COVID-20 And Beyond – What Will It Take For Brick And Mortar Retail To Thrive?

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The news is full of information about the current “novel coronavirus”: (2019-nCoV), as the Centers for Disease Control and Prevention identifies it. A “novel coronavirus” is a new coronavirus that has not been previously identified. So, there will be further coronaviruses. They will be just as novel. Hopefully, they will be no more disruptive than the common cold, also caused by a coronavirus. The keyword in that last sentence is: “disruptive.”

COVID-19 has swept swiftly over society and our industry. So has the disruption it has brought. We’ve seen many disruptions before. In fact, they overlap one another. The difference this time is its swiftness. In the 1920s, as the developed world was transitioning from an agrarian society to an industrial one, although the future was imponderable, there was time to adjust. Today, although on-line merchandising and sales are shifting the retail paradigm, the disruption has been slow and progressive. “Slow and progressive” allows time to adapt.

So, how (in general and for the most part) has our industry reacted in the past? We think: “Like the Generals – fighting the last war.” How are we reacting today? We think: “Samo-samo.”

Folks, the past is prologue. It is only a clue as to things to come. World War I was a disrupter (for sure). Heed these words from a reflecting Thomas Mann:

The war they went to fight was lost. But we . . . must remember that this war would still have meant the end of an epoch, revolution and the dawn of a new age and that afterward, even if it had ended differently, we should still have found ourselves living in a new and unfamiliar world.

In practical terms, what is Ruminations babbling about? We need to get ahead of the curve. We can’t be self-satisfied that reworking our force majeure clauses and buying additional insurance coverage will be our industry’s vaccine to protect us against the next disrupting virus or whatever. Colleagues, we will find ourselves living in a new and unfamiliar world. Customers are learning about both the advantages and disadvantages of online shopping, with the advantages “winning on points.” Many who never or rarely bought merchandise on-line will now become quite adept at doing so.

Online shopping may have begun in 1979 when Michael Aldrich used VideoTex to launch a new industry. Amazon.com was started in 1994. In 2010, it represented 6.4 percent of the retail market. Last year, that figure was 16.0 percent. Today? Who knows? Tomorrow, certainly a lot more.

Movie theaters? People are discovering streaming services like never before.

When will the fear of crowds dissipate? Will customers return to restaurants like “the good old days”? Or, will they adapt to the rapidly-developed “take-out” model? And, if restaurant-meal delivery becomes a larger part of the dining model, who needs a street-front location when a lower-rent commissary works even better?

How quickly will customers stream back to health clubs and similar facilities? Classes through Zoom and similar modalities aren’t going away. Yoga and dance studios won’t be needing visibility.

More to the point, what will be the effect of the crushing economic stress felt by so many? How tight will wallets be and for how long?

Yes, we’ll see a great deal of “rah-rah” promotion from our leaders (as they should). And, we’ll see a lot of marketing efforts to convince us that consuming goods and services is the “cure” for cabin fever and all will be just like the “good old days.” But, it won’t, and real leaders need to look ahead, not backward. Included in the term, “real leaders” are lenders, landlords, and tenants.

OK, by this point our readers are ready for one of Ruminations’ illusory magic pills – words of wisdom to guide us to future success. Well, we don’t have any. We think landlords need to have faith that their retail tenants really know best as to what to sell and how to merchandise. That leads us to believe that leases should be less restrictive. We think landlords and tenants need to work cooperatively, with landlords providing or coordinating shared tenant-services, such as delivery methods. It may be time for landlords and tenants to accept the inevitability of on-line shopping and integrate them into the brick and mortar world. If the holy grail of physical retail is foot traffic, why are we still fighting over squeezing percentage rent out of a tenant’s in-store pick-up or ordering service?

We realize that it seems that, today, we are “picking” on landlords – asking them to increase their costs and to give up control and potential revenue. That would be a fair criticism. Even we read this blog posting that way. But, there’s a reason, and it is that landlords are the “conductors” of this brick and mortar orchestra. They are the only ones who can coordinate the activities at their properties. They are the ones who make the music. So, they need to keep in mind that when a symphony orchestra conductor is seeking to hire a musician, she or he doesn’t grab the first washboard player that comes along. Yes, the washboard is a musical instrument, but if its player occupies a permanent chair on the stage, it will drive patrons away, never to return. There will be a lot of new vacancies after this most recent disruption is over (whatever that means), it would be a mistake to fill them with washboards, jugs, and spoons. Tenants and landlords (lenders, too), here’s what has always worked before, during, and after each war: give customers a reason to visit your location. What can we do in that regard and what in our leases is getting in the way?

[We can’t wait until we can return to the nitty-gritty of retail real estate law. Today, however, that seems all too trivial. Stay well.]

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Comments

  1. Landlords and tenants are co-dependent. Neither can survive without the other. Having said that, however, in order to realign the “orchestra”, each side must secure a much deeper understanding about and appreciation for the other’s challenges and for what each needs to survive and thrive, and each must be prepared to invest in and embrace a whole new paradigm for real estate occupancy commitments and controls. Until that happens, the same old tug of war will continue to divert the vital resources so sorely needed at this time to pull with each other instead of against each other. The idea of shared blessing and shared burdens has never been the basis for lease construction. Perhaps now is the time we start thinking differently.

  2. jeff corwin says:

    Everyone asks for concessions from their landlord. Landlords must change their behavior. Etc. Please do not forget that most Landlords are just the middleman. The real Landlords are the banks and government. For without expenses the Landlord just might be able to help more. With cap rates so low most real estate is priced for perfection. When it hits the fan, mostly what is lost is the Landlords equity. Banks will not wait for you to fill up your location with a symphony, therefore we need the spoons and washboards to keep the bank fed. Its not your fathers 15 % cap rate real estate anymore.

  3. Steve Cross says:

    As far as landlords go, there are ‘George Bailey’s’ and there are ‘Mr. Potter’s’. Those that wish to survive (and, ultimately, prosper) are well advise to adopt George’s perspective – not just in how much they are able to charge when times are good, but also in sharing the financial ‘pain’ when things go south.

    Lenders don’t want the keys back to properties any more than landlords want vacancies. Both should be mindful that a little bit of ‘something’ is preferable to a whole lot of ‘nothing’.

  4. Anaheeta Kolah says:

    And right now, none of us in the orchestra can do anything but wait, regardless of how we shift blame, the finite pot of money and preparing for a future that we still won’t be able to predict. We wait, because our audience isn’t allowed in our theater yet.

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