As we begin 2021, we are nearly one year into the COVID-19 pandemic here in the States, and the end date is still uncertain. The fallout has upended entire industries seemingly overnight, and commercial real estate is no exception. In fact, it could be reasonably argued that no other property type has been more impacted than retail. In some cases, companies like Amazon and Walmart were well positioned to benefit from the required changes. In other cases, smaller retailers with physical stores have been forced to alter their business models in an effort to stay afloat. At this point, it is unknown how many of these changes will become permanent, and how many such challenges will dissipate when life returns to normal. In any event, it is our job as retail property investors to understand how consumer behavior has changed and how it will affect investment trends going forward. To that end, we believe that retail shopping will change in the following ways post-pandemic.
The Continued Rise of E-Commerce
In the early stages of the pandemic-induced lockdowns, e-commerce was the only outlet that many of us had for our needed supplies. From groceries to household items, consumers turned to e-commerce outlets in record numbers, while delivery workers became essential. Today, it’s expected that this trend will only continue to accelerate. In fact, a recent survey by McKinsey shows that more people plan to make online purchases post-COVID than before, and that the top categories include medicine, household supplies, groceries, personal care products, and even furnishings. For example, 23% of survey respondents reported buying over-the-counter medicine online pre-pandemic, and 33% expect to make these same purchases online post-pandemic. This is a significant increase and can be seen across all major categories in the retail industry.
The investment impact of this is a bit more uncertain. Our belief is that this will not lessen the importance of the physical presence of a retail store—rather, it will change it. We prefer retailers who offer a customer experience that cannot be replicated online. In many cases, this includes companies like quick-service restaurants and boutique gyms with the appropriate social distancing policies in place.
To address the continued rise of e-commerce, many retailers will shift to an omnichannel fulfillment strategy to manage their supply chain. This means that they will look to fulfill customer orders in a variety of ways. Amazon-owned Whole Foods is a good example of a leader in this space. A customer could purchase their groceries through online shopping and have them delivered to their front door; or they could purchase the same items online and make a quick curbside pickup at the store (known as Buy Online Pick Up In Store, or “BOPIS”); or, they may go into the physical retail store and complete their shopping in person. Whatever their shopping behavior or preference, there is a way for most of these retailers to meet it.
From an investment standpoint, this likely means that interior build outs will change to blur the line between the retail floor and the stockroom or distribution area where online sales will be fulfilled. In their report “Post-Covid Strategies for Retailers,” Deloitte confirms this trend and advises retailers to: use their stores as a showroom, set up a call center on the shopping floor, and offer virtual shopping services to their customers.
To demonstrate to customers that in-store shopping was safe, many retailers quickly adopted increased hygiene practices like touch-free payment portals, one-way aisles, plentiful hand sanitizer stations, and a practice of wiping down carts after each use. We predict this is going to be the new normal. In fact, McKinsey highlights this trend in their survey, reporting a significant change in consumer engagement with low-touch activities. For example, 21% of respondents said they are using restaurant drive-thru options more frequently and 13% said they are using self-checkout options in stores. Retailers will be expected to be transparent about their hygiene practices moving forward, and those with those highest standards and most transparency are likely to gain market share as a result.
The investment impact of this trend may lead us to consider tenants and businesses with strong hygiene practices more carefully, or it may drive us to actively seek quick-service restaurants, coffee shops, and pharmacies with drive-thru options as those may see increased business in the years to come.
Increased Focus on the Essentials
Driven by depleting amounts of discretionary income, consumers are focusing more on the essential goods and services that they need to survive on a day-to-day basis, and it’s predicted that this will continue post-COVID-19. In their survey, McKinsey reports that this is good news for grocers and sellers of household supplies, personal care products, and restaurants with takeout and delivery options. On the other hand, this could be bad news for sellers of non-essential items like jewelry, footwear, and apparel.
In this case, this will not mandate a major shift in our investment strategy because we already focus on the acquisition of shopping centers with grocery stores and other “essential” businesses including pharmacies and quick-service restaurants.
Shift in Technology & Sales Strategies
Stay-at-home shoppers will continue to drive the increased need for enhanced technology solutions and differentiated sales strategies. To this end, Deloitte advises retailers to take steps like: using social media channels to drive sales, offering curated subscriptions, providing personal shopping services, selling services to go along with products, and using 3D technologies to allow customers to virtually imagine what the product may look like in their home.
As we work with tenants to occupy our properties going forward, we will carefully evaluate their business plans and their adoption of these sorts of technologies and strategies to ensure they have the greatest chances for long-term success.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
When evaluating potential properties for purchase, we are aware of these trends and will incorporate them into our future capital allocation decisions. In addition, we are prepared to adjust our strategy in real time as market conditions change.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.