By: Ehud Gersten – Vice President, Kay Properties and Investments, LLC
Certain segments of the retail sector have been particularly hit hard by the lockdown orders instituted because of covid-19, for example clothing and home goods. Other retailers, like grocers and drug stores have outperformed, having been determined essential and where able to remain open. And although more States are now reopening their economies to “non-essential” businesses, some areas of retail will still nevertheless not recover fully and may see a paradigm shift in how consumers acquire their goods and services. *
For example, the reopening of businesses will require, at least initially, social distancing and sanitation guidelines which might be difficult to meet. Gyms, for examples, might need to limit the number of clients that can work out at any given time, and possibly require more staff to ensure they are meeting cleaning guidelines. If a gym business was reliant on a certain level of membership to make it financially viable, limiting that membership to working out at certain times may see many gym-goers cancel or reduce their gym membership and activity and instead opt for online fitness memberships and classes or choosing to work out at home. Another example are buffet-style restaurants, where some have already had to cease operations since they cannot comply with the new safety and health regulations. *
The financial stress on some retail tenants will likewise be felt by their landlords. Landlords will need to decide how much leeway and how much consideration they will give to their tenants; too much leeway and the landlord may leave money on the table, while too much, and the tenant may not make it, requiring the landlord to re-lease, assuming they can find another tenant under desirable lease terms.
For those brick-and-mortar retailers that survive the shutdown, it may not be enough. Those retailers will also need to create an atmosphere within their stores so that customers that are fearful of contracting the Coronavirus, will return. Operationally, higher costs may be incurred for increased sanitation, reduced opening hours, and fewer customers allowed in the stores, placing even more pressure on brick-and-mortar locations that compete with online retail. *
And the possible lower income of retailers in shopping centers and strip malls could likewise impact their landlords. In addition to the base monthly rent in the lease, many strip mall and shopping center owners also charge retailers a percentage rent, whereby they additionally receive a share of a retail tenant’s profits. These landlords, which can range from individual owners, to large companies to Real Estate Investment Trusts (REITs), are therefore projected to also suffer the financial pinch.
Covid-19 has dramatically changed our world in a period of a few short months. Some retail, like gyms and sit-down restaurants have been, and will likely continue to be, detrimentally effected. It appears that those areas of retail that will remain strongest are those retailers deemed “essential”, like grocers, auto parts, and pharmacies. Investors should take note of the new and emerging trends in deciding how to invest their commercial real-estate dollars.
For those accredited real estate investors that are looking to diversify their portfolio and gain access to income producing real state at minimum investments normally starting at $25,000, Delaware Statutory Trusts (DSTs) should certainly be another route to consider.
Janet Portman, Percentage Rent in a Commercial Lease, https://www.nolo.com/legal-encyclopedia/clb-percentage-rent.html
Marcus & Millichap (May 2020), Beyond the Global Health Crisis: Special Report – Retail, https://www.marcusmillichap.com/
Peter Diamandis and Dan Sullivan (May 22, 2020), How Industries Will Change, Exponential Wisdom podcast, http://podcast.diamandis.com/
Lori Weisberg (May 7, 2020), Souplantation’s buffet-style restaurants closing for good due to the coronavirus, San Diego Union Tribune, https://www.sandiegouniontribune.com/business/story/2020-05-07/souplantations-buffet-style-restaurants-closing-for-good-due-to-the-coronvirus