Wells Fargo Securities: Pandemic Could Accelerate Retail Sector Trends

The economy has improved from a few months ago, “[but] the same cannot be said of the retail sector,” said Wells Fargo Securities, Charlotte, N.C.

Vacancy rates rose to 4.8 percent in the second quarter, the highest since 2016. Similarly, asking rents registered their first contraction since 2013, falling 0.3 percent over the quarter.

“Retail’s struggles have continued into the fall, even as broader economic activity has improved, and leasing activity is still running at about half of its pre-pandemic pace,” Wells Fargo Securities said in a new report, Retail After the Pandemic. “Furthermore, occupancy limits and the reluctance of consumers to spend a meaningful amount of time shopping inside physical stores have pushed a growing list of retailers into bankruptcy.”

The report said the pandemic has hit shopping malls and power centers particularly hard. Many smaller centers that has shifted their focus to entertainment, experiences and dining before the pandemic to avoid online competition now find themselves in an uncomfortably weak position amid prolonged business shutdowns and social distancing requirements. “That noted, it is hard to blame retail’s recent hardships entirely on the coronavirus crisis itself,” Wells Fargo Securities said. “Large numbers of brick-and-mortar retailers were struggling well before the outbreak. Department stores, which are often key anchors at malls and shopping centers, have been under tremendous strain for decades, losing market share initially to discount stores, later to big box category killers and more recently to warehouse clubs and online competitors.”

Not every retail segment is suffering, the report noted. “Retailers that offer curbside service and provide products that augment or enhance home living spaces, including furniture, appliance and home electronics, have generally outperformed,” it said. “Building material stores such as Lowe’s and Home Depot, and big box stores with robust e-commerce platforms, such as Walmart, Target, Staples and Best Buy are holding up well. Grocery stores and pharmacies–especially those providing online ordering–and delivery, drive-thru and pick-up services, have also faired relatively well.”

Looking ahead, the pandemic could accelerate several trends already in place before the pandemic. “For example, town-center properties, which are mostly outdoor and walkable, stand to benefit in a world of social distancing and preference for open-air activities,” the report said. “The resiliency provided by these outdoor shopping and entertainment venues is likely to remain in high demand, even after the pandemic.”

Wells Fargo Securities said many traditional enclosed shopping malls could transition toward a town-center format. “This would offer some protection if we saw the virus or a variant reemerge,” the report said.