The Hardest Hit: How Retail and Restaurants are Retooling for an Ever-Changed Future

Omni-channel retailing, curbside pickup, and customer delivery are long-term musts for successful businesses, says The Retail Connection's Alan Shor.

Remember restaurants so loud you couldn’t hear your friend across the table? Or lines at store counters so long, you put the sweater back? If those seem like distant memories, they’re mirrored by the damage COVID has done. 25,000 stores are predicted to close in 2020, with a record number of retail bankruptcies continuing into 2021. For a post-pandemic comeback, transformation will be key.

The pandemic requires retail and restaurants to evolve not just for this crisis, but long term, says Alan Shor, President of The Retail Connection. Still, he’s “very bullish” on the eventual emergence of retail and entertainment—and sees DFW as well-positioned to outpace the country.

Shor, one of the commercial real estate experts in our feature “21 on 2021,” shares his take on what’s next in our Q&A.

What’s the outlook for DFW retail into 2021?

Historically, DFW has fared better than other areas of the country during economic disruptions. We remain very well positioned as one of the best markets for retail for 2021 and beyond, as DFW has all of the fundamentals that retailers require: pro-business policies, a well-educated consumer base, strong population base and growth, job growth, centralized geographic location, and above-average disposable incomes due to the low cost of living here.

Dallas-Fort Worth certainly has a leg up on the rest of the United States due to these factors. The DFW unemployment rate is currently 7.1 percent versus the national rate of 8.4 percent. That’s the lowest of the 10 largest MSAs in the U.S. DFW is projected to grow by approximately 139,000 people annually from 2020-2029, again leading the nation. We’re confident that retail growth will surge in DFW and Texas post-pandemic, outpacing the rest of the country.

What long-term changes do you anticipate in the retail industry?

For the past several years, retailers have been working toward an efficient integration of their physical stores and e-commerce operations. For the retail and restaurant industries, COVID-19 has been a great accelerator for these trends and other strategic initiatives that were started pre-pandemic. Physical footprints will continue to get smaller and more accommodating to the online shopper, as retailers integrate omni-channel into their brick-and-mortar footprints.

Given the necessity to embrace omnichannel retailing, initiatives such as BOPIS (buy online, pickup in-store), curbside pickup, and customer delivery are of the utmost importance. Physical stores will continue to update their design and layout, both inside and outside the store, to better serve their customers using these contact points.

How do you expect tenant needs to evolve next year and beyond?

COVID-19 resulted in a massive number of requests by retail tenants for both financial and non-financial lease accommodations. Many tenants requested multiple months of rent relief in the form of rent abatements and deferrals. For those who received rent deferrals, the financial obligations were pushed to 2021 and beyond. Hopefully, any anticipated retail recovery will allow the tenant to repay these rent obligations, therefore resulting in any requested needs in 2021 to be more operational than financial. For example, tenants are looking for shorter-term leases, flat or decreased rents, and enhanced customer experience changes such as additional customer pick-up parking, drive-thru pick-up/drop-off areas, and upgraded wi-fi. In exchange, tenants are giving back certain rights such as exclusivity and co-tenancy.

What trends do you see rising?

This pandemic has triggered a number of trends, some positive and some negative, most of which were preexisting trends that have been greatly accelerated by COVID-19.

“The superb execution of omnichannel retailing, curbside pickup, and customer delivery are the long-term requirements of a successful retailer.”

First the negative: The pandemic has resulted in a record number of retail bankruptcies so far this year. Through August, 29 major retailers have filed for bankruptcy with over 10,000 stores closing. Unfortunately, this trend will continue. We expect 2020 to set a record for retail failures, surpassing the number filed during 2010 (the back end of the Great Recession), and this will continue into 2021. Total store closings for 2020 are predicted to be approximately 25,000. Consumers have been stuck at home for seven months now and are buying more online than ever before. Consumer confidence has fallen to its lowest level in six years.

Now the positive: Fast-rising internet sales will continue and offset—at least partially—lower sales in the physical stores. Customers shopping online during the pandemic have found the exercise to be easy and efficient, so this trend will continue post-pandemic. In terms of trends, retailers that are able to give the customer both superior in-store service and the convenience and efficiency of online shopping will not only survive but will be extremely successful. Finally, we’ve seen a trend of large landlords such as Simon Property and Brookfield buying certain troubled retailers, in part, to keep them as tenants. This trend will continue.

