What's Going to Happen to Stores/ Galleries?
The commercial space landscape is in total flux, suspended animation really. No one can accurately predict where everything will land when we emerge from this crisis.
The good news is what's fairly likely to be on the other side. There will be more opportunity than ever to begin anew with lower costs. Rents will inevitably be less, maybe a lot less. Supply chains will stabilize. Prices will come into line and stabilize. The biggest opportunity of all: that the economy has always been super-charged after a truly significant downturn like this one, especially after a national emergency.
But this in-between time looks like rough sledding. Stores will begin to reopen, already are. But carefully, limitedly, in sequences that will last months in most places. Still, open doesn't mean profitable. Open doesn't even mean viable. Take restaurants: Tom Colicchio, in a recent interview with The Daily Beast, predicted that maybe 25% of all restaurants in New York will be able to reopen. For his part, he has closed all his restaurants in New York, Los Angeles, and Las Vegas. Closed. Laid everyone off (https://www.thedailybeast.com/top-chef-host-tom-colicchio-warns-coronavirus-could-kill-75-percent-of-restaurants)
And it's not only restaurants, it is no secret that storeowners barely have enough operating cash during normal times. Precious few of them have the cash reserves to survive this crisis and be able to reopen when it's over. Even the ones who do have those reserves would mostly run out of cash if they continue to pay the rent for all that long without any sales. The ones that have inventory are in worse shape. Unless they have, or are able to establish, a thriving online business, their inventory is eroding in value by the day. Seasonal merchandise will be close to valueless. Making matters worse for inventory businesses--how in the world do you make an informed decision on how much to order for the coming months, coming years? It's sort of impossible at this point. Even if it were possible to project, how can you trust that the supply chain for that merchandise will be intact?
What about opening under partial steam? Clothing stores in California will be allowed to open, for curbside delivery only, this coming Friday. Curbside only? Are you kidding? Most of these stores wouldn't make it at this point if they were fully open and customers could come freely, undeterred by social distancing. But none of those things are happening, none will happen for quite some time. Not if we all want to stay alive, that is.
How will the matter of back rent be resolved? How about rent going forward? What about the rest of the lease? How much will rental space be worth in the new retail landscape? Those questions are unanswerable at this time. But some things are inevitable. For one thing: retail space will be worth less so it will be less expensive to rent. Already is worth substantially less. Who even knows how many people will shop in any given category when things reopen? Will seniors and those with underlying conditions be shopping at the mall before a vaccine, or at least before some super successful treatment is established? Not in any huge numbers, I don't think.
It is also for sure that office space will be worth less. It will simply cost less to lease for a fair amount of time, I think. How much will office space be worth if we all need to sit at least six feet apart until this thing is over? How much space will companies keep renting after they take stock of how well their employees performed working from home, without any space at all? How much will space be worth if business volume, business profitably, has been refigured down and we don't even know how far? Hard to know. But less.
All this to say that working out whether, or how much, rent to pay during the quarantine doesn't answer these questions. Sure, gun stores and grocery stores will be fine. Pharmacies are thriving. Amazon's stock price is at an all-time high. But that just means that stores, especially local stores, have been supercharged in their march toward closing, a march already well underway before the crisis.
Take the case of large regional malls. What will happen now? The major department stores that anchor just about all these malls are teetering on the brink, many are likely to close. A retail analyst predicted that no more than 50% of all department stores would make it through. What's gonna happen to the stores in between? Just this week, the private equity firm, Sycamore, backed out of their agreement to pay $525 million for a 55% stake in Victoria's Secret. No kidding. That valuation would be ludicrous in today's atmosphere. It would be hard to get a private equity company to bet on a chain retailer in malls at any price right now.
Individual landlords will be under the gun. With tenants unable to pay at the old rate, if at all, landlords will need to find a way to renegotiate their debt or start losing their properties. Depending on the landlord, depending on their particular situation, they will respond either in an enlightened way or with blinders on, hoping against hope that what they see isn't really happening. Doesn't matter, really. The market will only bear the rents that the market will bear.
The ultimate result will be less rent for the tenant for some time. The whole reshaping will not go well for a while, I don't think. The negotiating, the evictions, the lawsuits, the remapping of the commercial real estate landscape--it will all take some time to shake out. But it will unearth incredible opportunities. After 2008, after 9/11, store owners were able to make incredible lease deals that set a lot of them up to have a decade of amazing profits.
It will be hard indeed for landlords to accept that their properties will produce less rent than planned. But it won't take long before that reality sets in. Even if most stores make a valiant effort and open back up--it doesn't seem likely that sales will be enough to sustain them, at least not under current rent to sales ratios.
But look to the other side. Protect your cash through the crisis and it will serve you well.
The entire retail landscape is up for grabs.