entrepreneurs will take creative approaches to the new normal, and a decade from now we will look back at the concepts that readily took advantage of a distinct landscape, cheap capital, and quality available real estate to grow into name brands.
Much more so than the Great Recession recovery, though, the post-Covid playing field for both the established brands and the innovators will look quite different.
1. The suburbs will likely recover quicker.
• In their vehicle-centric world, suburban consumers have already begun to adapt to changes that will likely continue in the post-Covid environment.
• Additional space for distancing and an increase of “work from home” will benefit the suburbs while urban business districts will undergo an adjustment period, especially those dependent on public transportation.
2. Users with the most effective mobile ordering apps who are best able to execute for their customers will win.
• Operators like Chipotle and Starbucks who had previously committed to mobile ordering are best positioned, but there is room for others to join them.
3. Restrictive municipalities likely loosen permitting.
• Higher vacancy in the near term and the resulting tax revenue decline will spur business-friendly permitting
• Drive-thrus and pick up windows will be viewed with less negativity when communities look to restrict guest counts in an establishment.
• Liquor licenses may become cheaper and easier to obtain to spur the rebuilding of the restaurant industry.
4. Even healthy regional malls will sustain irreparable damage.
• For several years malls have been fighting a losing battle with department stores and their apparel co-tenants, accounting for the vast majority of closings and lost retail square footage. Those tenants and their replacements – food and fitness – are being hit the hardest.
• Open air centers will provide a landing spot for many of those that survive.
5. Anchor tenants will relax use restrictions to avoid heavy vacancies in the centers they occupy.
• This has already come into play as a bargaining chip as retailers and landlords work through rent deferrals and/or abatement.
6. Medical users will continue to be a major player for retail assets
• So called “well-visit” users (physical therapy, dermatology, etc.) may increasingly look to direct-access retail sites instead of larger medical office buildings.
• Hospitals will learn from how the crisis impacted their main campus operations and may look to larger retail boxes as off-site solutions to isolate specific patients in the next event.
Similarly to what we saw coming out of the recession, leading retailers will maintain their position if they make correct on-the-fly adjustments, but it will be the innovators who craft concepts that match the new more “frictionless” environment who will have the greatest impact on the decade to follow.