How will the current environment impact the convergence of industrial and retail spaces?

This is yet another trend that’s been accelerated. For the last few years, the line between retail and industrial real estate has been blurred. In the short term, retailers will utilize oversized store footprints as mini-distribution centers to aid with last-mile distribution. Longer term, this becomes more of a challenge as retailers continue to refine their supply chain models, and retail space used as industrial is cost prohibitive.

With thousands of big-box retail stores closed, owners of such retail spaces are looking at micro-fulfillment centers and logistics nodes that can occupy such dark space. This would result in the retail store, e-commerce function, and online purchase fulfillment all being in one convenient place. These micro-fulfillment centers help landlords fill empty retail space, while helping retailers meet customer expectations for online orders. These “centers” become an essential part of the retailer’s supply chain since these shopping centers are already located where people live, and provide easy and ample parking.

We’re still early in the convergence of these two categories of real estate and much is left to play out.

What opportunities and challenges do you see in retail for the coming year?

The challenges in retail are both short and long term. Short term, retailers and restaurateurs have to figure out how to survive through this very challenging period. Many will not make it. Further, the consumer space has changed long term, so retail/restaurant businesses will have to change longterm as well. As mentioned earlier, the superb execution of omnichannel retailing, curbside pickup, and customer delivery are the long-term requirements of a successful retailer.

Still, each challenge will be met with an opportunity. Retail and restaurants have adapted and transformed for many years and through many cycles. This evolution will be no different. Retail categories that have thrived through this pandemic include outdoor sports and recreation, home and patio furnishings, arts and crafts, and athletic and casual attire. The common thread: staying close to home, being with family, socializing outdoors.

Some of the biggest opportunities will be in the restaurant space. While many restaurants have closed for good, the next wave of talented sous chefs will emerge with new concepts. With the large inventory of closed restaurant spaces, capital costs to open will be considerably lower, thus sparking new restaurant growth. These opportunities will remain for the coming year.

What asset classes do you see emerging strongly from the pandemic? Which will lag?

Industrial has been strong and will remain strong for the foreseeable future. Multifamily has held up nicely and will remain strong post-pandemic. The office sector is a difficult class to predict because it’s too early to measure the longevity of the work-from-home trend. Clearly retail, entertainment, and hospitality have been hit the hardest by the pandemic and will likely experience the longest lag time. That said, we’re very bullish on the emergence of retail and entertainment post-pandemic.

What’s the biggest deal you’ve closed in the pandemic?

While the first nine months of 2020 have been challenging on both the brokerage and investment sides of the business, we’re seeing a steady increase in deal flow. Our biggest deals closed during the pandemic include:

1. The renewal of the Stanley Korshak lease in the Crescent Court. The 51,000 SF lease will continue Korshak’s 33-year presence in Uptown.

2. Topgolf’s recent transaction for an 11-acre location in Waco, just south of Baylor University. This Topgolf facility will feature a one-story complex with climate-controlled hitting bays, foodservice, and yard games.

3. A package of build-to-suit developments for Take 5 Oil.

Has the pandemic driven increased technology adoption at your firm?

Prior to COVID, TRC was already working towards having the technology infrastructure to access information anywhere, anytime. The pandemic certainly accelerated that trend, as we now operate mainly from DropBox so all files can be accessed remotely. Prior to COVID, TRC upgraded its back-end server system and other hardware to allow all employees to operate remotely via VPN without any infrastructure interruption. Additionally, TRC transitioned from On-Prem email software to Office 365, a cloud-based email server. These changes have allowed for a seamless transition to our work-from-home operation due to the pandemic. We have also accelerated our emphasis on IT security during this time.

What’s next for The Retail Connection?

We’re most excited about continuing to do what we do best: helping our retail and restaurant clients optimize their real estate strategies; working with our landlord clients in the elevation and re-merchandising of their shopping center assets; and carrying out with our investment partners the execution of our strong risk-adjusted investments. The best transactions and investments TRC has put together have followed periods of major disruption. The post-pandemic period will be no different. The retail and real estate industries have been, and will continue to be, severely impacted by the disruption caused by the pandemic—and we are uniquely positioned to strategically and creatively meet these challenges and act upon the opportunities this period of disruption presents.

The interview has been edited for brevity and clarity. A version of this story first published in the Fall 2020 edition of the Dallas-Fort Worth Real Estate Review.

Sandra Engelland contributed to this report.

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