Three key themes in Retail Real Estate post-Covid-19

Three key themes in Retail Real Estate post-Covid-19

November 2020

As we enter the final quarter of 2020 it is fair to say that commercial real estate has experienced significant challenges this year. Sectors reacted differently, with the most immediate impact faced by hospitality, entertainment, retail and development. Office, apartment and industrial have been more resilient. While retail continues to receive the bulk of the negative press, we see three key positive themes in retail real estate post-Covid-19.

By Sari Samarah

1. Re-emerging and Growing Uses

Covid-19 has undoubtedly accelerated existing trends of e-commerce penetration. Traditional brick-and-mortal retail sales, particularly for apparel, consumer electronics and other personal care products have been eroding from e-commerce penetration for years. Despite the secular shift to online consumerism, we are seeing continued demand for retail real estate from re-emerging and growing uses on the back of the economic shocks of Covid-19. In our opinion, the overly negative sentiment towards this sector is unwarranted. We believe that physical space will remain an integral part of the overall sales strategy. Many retailers have chosen to adopt an omnichannel business model, accelerating their digital integration rather than opting for pure play digital presence.

We are seeing re-emergence of demand for retail real estate from consumer staple uses such grocery stores, medical clinics, hardware, general merchandise, automotive, as well as discount merchandise. While e-commerce penetration has surged in recent months with necessity-based retailers, increasing online grocery sales have not been impeding grocery store expansion. Grocers have been benefiting from Covid-19-driven consumer in-home dining trend. Automotive use has also re-emerged on the back of Covid-19, which led to an increase in used car sales as mass public transportation is avoided by people. Changes to consumer behaviour stemming from the stay-at-home trend have also led to positive catalysts for home gardening, home improvement and furnishing, among other home care products.

Cannabis tenancy, despite being controversial, is a growing use that has been gaining increased mainstream appeal since Covid-19. Since the legalization of non-medical use in 2018, cannabis retail real estate has undisputedly become one of the prime beneficiaries of this tailwind. The massive growth of the cannabis market presents landlords opportunities from store expansions in the cannabis sector. Sales from cannabis stores in Canada increased nearly 6x from $42.1 million in October 2018 to $244.9 million as of August 2020(1). This secular trend in retail real estate continues to be buoyant.

2. Suburban spur

Since the pandemic hit in March, reverse migration from urban cities to suburban areas has emerged as more people work from home. This new trend has certainly impacted the office sector. Urban retail real estate which relies on the population density created by the downtown core employment centre has had a noticeable impact. However, we believe that office will continue to be a viable asset class as companies prioritize preserving a firm-wide culture and maintaining collaborative and creative environments physically. Having said that, the possibility of satellite office locations near workforce population clusters is an emerging trend that is going to spur economic growth in suburban markets. We have already been seeing the emergence of this trend with assets in suburban areas becoming increasingly attractive to tenants and investors alike.

3. Increased Value of Drive-thru

As would be expected, fast-food restaurants, also known as quick-service restaurants (QSR), have been much more resilient than full-service restaurants. QSRs that are equipped for drive-thru service can continue to operate, while indoor dining remains limited or restricted. Demand for drive-thru locations is now stronger than ever. The “new normal” has forced food retailers to rethink and align operational business models with the new way of living and socially distanced consumerism that has emerged in 2020. For example, QSRs such as Starbucks and Taco Bell have been growing and upgrading their drive-thru models, while Shake Shack and Chipotle are focusing on establishing their first drive-thru locations(2). This undoubtedly is a positive trend for retail real estate that heightens the continued relevance of physical space.

(1) Statistics Canada, Cannabis Stats Hub

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