THE LAB

What Will Shopping Districts Look Like Post Pandemic?

Ann V. Ehrhart | May 16, 2020

That’s the question Jackie Bruno of NBC10 Boston wanted answered when she asked to interview me for a story she was doing on retail real estate in Boston.

Click here to see the segment.

Jackie, thank you for leading a great conversation and for the important coverage on our industry.

Here are a few of my additional thoughts on where the market was; where it is; and where it could be going.

1.Pre-Pandemic.

It is my team’s belief that retail/restaurant real estate entered into a recession sometime in early 2019. The number of retail/restaurant lease transactions had decreased; the transactions that happened took longer to complete; rents had peaked and then fallen; and there were more spaces on the market than there were quality tenants to lease them. This was particularly true for the full-service restaurant sector where oversaturation; labor shortages; crushing constructions costs and shrinking profit margins had operators shying away from new venues.

Along those lines, it’s a mistake to think that things were going gangbusters for retailers, and then COVID-19 came along, and abruptly ended the party. Instead, the pandemic accelerated certain outcomes that were already in motion. Stalwarts like Neiman Marcus and J. Crew were at risk of going into bankruptcy before the pandemic shutdown. They may have declared sooner because of the pandemic, but the pandemic is not the singular cause.

2. Now.

We’re hearing that 20-25% of restaurants will not reopen after the shutdown. The restaurants that do reopen will not have it easy. It will be a lot like opening from scratch in terms of rehiring and retraining staff, re-establishing vendor relationships, and advertising. Typically, openings are staggered organically, with each getting time for press and our attention. Now, imagine you’re a restaurant owner, and you’re launching your restaurant simultaneously with every other restaurant owner in town… creating further distress is the fact that social distancing rules will almost certainly mandate operating at reduced capacity.

Soft goods retailers are in a tough spot too. They have Spring/Summer merchandise going stale, and even though e-commerce helps, people aren’t buying many non-essential items. And the problems don’t end when stores get the green light to reopen. Manufacturing for Fall/Winter merchandise should be happening now, but with factories abroad and in the US shut down or backlogged, there’s a big risk that the product won’t hit stores on time. Retailers could be faced with out-of-season inventory they can’t move and no new inventory to offer. Even if stocking the shelves were no issue, many shopping destinations will face a shortage of customers. Newbury St., for example, relies heavily on tourism, college students and back-to-school shopping. Unfortunately, many travelers are expected to stay home this summer, and major colleges and universities in the Boston area are considering closing campuses through the fall.

As a result, sales volumes across the board are going to decrease drastically in 2020. Retail and restaurant rents are based on a percentage of volume, and prices for retail real estate will keep dropping. At least until the current uncertainty dissipates, and we reach “a new normal.” To keep the lights on in the meantime, leasehold obligations need to be examined and adjusted.

3. Post Pandemic

Will we see a mad dash to the suburbs? Will this be the end for cities? Will Newbury St. and other favorite shopping districts stay shuttered and deserted?
I get asked these questions frequently right now, and my answer is NO.
From a practical standpoint, an en masse move to the ‘burbs may not be possible. Were demand for suburban real estate to sky rocket, costs would shoot up accordingly. This likely increases the number of would-be homebuyers who must sell their current, urban residence in order to afford a home outside the city. But if it’s a weak market for selling in town, a lot of people simply may have to stay put.

More importantly though, those of us who love city-living will continue to love city-living. In his recent piece for the Boston Globe, David Manfredi summed up the role of cities perfectly, “they are places convenient to live and work… they provide places to gather; fortify our lives with music theater, dining, and sports; and foster the exchange of ideas that contributes to our well-being and happiness.”

Boston will remain a vibrant place, teeming with the world’s leading thinkers, innovators, makers, teachers,

students, healers, citizens. Our presence will require an array of retail and restaurants to meet the many different needs of our daily lives. We will see tenants turnover, and there will be changes to the built environment, but the fundamentals that drive Boston’s retail/restaurant economy will remain intact.