Losses can be replaced with medical office, Cannabis, entertainment and childcare
Almost everyone in the commercial real estate industry has felt the COVID-19 pandemic’s negative impact—especially multi-tenant retail properties, according to Marcus & Millichap’s recent special report, “Beyond The Global Health Crisis.” The report noted that multi-tenant property vacancy rates increased 40 basis points to 6.4%.
“The rate was last matched in the first half of 2017, and further erosion is anticipated in the coming months,” the report said.
Malls remain one of the most impacted by COVID-19
Malls and neighborhood centers were the one of the main reasons multi-tenant retail properties drew such poor numbers in Marcus & Millichap’s report. Both property types saw increases of more than 100 basis points since the beginning of 2020. Meanwhile, neighborhood centers that had a grocery store anchor have performed better overall than centers with a non-essential anchor like a clothing store. A grocery store anchor is not a guaranteed shield from the pandemic however; inline retailers in such centers have still closed permanently because of extended closure restrictions.
Marcus & Millichap forecasts that lifestyle centers will rebound, however. The expectation is that smaller retailers will move into these properties with stronger foot traffic and replace permanently closed restaurants.
“Power centers have benefited from the pandemic due to the prevalence of essential businesses, though some of the gains in customer traffic could be surrendered as shoppers are offered more options when the entire market opens,” the report said.
The upcoming Connected Virtual Tech Event (www.connectedvirtualshows.com) will feature a panel on Retail replacement called “Where’s the money? Creative Ideas for Replacing Lost Retail Revenues” on November 17th at 2:00 PM Eastern time. There will be a discussion of the kinds of businesses that can replace lost retail tenants with new concepts like childcare, entertainment, medical offices and Cannabis. Recently New Jersey passes legislation legalizing Cannabis in the state along with many others.
Better news for single-tenant retail centers
Where trouble lies for multi-tenant retailers, single-tenant properties are expected outperform, at least temporarily, according to Marcus & Millichap. “Some weakness in the sector has emerged as experience-based retailers struggled, though a sizable share of standalone tenants should be able to weather the crisis,” the report said.
Overall, these properties’ vacancy increased 20 basis points in the third quarter to 5.2%, while rents softened modestly. Quick-service restaurants with drive-thru lanes and essential retailers like drugstores were among the strongest single-tenant performers. Meanwhile, big-box retailers that have been allowed to keep operating during the downturn reported strong sales, too. The uncertainty surrounding the pandemic has caused Marcus & Millichap to include a warning in its report, however.
“As the prospects for a widely distributed vaccine extend into 2021, and another wave of infections occurs across the country, more standalone retailers could be damaged without additional federal stimulus,” the company said.
What these figures mean for CRE
Marcus & Millichap noted multi-tenant retail centers are feeling the impact of COVID-19 now, but will rebound as smaller retail stores replace the restaurant spaces that are currently closed. Meanwhile, the company also forecasted that the holiday season could boost retail sales this year. The combination of a potential new round of stimulus and the fact that a lack of entertainment options and travel could push more people to shop in person could increase holiday sales by 4% from 2019.
If that proves to be the case, in-person shoppers will likely use their cell phones to pay for items, perhaps scan codes while in a store if that’s available or simply just to make calls. All of these functions will require strong connectivity—especially in highly populated retail centers. It will be up to CRE owners to ensure their current or new tenants that their network can handle all of the increased traffic during the holiday shopping season.
Joe Dyton can be reached at email@example.com.