On May 1, we heard from Nick Egelanian, President of Siteworks, a retail real estate consulting practice. Nick is a national expert on retail and the shopping center industry, Nick pioneered the segmentation of retail into Commodity & Specialty sub-groups as the author of the retail chapter of the Urban Land Institute’s Professional Real Estate Development: The ULI Guide to the Business, 3rd Edition in 2012 and is currently updating the chapter for its 4th edition due out in 2022. He was a presenter and consultant for the 2019 CARW and ICSC Wisconsin Retail Conference. Mr. Egelanian served as VP of Real Estate & New Store Development for Crown Books and FAO Inc/Zany Brainy before forming SiteWorks Retail Real Estate Services in 1992. As President of SiteWorks, Nick has worked with retailers including Stuart Weitzman, Balducci’s, Jos. A. Bank, Gap. Starbucks, Justice, Lane Bryant, & Zoës Kitchen and many other retailers.
Full (edited) presentation video HERE
He provided insight into the retail world pre and post pandemic. While it was well known that certain segments of retail were struggling prior to the pandemic, the picture that is painted for the future is not pretty. Nick believes we will see a much larger dip in retail sales as compared to the recession in 2008-2010. In January, Greenstreet Advisors predicted that 50% of remaining department stores would close within the next five years. They recently revised their prediction and now believe that 50% of retail will be gone in the next two years. Department stores have been losing market share since the late 1980’s. Discount, big box commodity retailers have been gaining market share ever since. More than ever, people are looking to street side retail, easy, convenience and efficiency. We were already seeing a contraction in retail space. This will likely accelerate.
At the end of the third quarter of 2019, E-Marketer, predicted a period of slow growth on the internet. The two main reasons were due to a complete penetration of prime and also a large portion of the population who lives paycheck to paycheck which results in an inability to buy online. This will be exacerbated by the effects of the pandemic.
E-Commerce IS seeing a spike in volume due to the pandemic. However, up until this year e-commerce was about 10-11% of retail spend which is similar to that of the catalog shopping peak in the 1990’s. Grocery delivery is skyrocketing, but there are a lot of issues with delivery delays, high costs etc. Nick feels this is very much a luxury service and not sustainable for those without discretionary income.
Retail efficiency is currently way down even for the stores that are open. We are limiting the hours, the amount of people in the store, stores are doing increased sanitation which costs additional money as well. As we begin to re-open, there will be a wide range of variability in their efficiency.
As a whole, Nick believes people are very focused on the short-term impacts of the pandemic, but they need to start thinking much longer term and how it will affect their business and what changes they will need to make in order to operate. Unfortunately, the average life expectancy of retailer with no money coming in is 30 days. Many stores are independent, mom and pop retailers that have lost so much cash already. Negotiating deferrals, interest only payments will only help so much if the retailer is never able to pay back their landlord.
Looking to the future, Nick expects every tenant will ask for pandemic protection in their force majeure and insurance clauses. However, he finds it unlikely that the landlords will offer it, nor will the insurance companies grant it. Nick hopes that there will be a system for pandemic business interruption insurance coverage backed by the federal government and federal reserve. This would insure and prevent the collapse of the “system”.
The most resilient retailers coming out of the pandemic are the commodity retailers. The most vulnerable are the ones that involve gathering and those without the cash to make it through. There will be opportunities for large land plays and open shopping center spaces as this goes on. Neighborhood shopping centers and urban markets will be winners as they avoid common areas and can make people more comfortable with less interaction. Neighborhood shopping centers will be the easiest to adapt with additional uses outside of retail.
We are already seeing great assets that may have been a “close second place” gaining traction as businesses become more cost conscious. Protect yourself in the short term but prepare yourself for the long term. There will be tremendous opportunity, but it will be related to the timing and where we are in solving the problems of the pandemic in the first place.