The Orange Report – 2020 Q4

The Orange Report – 2020 Q4

COVID-19: THE GREAT ACCELERATOR

How the pandemic expedited the pace of change around us, even beyond the commercial real estate market
LEASE RATE - $13.22
VACANCY - 6.1%

RETAIL

LEASE RATE - $21.07
VACANCY - 7.7%

OFFICE

LEASE RATE - $4.49
VACANCY - 3.1%

INDUSTRIAL

The COVID-19 crisis accelerated many trends in the commercial real estate industry that were impacting the ways in which we use physical space even before the world turned upside down in March 2020.
Throughout this last economic cycle (2010-2019), businesses were discussing remote work and how a hyper-connected world may change the way we use office space. Distributors were grappling with last mile logistics and warehouse space was proliferating at a breakneck pace to keep up with shifting consumer demands. In the retail sector, where the impacts of the internet age were already being felt disproportionately relative to other property types, the acceleration of these trends hit abruptly and with more force than anywhere else.
The mandatory shutdowns beginning in March sent a shockwave through the retail world. As we all hunkered down in our homes, businesses suffered. However, the Paycheck Protection Program provided a lifeline to many, and as restrictions on businesses lifted later in the spring, we witnessed a remarkable wave of adaptation and resilience in the face of 2020’s challenges.
Retailers were not blind-sided by customer demands for convenience and seamless synergies between their online and physical platforms; retailers have been adapting to these demands for the past decade. Many of the ones that saw success this year are the ones who were proactive in building the infrastructure needed to be responsive to these trends.
Throughout the year, headlines warned of catastrophic damage within the retail sector. “Retail rent collection plunges to 58%,” and “Countless retailers sink into pandemic bankruptcy,” are just a few examples. However, many of these news stories failed to differentiate between the neighborhood and convenience-based retail properties where tenants have mostly held strong, and other property types like power centers and enclosed malls, which were struggling to find their footing even before COVID-19.
Properties and retailers that were already adapting to changing consumer demands fared decently, if not well, after a period of transition. Those catastrophic headlines were, in many cases, accelerated by COVID-19’s effects, but not caused by them.
As we emerge from the pandemic, centers that continue to adapt to the changing environment will perform well. Those struggling before COVID-19 but who skate through, will continue to face the pressures of obsolescence once the crisis subsides. The key to the challenges they face are adaption. Those same challenges that were accelerated in 2020 could also compel the acceleration of their re-birth.
Once the pandemic subsides, we expect to see both experiential opportunities and mixtures of uses introduced to these struggling properties because of their typical locations at highly desirable intersections which draw from a regional radius. This means apartments and office buildings where big boxes and malls sit today. It means entertainment and community-focused uses where soft good have traditionally been sold.
“Experiential retail” was the hot topic pre-COVID-19. After 18+ months of being told to distance ourselves and stay home, our social nature is starved for togetherness when it is safe once again. Experiences, community, and excuses to gather, balanced with convenience and service, will once again drive the trajectory of retail and real estate.
Even before COVID-19 introduced itself, we knew that the world around us was changing at a breakneck pace. “Exponential growth” was something associated with COVID-19 transmission and spread, but it is a concept that can be applied to the pace of change all around us. The most successful businesses will be the ones that embrace this dynamic and adapt to changing circumstances. The plexiglass, the curb side pick-up, and other changes that we quickly rolled out in 2020 are symbolic of how nimble we all must continue to be.
The three primary real estate principals continue to hold true: Location, location, location. When those can be combined with the creativity and adaptability required in a post-COVID-19 world, there exists an incredible opportunity to re-create, re-imagine, and re-develop our physical spaces to meet the demands of a changing world.