Tenants and landlords wrestle with new trends and tough forecasts

As retail tenants scrambled, pivoted, reimagined and retooled their operations in the early months of the pandemic, Michael Gioioso dug into the mystery of what initiatives could save shops, restaurants and retail
centers. The Vice President of Brokerage at MacKenzie Commercial Real Estate Services admits that he was occasionally dubious as he watched restauranteurs turn to selling pizza kits, baking supplies and even toilet

At Belvedere Square, MacKenzie Commercial Real Estate Services and their tenants collaborated to create additional outdoor dining space in the parking lot to support food sales throughout the pandemic. Photo courtesy of MacKenzie Commercial Real Estate Services.

“There were moments when you sort of face palmed, but you also thought, dang people are inventive and resilient,” Gioioso said. “It has been both sad and totally admirable how many times these businesses have pivoted… In the case of Belvedere Square, our merchants have developed some positive habits, like online ordering and streamlined carryout, that will provide a lasting, top-line benefit even after a return to normalcy.”

Normal, however, is still a distant and uncertain prospect. In the interim, retail tenants and their landlords will have to determine how to best sustain their operations.

“I personally have a lot of concerns about where our economy is headed and what this winter is going to bring,” said Daniel Klein, President of Klein Enterprises. “The warm weather and the summer have allowed a lot of people to forget what it was like back in March… It’s a completely different dynamic when the temperature drops to 30 degrees and you can’t have outdoor dining.”

The anticipated end of federal aid through the Paycheck Protection Program this fall could compound financial hardships for retailers. Without further aid and with ongoing limitations on indoor dining, analysts
warn that 40 percent or more of existing restaurants could close permanently.

Five months of pandemic experience, however, has generated some ideas for supporting retail tenants and properties.

“My mind has been blown away whenever I have driven past a Chick-fil-A recently,” Klein said. “Pre-COVID, they were the busiest drive-thru restaurant around. Now, they have adapted, taken over entire parking lots, created pop-up tents and put employees out there with iPads to accelerate the sales process and meet increased demand.”

And Chick-fil-A isn’t alone in heralding in the new age of the drive-thru.

Rene Daniel, Principal at Trout Daniel & Associates, represents Starbucks Coffee in the Baltimore market. The coffee retailer’s “growth is going to be in drive-up stores because drive-up has enabled Starbucks to stay in business,” Daniel said.

Chipotle and other fast casual restaurants have adopted similar requirements. In August, the Baltimore-based chain Nalley Fresh debuted its “green box” – a customized shipping container with a commercial kitchen and drive-up/walk-up window that can be set up in any parking lot.

Meanwhile, the market is seeing an uptick in “ghost kitchens” — leased commercial kitchen space that any food service provider, can use to prepare food for pickup and delivery customers. The arrangement spares
tenants the expense of sustaining a dining room and the flexibility to scale up or down their kitchen space as needed.

While the pandemic has severely strained some retailers 2020 has also fueled a few positive trends.

The pre-COVID trend towards including a greater mix of tenants in retail centers is accelerating. Law firms, insurance brokers and other companies who wouldn’t normally lease in retail strip centers, are increasingly looking at those properties, Daniel said. The hugely successful “doc-in-a-box” trend at retail sites is gaining more momentum and expanding beyond urgent care facilities to include chains of dental, chiropratic and other medical offices.

“But the most interesting thing to me is the decision by large developers, like Simon, to buy retailers. That’s a completely different trend,” Daniel said.

In recent months, Simon Property Group has started buying some of its retail tenants, including Brooks Brothers and Forever 21, out of bankruptcy in order to stabilize the retail base in its malls.

Retail centers with drive-thru lanes, such as Klein Enterprises’ Saint Mary’s Marketplace, are becoming more popular. Some retailers, including Starbucks, are requiring drive-up windows at their new locations. Photo courtesy of Klein Enterprises.

While most property owners don’t have the investment capacity of Simon, Daniel and other industry experts suggest that owners consider making more modest investments, possibly in the form of lower rent, in their struggling retail tenants.

The onset of winter, the end of PPP, the continuation of the pandemic and
the economic downturn could seriously impact retail properties. Daniel said landlords “will need to work with their current tenants so they don’t close their stores. Don’t let them close. Never let them close.”

“I think vacancy is going to be rapidly increasing four to six months from now,” Gioioso said. “Landlords need to recognize that the long-term financial health of their real estate often times depends on overall occupancy. Working with your tenants who demonstrably have decreased sales, is the only strategy in this market because replacement tenants, unlike in the past, will not be a foregone conclusion. If you play hardball and kick them out, you are not golden on finding a same or better alternative.”