The retail sector continues to contend with a high degree of disruption in the wake of COVID-19’s impact on the U.S. economy. Just in the past week JC Penney declared bankruptcy and Pier 1 announced the impending closure of all 900 of its stores. Earlier in May, high-profile brand names J. Crew and Neiman Marcus filed for Chapter 11 protection, and others will surely follow. Not all retail news is grim, however. Chipotle’s stock is up 225% in the last two months as many quick-service restaurants (QSR) are largely weathering the worst of the storm; and stalwart retailers Walmart and Target are doing quite well, although they were both designated as essential retailers and therefore had a greater ability to keep revenues rolling early in the pandemic. What does the future look like for retailers, and consumers for that matter? How will the sector navigate these new waters and find its new normal? These are million-dollar questions with no immediate answers, but several trends have begun to appear which we will continue to address in the coming weeks. Up until now, retail was all about location. Today, the most critical thing retailers need to be able to do is to pivot, to change direction quickly and meaningfully, and then adapt in order to survive. Tomorrow and its new normal will come soon enough, and decisive steps taken now will increase the chances that a business will still be here when it does. There are many pressing issues to be worked through, including when consumers will begin to show up and exactly how retailers will handle things differently as it relates to merchandising, traffic flow in their stores, etc. A reset of consumer behavior is likely, and many people won’t have the means to spend to the degree they did prior to the pandemic. That said, one thing is certain. People are social animals and are craving a return to what was normal. Some retailers have reported long lines of people waiting outside to get in due to limited allowed capacity, which is generally about half of what occupancy was previously. There are very real financial considerations on the part of businesses and many decisions will be driven purely by math. Some smaller restaurants that can get by with delivery and curbside takeaway are opting not to reopen so they don’t have to fully staff their locations, which ultimately increases their revenues. The reality is, not only do restaurants have the challenge of social distancing, but they are losing much of their income as many of their former customers are largely working from home. How and when will that change? That’s yet to be seen, but there could be real pressure on the revenue side for the balance of the year. There is activity on the legislative side to provide some relief to small businesses, including the controversial proposed SB 939 legislation in California, which if passed would allow restaurants, cafés and bars to engage with landlords to renegotiate their rents. Should they be unsuccessful with their landlords, they would have the ability to cancel their lease with the payment of 3 months of rent and all personal guarantees would be erased despite what term was remaining. Some legal professionals think the legislation is unconstitutional and would immediately be challenged in the courts. Many state governments are putting pressure on landlords, even though they are largely unable to legally enforce that pressure, in an effort to preserve small businesses and help them weather this storm. In the end, it ultimately comes down to three equal sides of a triangle. What current legislation will allow retailers to do, what it makes sense for retailers to do, and what consumers are comfortable doing. What is the new normal, and what are revenues going to be moving forward? The larger companies that have the staying power because of a solid balance sheet have an advantage as well as the companies that have a well-defined omni-channel sales system. Those are the companies that are best equipped. The ability of businesses to pivot and be agile and to understand the new economy and where they can make money will be critical. Businesses are getting creative in adjusting to the new normal – it’s either pivot or perish, including some restaurants offering takeaway cocktails and selling pantry items like toilet paper because they can get it through their supply chains. Six degrees of separation has become six feet of separation. Retailers are very resilient and creative when it comes to dealing with disruption because they have been forced to deal with it in other forms (i.e. online shopping and the rise of Amazon). Their ability to pivot is likely much greater than in other sectors. Smaller retailers – mom and pops and brand names that are not as well capitalized – have been somewhat slow in responding to omnichannel marketing but they’re going to have to be quick to pivot in order to successfully respond to COVID-19. Florida-based restaurant chain BurgerFi is a perfect example. The company recently announced it has signed a venture with REEF Technology that will allow it to quickly expand into multiple markets outside of Florida (including Seattle, Nashville, Minneapolis and Houston) by turning ”vessels” that resemble shipping containers into commercial kitchens and then stationing them in parking lots for carryout orders. The move provides flexibility at lower costs than operating brick and mortar locations. There are many challenges right now, but retailers are very good at finding a way to pivot, survive and adapt. With considerable pent-up consumer demand to get back to dining and shopping being expressed from coast to coast, the one certainty is that while not every retailer is going to make it, for many this too shall pass.

Retail Sector Observations

• Some REITs and private owners are likely to sell off pad sites to redirect that capital to in-line centers.
• Many lenders have been able to provide some flexibility for landlords, while others have not as their loan covenants may not allow for forbearance of debt service.
• Institutional owners that have low leverage have been more willing and able to be flexible with tenants.