Retail Q&A : Pandemic Accelerates Reinvention
What types of properties seem to be most in demand in your sector and why?
JOSH BROWN: We are heavily invested in medical real estate. We have seen significant new demand for medical space in northeast Arkansas. We also own and manage multiple retail shopping centers. Due to the tornado damage at the Mall at Turtle Creek, we have filled the few vacancies in the market with former mall tenants looking for temporary space or to relocate altogether to more affordable space.
HANK KELLEY: The slowest category has been traditional retail spaces which are normally attractive to national and regional retailers. … In addition, some businesses are using this slower time to reexamine their building needs, where they are located, and if they need the same space configuration.
CLINTON BENNETT: Retail is retail. We’re going to have people that need to sell products. But the space that was traditionally occupied by a large percentage of retailers, we seem to see a lot more service businesses going into that space now. I wouldn’t say there’s a retraction in retail but it was certainly the least active of the major properties.
ZACK KIFER: There’s not a ton of demand, period, in the retail world at the moment just due to COVID and the ongoing situation there. I do know fast food restaurants are doing a lot better than per se sit-down restaurants. A lot of those are closing shop, maybe permanently.
Do you expect these trends to continue?
JOSH BROWN: Due to an aging population, we expect the demand to continue to increase for quality medical real estate. We expect for there to be a decline in demand for retail space. The tornado was a rare event. We expect many small businesses to go out of business. We expect a huge amount of box type of tenants such as JC Penney to become vacant over the next 12-18 months.
ZACK KIFER: It kind of goes hand in hand with the reopening of the government. They announced … the second phase of reopening, restaurants, gyms and salons can get to two-thirds capacity so that will help. But most folks are trying to survive at this point.
Pre-pandemic, where did you see downward trends?
JOSH BROWN: We feel like the pandemic will be labeled as the “great accelerator” in real estate development circles. Retail was shifting to e-commerce. The clothing boutiques have kind of run their course. People are eating healthier and faster. We feel like the pandemic has been like pouring gas on these things. I recently read where online shopping’s share of total retail sales had been increasing by around 1% percentage point per year. COVID increased that from 15% to 25% in less than two months. That is a decade worth of change in just a few months.
CLINTON BENNETT: One thing that has been kind of an interesting phenomenon to watch that is no secret is the significant trends in retail. We used to lease more retail space than we do now. It’s almost like retail has evolved into the service business.
HANK KELLEY: The retail sector was already under consolidation from more online activity from shoppers and consolidation of department stores.
ZACK KIFER: Only downward trends in retail were big boxes. We’re all pretty much aware of that. It’s just tough with online sales these days. It’s a little different with big boxes… now they drop it off at your front door. [We’re] just trying to find creative ways to backfill that space. … Just really trying to get creative to fill those big boxes.
How did your sector perform in the previous year?
HANK KELLEY: Prior to the pandemic all agents were busy answering client needs for lease and purchase of property and we enjoyed a good first quarter in 2020. Our management business added new accounts and we have transitioned them into our management portfolio. After the pandemic, starting in mid-March, sales and leasing activity slowed considerably.
ZACK KIFER: I’ve been as strong as ever. I’m pretty young. I’m about five, six years in and this is when I’m really starting to see repeat business, word of mouth. I’m starting to see more deals. … As far as northwest Arkansas the market is strong as ever. People are just scared of those big spaces with those big rent numbers.
JOSH BROWN: I’m nervous to say it out loud. Our portfolio and our clients properties have performed extremely well. Tenants are paying rent and landlords are making their mortgage payments. I am extremely proud of Gov. Hutchinson for keeping the state open as much as possible. His leadership saved millions of dollars in lost revenue for tenants, landlords, and banks all throughout the state.
How has the pandemic affected the market from your perspective?
JOSH BROWN: I recently read where online shopping’s share of total retail sales had been increasing by around 1% percentage point per year. COVID increased that from 15% to 25% in less than two months. That is a decade worth of change in just a few months. Restaurants have not been affected like this since prohibition. All restaurants are having to rethink how to get food to their customers and how to be profitable.
How has the pandemic affected the day-to-day ways in which you do business?
CLINTON BENNETT: I think it’s certainly contributing to an evolution in regards to how physical space is used for retailing. I still believe it’s important for retailers to have a physical presence in the marketplace but it certainly seems like their business needs to be both physically accessible to their customers and they need to be accessible online.
JOSH BROWN: My business day-to-day has not changed much. We are a bit socially distanced with the way we office and operate at Haag Brown. What has changed is my personal schedule. Prior to COVID-19, we were running from school events to sporting events nearly every day. Our teenage daughter had maybe 2-3 open nights per month. The quarantine has been great in changing that for our family. We have had more quality time at home than ever before. I wrote an article on this subject.
HANK KELLEY: For 45 days most of our team members worked from home so connecting to discuss properties and prospects took more effort. Having services performed on buildings has required adjustment for the safety of both the workers and the individuals in the buildings. Traffic is much less in the buildings as a result of the pandemic, but we are seeing an increase in the traffic now.
What was the biggest surprise of the past year?
ZACK KIFER: We’re upward trending it always seems in northwest Arkansas over the past four or five years. There is a staggering amount of multi-family being built. … Walmart home office, there’s a lot of energy and excitement around that. Up in Bentonville, prices up there, they continue to rise. I do believe U of A closing their campus had an impact on Fayetteville retailers quite a bit.
JOSH BROWN: I have been most surprised at the national credit tenants stance on paying rent. Some publicly traded companies with millions of dollars of capital outright refused to honor lease agreements. Even when the stores were not shut down, the blatant disrespect of lease agreements is what has surprised me the most.
HANK KELLEY: How quickly well known national brand retailers ran into financial trouble and the impact that had on their employees and their landlords. The consumer spending slowdown will have long-term effects on the local and national economy when considering the loss of jobs, loss of sales tax revenue, and the ripple effect on neighboring businesses.
What’s the outlook for the retail market for 2020-2021?
HANK KELLEY: I expect more vacancies to appear over the next year in both the retail and office industry in 2020-2021 as retailers continue to reorganize and shift their business to online sales with distribution in key areas and minimizing retail outlets where population density is lacking. Landlords will seek businesses that deal with products that don’t do as well with online sales. These retailers will be making adjustments on a regular basis to survive and hopefully thrive.
JOSH BROWN: Lots of well located space will become available. Like millions and millions of square feet of space. JCPenney, Pier 1, and several other retailers will simply vanish.
ZACK KIFER: Obviously there’s going to be people that have to close up shop and cease operations. On the contrary to that, the ones that survive, there is going to be a lot of opportunity to backfill some vacant spaces. … The best way I interpret it right now is the negotiating power shifted from landlords to tenants overnight with COVID. Landlords do not want empty spaces.
Arkansas Business Article | June 29th, 2020
