A Tale of Two Shopping Centers

March 4, 2021

2020 was a bit of a disaster for many classes of CRE. The impact of the global Coronavirus pandemic dug deep into the pockets of retailers and consumers alike, leaving landlords stuck between a rock and empty retail space.

As bad as the numbers looked in 2020, losses weren’t shared equally across the board. Shopping centers are a great example of the contrast within different sectors. While retail shopping malls saw dramatic shift downwards, smaller community shopping centers remained surprisingly strong, especially those anchored by a grocery store.

How Did Grocery-Anchored CRE Perform in 2020?

Strip malls and community shopping centers with grocery store anchors did not suffer as much as retail shopping malls during 2020. While retail shopping was heavily driven online, a large percentage of people still preferred to shop for groceries, cleaning supplies, and basic home goods in person.

No matter how bad it looked in 2020, people still needed to eat and buy cleaning products. As a result, CRE investors holding grocery-anchored shopping centers saw relative stability in their investments.

Shopping Mall Performance in 2020

A large percentage of shopping mall tenants are apparel stores, department stores, or movie theatres. Many of these remained closed throughout 2020 during the peak of the pandemic. Some are still closed in states like New York.

Tenants requested reductions in rent, putting more pressure on already strained landlords. In 2020, around -2.7 million square feet of rentable space was absorbed by the market. Rentable space vacated by major retailers like Kmart – who closed 16 stores in 13 different metropolitan areas – was absorbed by grocery stores, gyms, and drug stores.

What’s Next for Shopping Centers?

While the future of retail shopping spaces is up in the air, there is a lot of discussion about what to do with the space itself. The vast open spaces used for shopping centers could be reincarnated into industrial complexes for logistics, processing, and warehousing. Companies like Amazon have already dug into this option. As good as it sounds, it’s easier said than done.

There are many obstacles hindering the conversion of retail spaces to industrial spaces. One of the biggest hurdles is rezoning. Any proposal is likely to receive stiff resistance from municipalities who have little to gain in terms of tax revenue.

Another potential use for old retail spaces is for community services, such as churches or homeless shelters.

Before the death of malls is officially declared, landlords will likely wait to see if there is any potential for recovery, especially as the pandemic is slowly brought under better control. Predictions based on the current vaccination pace show that by June around 60% of the population will be inoculated.

Once enough of the U.S. feels safe going out again and regulations loosen, built-up consumer savings could erupt into a wave of spending that will provide a much needed, albeit temporary, lift to the struggling retail sector.

The pandemic is emphasizing the existing need for retailers to set up a strong online presence. In 2020, 19% of all retail sales in the U.S. were from e-commerce, up from 15% in 2019. Additionally, digital sales in the period of November through December rose to 45.4% in 2020, more than triple the rate YOY for the same period in 2019.

Grocery store anchored shopping centers are not expected to evolve greatly because of the type of occupants that take up much of its space. These tenants offer essential goods like food and cleaning supplies, which are regarded as necessities. While online grocery sales grew by 35% in 2020, they’re still only projected to make up 10% of total grocery sales by 2023. In the long-term, grocery shopping may begin to shift online, but there is no immediate threat to strip malls.

Final thoughts

As ecommerce continues its exponential growth, CRE investors need to find a way to hop on the train before it’s too late. Businesses have already begun reorganizing themselves to deal with the pandemic, building up more robust ecommerce systems, but available rental spaces may not fit those needs as well. Retail real estate developers and investors need to adapt, quickly.

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