Residential pops, commercial drops

As we have explored in previous articles, the residential real estate market has been extremely strong in 2020, and it shows no sign of slowing down, even with limited inventory and very high prices.

That sector of the market has certainly adjusted to the economic challenges resulting from the worst pandemic in a century, although there are questions about the sustainability of the boom.

What about other areas of the real estate market, what are the prospects there? Commercial real estate, consisting of retail stores, office buildings, warehouses and so on, has not fared nearly as well.

In the short term, any further restrictions on public gatherings as the economy grapples with the stubborn Covid epidemic will only exacerbate the difficulties many restaurants and retail stores have gone through these past eleven months.

A critical factor in a retail store or restaurant’s business model is the ability to generate gross revenue. Gross revenue pays the rent, the cooks and waitress wages etc. Putting a ceiling on generating sales revenue by limiting capacity is like shutting down three-quarters of your heart valves: it greatly limits the flow of blood throughout the body.

Meanwhile, the operational costs did not decline by 75% : the rent still has to get paid, and key staff must be retained. In this huge squeeze, many retail stores have succumbed. It may be a while before we are back to normal public gathering routines, and even with a successful vaccine, there is still a long tough path ahead. Before the virus hit, there was already a “retail apocalypse” occurring.

Business Insider defines this rather dramatic term as “the closing of numerous brick-and-mortar retail stores, especially those of large chains worldwide, starting around 2010 and continuing onward.

In 2019, retailers in the United States announced 9,302 store closings, a 59% jump from 2018, and the highest number since tracking the data began in 2012. Over 12,000 physical stores have closed due to factors including over-expansion of malls, rising rents, bankruptcies of leveraged buyouts, low quarterly profits outside holiday binge spending, delayed effects of the Great Recession, and changes in spending habits.

American consumers have shifted their purchasing habits due to various factors, including experience-spending versus material goods and homes, casual fashion in relaxed dress codes, as well as the rise of e-commerce, mostly in the form of competition from juggernaut companies such as Amazon.com and Walmart.

A 2017 Business Insider report dubbed this phenomenon the Amazon effect, and calculated that Amazon.com was generating greater than 50% of the growth of retail sales.”

The effect of the COVID-19 virus has been to greatly intensify these forces: what were previously subtle trends became tidal waves today. The list of bankruptcies is impressive and growing, literally hundreds of once dominant chains now referred to as “zombie retail”: Abercrombie & Fitch, Aeropostale, Ann Taylor, A&P Grocers, Barney’s, Bed Bath & Beyond, Brooks Brothers, Brookstone, Claires, J Crew, Mens Wearhouse, Saks Fifth Avenue, JC Penney, Macys, Payless Shoes, Toys R Us to name just a few. And this decimation is even worse in the restaurant sector and movie theatres.

There are all sorts of repercussions here with this intense and rapid change, not all of them negative. Maybe the situation is similar to the forests out West that have been allowed to grow too dense and now raging fires sweep thru them devasting everything in their path, but perhaps changing the ground for a new order. Some business failures have released prime locations, with other stronger users swooping in on those vacancies to improve their locational strategies. There were already new concepts reacting to the changes in the marketplace prior to the pandemic shutdown stresses on the economy, concepts like retailers that only offer online buying, or pop-up retail that is supposed to last a few months (or weeks even) in random locations.

The food delivery industry of Grub Hub and Uber Eats. The growing popularity of “ghost kitchens” which are basically industrial cooking facilities located in warehouses that service delivery-only orders. These ghost kitchens are like food sub-contractors: this morning churning out burritos, then switching over to fine dining in the afternoon, to take out Chinese late at night. One huge kitchen that can be multi-purposed, putting out a wide variety of dishes that are branded with a restaurant’s name as they leave the premises. Utilizing the plant 24 hours a day, saving many food concepts from having their own cooking facilities and cooking staff. Consumers are still buying clothes and dining out, but the ways in which they are doing these activities are changing. The net effect though is that there is less requirement for a multitude of physical locations for stores and restaurants.

Office buildings are also undergoing a revolution. By now the novelty of Zoom meetings has worn off, but you have to admit it does save a lot of travel, and productive work/collaboration is getting done. More businesses are finding they do not need all the expensive space, the rent and the furnishings, to be concentrated in Central Business Districts with long commutes. We are seeing this reflected already in the type of housing that is in most demand: homes with potential office rooms, in communities that also are nicer places to live than the dense urban environments.

The COVID-19 virus will eventually play itself out: vaccines will become more prevalent, people will recover. But the forces for change that have been unleashed will not subside. There’s simply too much space devoted to shopping in person, and too many food outlets for them all to succeed. What we are witnessing is one of those time-lapse videos, like a flower that takes two weeks to burst open in real-time but we can see it “live” in 30 seconds. Those are the times we now live in.