The pandemic is placing numerous financial pressures on physical retailers. With costs piling up and consumer spending down from pre-COVID figures, what will it take for brick-and-mortar stores to keep the lights on?
Temporary store closures have begun to ease, giving way to the new challenge of reopened stores with capacity restrictions. E-commerce sales can make up some of the deficit created by having fewer customers coming in the door, but it may not be enough to stay afloat. The outlook for being able to remain open varies depending on factors including margins and cash on hand, but companies of all sizes are feeling the pinch.
“Even some of the large companies are really struggling [due to] the cost of carrying inventory, paying their employees’ benefits and trying to remain profitable,” said Carter Magnin, director at real estate services company Cushman & Wakefield in Los Angeles.
In light of these challenges, a few big-name brands have pushed back, with Urban Outfitters Inc., H&M and Gap among the retailers that temporarily put off paying rent.
“The more sophisticated retail tenants have realized not to pay their rents, which is funny because the mom and pops are the ones with a bigger risk, but they’re just much more sophisticated businesses, and they play the game and they’re trying to preserve cash flow, so a lot of that was preemptive,” said Ryan Patap, L.A. retail market analyst at commercial property analytics and marketing firm CoStar.
In response, some landlords are taking legal action against retail tenants to collect what they are owed. For instance, mall operator Simon Property Group has fought back, suing tenants Gap and Brooks Brothers for millions in unpaid rent.
Sharing the pain
Rather than what has sometimes been a contentious retailer-landlord relationship in recent months, collaboration is deemed a more effective approach. With the struggles of running a retail business adding up, experts believe merchants shouldn’t have to shoulder the burden alone.
“I think it has to be a shared approach where you have relief from the federal government, you have relief from tenants and relief from landlords, and the landlords are getting relief from their banks,” said Magnin. “I think it has to be a 360-degree approach. Not one party can carry the weight of this.”
Landlords could reduce rent or allow their tenants to defer payments. Some deals are giving tenants a few months of rent relief in exchange for certain terms. This could mean signing a longer and more expensive lease, allowing landlords to recoup the lost rent later. Other agreements are stipulating that retailers apply for a PPP loan or open as soon as local regulations allow.
Another option is to switch to a percent of sales model, which is more commonly used in malls. While this might mean a lower rent payout, it acts as a protection to landlords that their tenants are paying what they can.
“The landlord is incentivized to work with [the tenant] because if the tenant goes bankrupt and the store closes, the odds of them leasing that to another quality tenant is that much harder right now,” said Patap.
Beyond rent help, Meghann Martindale, global head of retail research at commercial real estate firm CBRE, has seen landlords help tenants reopen through assistance in areas such as marketing, signage and curbside pickup.
Even if some stores close during COVID-19, brick-and-mortar is not expected to go away completely.
“Early indications of pent-up consumer demand reinforces that place still matters, but consumers have also become more accustomed to online shopping, so the brick-and-mortar retail experience will evolve to meet ever-shifting consumer demands and interaction with physical retail space,” said Martindale.
Per Magnin, this might mean that stores increasingly function more as a showroom than a transactional space due to social distancing requirements. Consumers could visit a boutique to get acquainted with a brand or check out new products in person and then complete their purchase online.
One of the hopeful signs surrounding physical retail is the lines of customers waiting to enter stores to shop.
“I think people being stuck in their homes for three months just reminds us all how important that human contact is…Sales have not returned to the levels that they were pre-COVID, but a lot of our tenants are giving us the feedback that things are bouncing back a lot faster than they thought they would,” said Magnin. “Hopefully in the next six months to a year, this whole thing’s behind us. And I don’t think retail is going anywhere, anytime soon.”