WHITE PAPER: Reimagining Retail

WHITE PAPER: Reimagining Retail 8 Apr 2021

By: James Nelson

It probably won’t be a shock to you that in the aftermath of Covid, we are going to need to reimagine retail. Even before the pandemic hit, retail vacancy was becoming more prevalent throughout the City. Now more than ever, landlords and retailers are going to need to think outside the box to fill vacancies and allow retailers to survive.

I had some great insight into this topic when I moderated a joint webinar between the Counselors of Real Estate at ICSC.  I’d highly recommend the discussion which you can listen to on my podcast Real Estate Investing Live From New York.

Tom McGee, the President & CEO of ICSC, kicked off the discussion which shared the results of a survey of their membership which consists of landlords, tenants, and service providers. The outlook seemed somewhat split as only 57% said the economy would improve within the next year. That being said, 73% wanted to see businesses open again in their state.  Even with the reopening, it will likely look much the same as today as 82% expect businesses to maintain safety precautions even after people are vaccinated, while 81% will avoid crowded places or large gatherings. 

My opening question was when could we expect to return to the been conventions and events that our industry is known for? ICSC is famous for its annual conference in Vegas that draws over 30,000 people. It’s a chance to catch up with friends and business contacts in a more fun setting, while also being able to accomplish dozens of meetings over a few days as everyone is in the same place.  As expected, Tom didn’t have an answer on that as it can be very difficult to envision how we return to normal. 

The bright spot for retailers is that almost all adapted to embrace online shopping accelerating this trend of “bricks to clicks” seemingly almost overnight. 99% of retailers reported their stores fulfilled online orders to some degree.  Meanwhile, pure play e-commerce grew by $86.6B or 24.2% in 2020, and accounted for 11.2% of total retail excluding auto, gas, and F&B. 

That all being said, the negative impact on physical stores was definitely felt. In 2020, there were 13,400 store closings which was tenfold the openings. This might seem like an astronomical number but keep in mind that in 2019 there were “only” 11,100 closings compared to 3,900 openings. It hasn’t been since 2016 when there were actually more openings than closings. 

Thus, landlords and tenants will have to embrace the new reality. Deborah Jackson, a retail consultant from C&W, and Lewis Sterling, a major retail owner, both spoke to filling dark spaces with everything from medical to logistics.  For NYC, essential retail has been popping up all over the city where there are lines around the blocks at CityMDs. 

There has also been a lot of talk about micro distribution centers. Ghost kitchens have been actively opening up so restaurants can utilize kitchen space for deliveries where they don’t have to pay main street rents. Meanwhile, Amazon has announced that they will be opening up over 1,000 hubs in the US. Walmart and other retailers are following suit. 

New Yorkers are also closely watching how the legalization of recreational marijuana will play out for retail. According to a CNN article “New York state leaders announced an agreement on legislation that would legalize marijuana across the state -- a move they say would create 30,000 to 60,000 jobs and bring in $350 million in tax dollars.” The NY State Budget deficit which will reach $6 billion in fiscal 2024 will need the help even with the hopeful federal bailout of upwards of $14 billion.  The next big debate to watch will be with the legalization of gambling statewide which could be another boom.

Landlords will also have to get creative if they want to fill their spaces. Jay Norris, co-founder of Guesst, has a win-win solution for landlords and tenants getting through this difficult time: his transparent platform that shows daily sales numbers. Landlords can structure lease concessions around them. For example, a tenant could receive a break in rent until certain sales milestones are achieved. This could also lead to the adoption of percentage leases which were previously only found in malls. The big question then as a recent Wall Street Journal article points out is if ecommerce sales will count towards these metrics. 

Above all, NYC retail can’t have a shot at coming back until people return to the office. At my building at 530 Fifth Avenue, RXR has an app that shows the occupancy each day. At a low point, I’ve seen it at 6% on a winter Friday, whereas in recent weeks it has reached over 20%, still a far cry of where we need it to be for the city to once again have life. 

New York recently reached a 20% full vaccination rate, which combined with 3 million doses daily across the nation, is a promising trend. With this trajectory, it would seem the return to office won’t happen in full force until the fall. Even with that, we know that the future workplace will change with flexible work practices or permanent work from home employees.  The office vacancy in Midtown has already risen from 10% to 16% and could end up north of 20%.

With this all in mind, there is no doubt that when it comes to solving the retail vacancy issue, creativity either through uses or incentive leases will have to play a major part.