A report from a Canadian real estate investment company provides a potential glimpse into the harrowing future facing both retailers and their landlords. After-effects of the COVID-19 pandemic are leaving 10 percent of retail tenants in the country with plans to permanently close their business, according to Colliers Canada.
If all of these tenants were to close, it would lead to a 10 percent decrease in retail rent collections and a 7 percent increase in retail vacancy based on total square footage, assuming there is no new leasing taking place, the report said.
As many as 62 percent of the tenants mulling permanent closure are identified as “high-risk” by Colliers’ risks analysis. If these tenants close permanently, rent collection will decrease by an average of 7.7 percent. Colliers anticipates it will take 1.5 months after the average retailer’s reopening date before rent collections start to increase, and expects a further decline in June before collections start to improve in July and August.
In what would be a blow to mom-and-pop shops throughout Canada, 92 percent of the tenants who could close down are operating small businesses instead of larger, regional chains.
To measure the state of retail tenants, Collier collected data from 148 retail tenants of all sizes, risk classes and geographies across Canada from May 26 through June 2. While retailers anticipate their revenue will rebound as the economy reopens, they say they’ll only reach 45 percent of last year’s June-to-August revenue, the report said.
The dip in revenue is causing most retailers—74 percent—to explore new sales avenues, with 41 percent looking at driving business online. Another 26 percent say they will be looking to offer different types of products and services to generate new revenue.
“COVID-19 is forcing retailers to do business differently. Thankfully, retail is practiced at constant evolution, and retailers have been widely adaptive,” said Jane Domenico, senior vice president and national lead of retail services for real estate management services at Colliers Canada. “However, we expect the trend around permanent closures to increase given the slow recovery in consumer demand and limitations created by physical distancing.”
Even as most companies reopen, they believe it is going to be costly. Ninety-three percent of retail tenants believe that adhering to government regulations for reopening will increase overhead costs. The median retail business indicated its overhead costs would increase by approximately 25 percent.
Of those tenants who have a plan to offset these costs, 47 percent plan to reduce expenses and 17 percent indicated they would raise prices.
Domenico anticipates that tenant retention is “more important than ever—we may see landlords spending money where they previously didn’t to drive traffic for their retailers. Providing positive guest experiences and communicating COVID-19 readiness will become a major advantage for well-managed malls and shopping centers.”
On average, retail tenants believe the government-mandated restrictions are acceptable, with 56 percent of respondents describing the restrictions as very reasonable or reasonable. Nearly one-fourth (24 percent) feel they are unreasonable or very unreasonable while 20 percent are neutral.
Tenants largely agree that regulations must be tailored to their business needs, with 42 percent wanting more business-specific regulations, while 29 percent feel regulations should be easier to understand and 28 percent believe the regulations need to be more flexible.
“Many tenants are struggling to get clarity around regulations,” Domenico said. “They need clear directions to maintain public safety, but also flexibility to determine what makes sense for them.”
On the whole, these retail tenants largely doubt they’ll be going back to pre-COVID employment levels. Only 37 percent of retailers believe more than 75 percent of their workforce will return to work by the end of the summer, while 26 percent think they will rehire between 51 percent and 75 percent of their workforce. To make matters worse, 23 percent believe between 26 percent and 50 percent will return, while 14 percent think less than 25 percent will be back by summer’s end.