COVID is Accelerating CRE Trends

Kroll Bond Rating Agency, New York, said the COVID-19 pandemic accelerated many commercial real estate trends already in progress.

Larry Kay

“Changes in property use have occurred overnight, some of which will permanently change the commercial real estate landscape,” KBRA Senior Director Larry Kay said in COVID-19: Trends Upended by Pandemic Disruptions.

The report noted physical distancing changed the ways businesses operate, with “dramatic” falls in demand for many property types. “Hardest hit are malls, other categories of nonessential retail and hotels,” Kay said. “However, industrial assets–in particular, last-mile delivery facilities–are expected to remain in high demand due to the proliferation of e-commerce.”

KBRA said many department and other retail stores that would have closed gradually over the next decade due to social preference changes will likely experience an “accelerated demise” amid the pandemic. U.S. retailers could close up to 25,000 stores this year compared to 9,832 stores last year. UBS, New York, forecasts that 100,000 brick-and-mortar U.S. retail stores will likely close by 2025.

“Class B and C malls have been on the radar screen as a dying breed for many years, with the pandemic accelerating their demise,” Kay said. “Class A malls, which seemed to be immune from the retail malaise due to tenants that would pay to be in the most productive malls, are also being affected as many shoppers are reluctant to return to those that have reopened.”

Mall owners have some options, the report said. Simon Property Group and Authentic Brands Group LLC this month agreed to buy clothing firm Brooks Brothers Inc. for $325 million. The proposed purchase includes a commitment to keep 125 Brooks Brothers retail stores open. Simon Property Group, Authentic Brands and Brookfield also bought bankrupt fast-fashion chain Forever 21 in late February.

Simon Property Group is also exploring turning some of its anchor department stores into distribution hubs for Amazon, KBRA said. Other mall owners are re-purposing underused shopping mall parking lots as “pop-up drive-in” movie theaters. “Smartphone apps allow drive-in visitors to order food from onsite concession stands in the parking lot or from shopping center-based restaurants and have the food delivered to the car’s stall number,” the report said.

Another trend altered by the pandemic: before COVID-19, brick-and-mortar retail filled vacancies through “experiential” tenants such as restaurants, gyms and play areas. “As this requires consumers to visit in person, it could provide some form of protection against online competition,” KBRA said. “But these business types have been some of the most affected by social distancing mandates. In addition, consumers have been setting up their own gyms or workout spaces at home. With an effective vaccine and/or therapeutics, we suspect those tenants that survive will bounce back, given consumers’ desire to get out of the house, be active, and avail themselves of recreational opportunities.”