Matthew Harrison participates in the IR Global Real Estate Virtual Series – Weathering The Crisis: What Future For Real Estate?
Foreward by Andrew Chilvers
Real Estate across the globe has taken a huge hit by the Covid-19 crisis as businesses and retailers close indefinitely, while customers are locked in their homes.
In the US and UK, the ‘brick-and-mortar’ retail sector has been in a sensitive state for some time as people have been deserting the high street and opting for online shopping. Even the new hyper-malls that had focused on the out-of-town shopping experience have closed during lockdowns imposed by governments around the world. Add to this the closure of all restaurants, pubs and hotels, and thousands of small and medium-sized businesses are now struggling to survive for month to month.
Consequently, real estate investment businesses are finding it difficult to collect rents. In London, Intu, a property investment trust, claimed it received less than 30% of the rent due to the company in Q2. This compared with almost 80% in the corresponding period the year previously. Elsewhere, Hammerson, an out-of-town retail parks developer in the UK, said it had only received 35% of Q2 rent from clients.
On the UK high street retailers such as BrightHouse and Debenham’s filed for administration along with Italian restaurant chain Carluccio’s. These were only the big names, many more smaller businesses followed.
Such horror stories were echoed across North America, Europe and Australia as real estate was hit worldwide. As with London, the sectors hit hardest in different jurisdictions were hotels, restaurants, bars and general entertainment outlets followed by retail and housing (particularly second-homes).
How this plays in the coming months and years is difficult to predict. But all real estate analysts agree there will be a sea change in the medium term at least as home owners, retailers, landlords and investors rethink their rental and investment strategies.
Can you tell us about the impact COVID-19 will have on the retail sector, short and long term?
We have a combination federal and also Arizona state regulations, similar to what’s happening with Lieven in Belgium. Certain businesses are still, for the most part, open, but there’s a restriction on large gatherings of individuals. Essential stores like supermarkets are open and other retail stores and outlets remain open for limited hours. Instead of opening for the entire time, they felt they should have limited hours. So out of those types of retail locations, it’s service industry, restaurant, fast food and entertainment where the biggest impact has been felt.
My clients in those industries, particularly food, are seeing a huge drop off of customers ordering. Right now, they’re the most financially hit out of my client group. The biggest worry for my clients is the great unknown at the moment. What happens next week, in three week or in three months? They’ve had to cut back on
staff and those that do online retails are not able to supply goods that they’re reliant on people coming to the locations to purchase goods. But those customers’ movements are now restricted.
On a federal level, the president signed a bill to help provide both individuals and employers. I’ve been monitoring what is in that bill. One of the main areas is tax relief. April 15 is the date in the United States for all businesses to file their tax returns and that due date will probably be delayed at least 60 to 90 days. Right now, it’s still in flux because I think the law has just been passed. So we need to look at that closely and interpret it for my clients.
How do we reinvent the High Street or Main Street after this kind of trauma?
Regarding Arizona, we have already experienced a shift in perspective when it involves commercial real estate in general. This is particularly true following the last economic downturn in 2007-08. Since then, Arizona commercial developers have wanted to avoid the never ending boom and bust cycle. They knew that online retail was coming, so they’re trying to adjust to it before this latest event. And for the most part, these adjustments have been taking place for several years.
Away from the big box malls and stores, there’s a trend for more of an integrated development with both commercial, retail business and even sometimes housing all in the same location. And luckily before the Covid-19 crisis developers had been very hesitant regarding commercial speculation projects. So, if anything, demand has far outpaced supply in the Phoenix metropolitan area. Even with this downturn, there’s still going to be more demand than supply when it pertains to certain commercial space. I do believe we’ll still see certain retail locations close because of their circumstances. But this is probably not a sudden shift – the crisis will just accelerate the closures. They were already trending that way to begin with. And from what I’m hearing from my commercial clients, they pressed pause on those type of developments months ago. So now they’re fairly happy at the moment with their past decisions.
In Arizona we have a large influx of new population coming in on a regular basis. People move to Arizona for the warmer climate, it’s usually more pro-business and avoids the anti-business regulatory insanity of California. As such, there is still going to be the need for commercial and retail spaces. But how those spaces are developed is going to be what’s different. They’re going away from getting the big box location. The huge malls. It’s becoming more of an integrated style as I said earlier. But the trend is still there. The Covid-19 crisis will have an impact but only in certain areas.
Nevertheless, I don’t think it’ll have the lasting impact that the boombust of 2007-08 had.
In response to Covid-19, will there now be a huge rise of online shopping? In the future can brick-and-mortarretailers also use technology to attract the right kind of customer?
Regarding online retailing, a lot of retailers are proceeding in one of two directions. The first is those retailers who have a heavy online presence. They still have retail locations, but it’s not for the same purposes that it was before. A retailer now does not want to have 20,000 square feet of space to have all these products. Instead, they have a third of the space. They still have products for people to go in and try on make sure it’s the right fit. Make sure it looks good. And then whether they buy it at the physical store or at the online store, it doesn’t matter to the retailer. It’s still being purchased. And we’re seeing a lot of that right now.
With those retailers they don’t have the overheads of maintaining large physical units. They’re making the retail experience a little bit more special, a little bit different. They are niches that have certain kinds of customers who want to come along to interact with certain items. The business still has a presence where they’re going more for the experience than they are for substantial inventory on the shelves.
Young people in particular like the technology. They also like interaction. Part of the technology allows them to interact with the similar groups of people and find the niche they feel comfortable in. And the store that caters for the niche. Regardless of the technology, they’ll say ‘hey, let’s go here, let’s decide to check out this.’ They’ll
then meet people with similar likes and circumstances at the retail location. Importantly, younger people tend to go back to that experience again and again if they like it and it fits with the niche they’ve adopted.
Businesses tend to get set in their ways. They don’t adapt. But, realistically, there are always opportunities out there, you just have to adapt to the circumstances, to find that niche that works.