Wells Fargo Securities on Retail’s Future

Measures taken to contain coronavirus harmed the retail sector, but the pandemic might re-shape retail in positive ways, said Wells Fargo Securities, Charlotte, N.C.

“The next 12 to 18 months will be challenging for commercial real estate in that there will be short-term pain for many businesses, which will surely lead to higher vacancies and slower rent growth across the board,” Wells Fargo Securities’ Commercial Real Estate Chartbook said. “Until the toolbox of therapies to combat the virus is expanded and a vaccine is successfully developed, there will also be a need to make changes in how commercial real estate formats operate, such as retail occupancy limitations.”

The report noted the retail sector’s current pain but said better days might be ahead. “For many struggling retail chains, the abrupt slump in consumer spending this spring was just too much to overcome and many have thrown in the towel,” Wells Fargo Securities said. “Headlines declaring the death of retail, however, are overly dramatic. Not every segment of retail is in dire straits. 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 relatively well.”

Furthermore, the pandemic did not cause all the struggles many retailers now face. “For roughly the past decade, retail has been in a state of flux, and many retailers were teetering on the edge of bankruptcy prior to the pandemic,” the report said. “Recessions tend to accelerate existing trends such as the long-running decline in market share for full-service department stores and many big-box chains. Many enclosed shopping malls and power centers were already struggling to fill their centers with creditworthy tenants.”

Wells Fargo Securities noted one retail segment might benefit from the current economic storm: town centers. “These properties are mostly outdoor and walkable, which gives them a great deal of flexibility to accommodate social distancing,” the report said. “Many also include residential, office and entertainment, and some are adjacent to mass transit. Not only do we see town center formats flourishing, but we also see many traditional enclosed shopping malls transitioning toward this format.”

Another trend that could gain momentum is the move by e-commerce companies to open brick-and-mortar locations in highly trafficked areas. “These locations, with showrooms that allow customers to test newly introduced products, allow firms to build their brands and deepen customer relationships,” the report said. “Rising homeownership should also be a solid tailwind for operators of neighborhood centers and smaller strip centers that feature restaurants and experience retailers.”