Amid The Wreckage, Some Retail Thrives, But Landlords Will Have To Work Harder To Get Those Tenants

The retail sector suffered tremendous reverses in 2020, but even in the midst of what some call a “retail apocalypse,” bright spots also appeared. Some tenants took advantage of the troubled market to sign favorable deals, launch new types of businesses or learn how to use the internet to sustain sales. That has kept many properties afloat, even as vacancy rates climb and rent collection remains below 2019 levels.“The thing that’s obvious to everyone is that there are some retailers that are poised to do well in this era,” Baum Realty Group President Mike Demetriou said.The Chicago-based Baum brokered nearly two dozen retail leases across the metro region in Q3. The deals included ones for restaurants that utilize third-party delivery and other essential businesses such as cannabis dispensaries, animal hospitals, oil-change shops, physical therapy outlets and medical centers.

Businesses like that helped national retail sales increase 1.9% in September, according to the U.S. Commerce Department, a bigger jump than economists surveyed by Dow Jones expected.

But the top-line numbers don’t mean the retail market has revived, Demetriou said. Sales for some retail types, such as electronics, were still slow. In addition, the overall job market still hasn’t fully recovered from the coronavirus, which seems poised to swamp the nation this winter. And even the restaurants doing high-volume business are watching revenues get cut down by payments to third-party delivery services, just one example of the difficulties in making it through 2020.

“There is a knife edge that people have to carefully dance on,” Demetriou said.

All that uncertainty may have permanently upended the retail sector, especially if COVID-19 persists despite the arrival of a vaccine, or if fears of another pandemic continue to shape consumer behavior, he added. And in the future, brokers and landlords will have to work harder, and more creatively, to identify the stores that will keep properties healthy, especially if hopes fade for another round of stimulus.

Some internet-proof retailers are thriving.

“Jiffy Lube is on fire all over the country and opening stores like crazy,” Demetriou said. “There is nothing you can do that slows down the need to change the oil.”

Landlords can’t go wrong by signing deals with veterinarians, which look poised to make it through the recession and flourish after a normal economy is restored, he added.

“A lot of people adopted pets or took on additional pets, and those are very long-term commitments, unless you have a goldfish.”

Cannabis providers also continue to ring up big numbers. Total monthly sales in Illinois surpassed $100M for the first time in October, according to state officials. Baum recently helped its client Cresco Labs, a national cannabis retailer, negotiate a lease for its new flagship operation at 1735-1741 East Golf Road in northwest suburban Schaumburg near Woodfield Mall.

“Cresco has a buy online, then pick up in-store model that hasn’t frustrated their sales at all,” Demetriou said.

Baum assisted Starbucks during Q3 in seven lease transactions in Chicago and the surrounding suburbs, including Melrose Park, Cicero, Wood Dale, Antioch and North Chicago. It also represented Chipotle in its lease at Edens Collection, a new center at 4713-4715 West Foster Ave. in Chicago, the chain’s first drive-thru/pickup lane in the city.

Starbucks and Chipotle have even started a set of digital-only stores, where customers can only order and purchase items online.

Transformations like that help make the old ways of evaluating retail deficient, Demetriou said. Tried-and-true methods like relying on in-store sales or using census data and vehicle counts to analyze how well a particular neighborhood will support new businesses aren’t as reliable as they used to be because so much business now takes place remotely.

“The way people are shopping has dramatically changed, so we are now relying very heavily on mobile phone customer data,” he said.

Next Realty CEO Andrew Hochberg said commercial real estate will have to adjust how it evaluates retail success. His firm owns dozens of retail centers across the Chicago region, typically ones with around 50K SF and roughly seven tenants.

“There is a lot of business now being done online and by pickup that may not be reflected by in-store sales,” he said.

Hochberg added that much of the retail sector will need to be redesigned, even if the pandemic ends, to facilitate spending that doesn’t require close, personal interactions.

“Stores with drive-ups are going to be really helpful,” he said.

Baum Realty does not plan to completely revolutionize how it puts together an analysis, Demetriou said, and won’t ignore traffic data or other traditional sources of information. Instead, it uses software tools to layer all that on top of the mobile data.

“We have to create that on our own because there is no CoStar on the topic,” he said. “But clients can see where shopping journeys start and where they end and can see it all on one map.”

Demetriou admits Baum’s business may be doing relatively well because few of its clients run older shopping malls, one of retail’s most troubled segments. But a large number of retail businesses did decide out of caution to slow down deal-making, and that means next year could be slower.

“The 2021 pipeline is smaller than 2020’s was, so we’re definitely feeling the impact of the pandemic.”

Landlords are suffering as well, according to Hochberg. But even though new leasing has been slow this year, his worst fears were not realized.

“There have been a lot of renewals, and we’ve lost relatively few tenants,” he said. “I expected a deep freeze, but my sense is that the [Paycheck Protection Program] money helped our tenants a lot, and in that respect, at least, it’s been better.”

Occupancy has remained high at Next Realty properties, he added, but that doesn’t tell the whole story. Keeping tenants viable has meant a lot of concessions, most often deferring rental payments for months.

The Chicago region’s retail vacancy rate rose to 11.6% in Q3, up from 10.9% last year, according to CBRE. But Edwards Realty Co. President Ramzi Hassan said many of the spaces that look occupied don’t generate revenue.

“In anyone’s portfolio, there is probably 20% that would be turned over, except the owners know if they did that, they’d end up having a dark store space,” he said. “Just because a store is filled doesn’t mean you’re getting full rent, or even any rent at all.”

Edwards Realty owns and operates nearly a dozen shopping centers in the Chicago area, and Hassan said it has responded to the pandemic by de-emphasizing national retail chains in favor of scrappy entrepreneurs, as well as services such as hair salons, veterinarians and other medical tenants.

“The larger national tenants are like banks: They don’t see past the next quarter,” he said. “The smaller tenants and the more entrepreneurial ones can see the long term. They also seem to know now is the time to get good deals, probably ones they’re never going to see again, because landlords are so stressed.”

“Instead of keeping a New York & Co. around for little or no rent, why don’t we get rid of them and find a local, online entrepreneur, some fresh blood, which may or may not work, but at least it’s new?”

Edwards has filled some of its spaces with pop-up shops, temporary stores run by small-business people, including a physical therapy facility and a golf instruction retailer it signed at its Burr Ridge Village Center in southwest suburban Burr Ridge. At its Orland Park Crossing, a lifestyle center in nearby Orland Park, it signed a pop-up deal with Masks & More, an online retailer that sells masks and other protective equipment.

The store doesn’t pay market rent, but it provides the community a needed service and keeps the space active, Hassan said. Masks & More has been there a couple of months and just renewed its short-term agreement.

“The pandemic has produced some decent entrepreneurs who have side businesses they are looking to ramp up.”

Identifying such companies is not as easy as inking deals with well-known national chains, he added.

“The days of just putting a sign in the window and making a site plan are gone. Everyone is going to have to work a little bit harder.”

That has more or less worked so far, but next year could be more difficult.

“The ultimate question is if we are going to be able to stand what happens when the weather grows cold and [COVID-19] cases rise and how Washington will react, if at all, to the spike in cases,” Hochberg said.

“Without a real stimulus or another round of PPP, I think the vacancy rate is going to be the highest we’ve ever seen,” Hassan said.