Four takes on how the pandemic is reshaping real estate
Store closings could mean prime real estate is available to brands that previously couldn’t afford it.
It’s too soon to call the U.S. commercial real estate scene a tenant’s market, but we’re heading in that direction according to four industry experts with different windows into the ever-shifting world of leases, brokers and buildouts.
As tenants and landlords move past panic mode, city governments are opening up (and sometimes closing back down), deals have resumed, and many signs point to higher vacancies and lower lease rates resulting from the months-long pandemic that’s been a major crisis for nearly all retailers and restaurants. Let’s discuss.
Wingstop: Bucking sales trends, adding first ghost kitchens
With COVID-19 disrupting real estate operations from inspections to negotiations with brokers and landlords, Dallas-based Wingstop is resuming its efforts to hit 6,000 locations through a mix of traditional stores with dining rooms, delivery-only facilities and so-called fortressing to add new units in existing territories.
Wingstop CEO Charlie Morrison said the brand was one of the first to close its dining rooms and will be one of the last to reopen its network of 1,385 restaurants, mostly operating through takeout and delivery.
Madison Jobe, Wingstop’s chief development officer, said things are returning to normal even as its dining rooms remain closed, with brokers and landlords now shifting from rent negotiations to more long-term thinking that will reshape a commercial real estate market that’s been labeled a landlord’s game since the last days of the Great Recession.
“We’re seeing some indications that Q3 and Q4 of this year is going to be pretty rapid change as the vacancy rates rise and landlords begin looking for strong tenants,” he said.
With many landlords assessing their bottom 20 percent of tenants, Wingstop sees an opportunity to snap up higher-visibility locations that previously would have been unaffordable for a brand that has succeeded in B- or C-level real estate.
Before the virus hit, 80 percent of Wingstop sales left the restaurant, rather than landing on dining room tables. Now with all-time digital highs, Wingstop is “essentially 100 percent off-premises” as it begins investigating what it calls “dark-kitchen” opportunities, delivery-only facilities in select urban areas.
With two delivery-only stores open in London, Jobe said ghost facilities could have a significant long-term role in the company’s expansion. It is also retrofitting some existing locations to improve ingress and egress for takeout customers and delivery drivers.
Wingstop opened its first U.S. ghost kitchen in Dallas in June, a small space around 400 square feet, which compares to an average Wingstop that’s around 1,750 square feet.
In central business districts, which have been especially hard-hit during pandemic lockdowns, Wingstop is focused on residential populations more than daytime workers, because the brand’s peak times skew more toward dinner and late-night occasions.
This all feeds into Wingstop’s “fortressing” plans, subdividing existing territories to capture additional volume. In contrast to Domino’s fortressing, which also subdivided existing, high-volume territories to uncork additional U.S. growth, Jobe said Wingstop is placing a stronger focus on average unit volumes to ensure that new locations won’t reduce sales at existing locations.
Tanya Spaulding, principal at Shea Design, says landlords will be motivated to fill vacancies, even at lower rates.
Shea Design: Seeing its own version of a second wave
Unlike retail, recreation and fine dining, which bore the brunt of the pandemic’s first wave, design and consultancy firms like Minneapolis-based Shea Design are now seeing a second wave of canceled projects and reduced budgets. A world traveler with diverse expertise, Shea Principal Tanya Spaulding and her now-remote team are helping clients weather the storm while their own billings take a significant hit.
“While we may have been able to keep busy the last couple months while they were fully closed, now the ripple effect on businesses like ours, we’re now really hitting that almost-complete stop and slowdown because … people are rethinking their priorities,” she said, still casting a hopeful tone. “I wouldn’t call it optimism, but at least it’s veering toward optimism now that we’re allowed to get back to business and the economy is starting to rebound a little bit.”
After months of businesses reaching out to landlords to pause rent payments or renegotiate leases, the firm said those back-door dealings include business owners talking amongst themselves about sharing or taking over employees, equipment and servicing customers.
“Consumer-based businesses, in particular, are rewriting their business plans,” Spaulding said, and reviewing all scenarios. “You’re taking a look at all of your expenses and if you can’t survive on that 50 percent of your typical business plan, then they’re making the decision to maybe close, so that has implications on who they serve, their employees and their real estate.”
Spaulding speculated that those countless decisions could result in a first wave of “transactional bits of real estate coming onto the market,” followed by motivated landlords trying to fill new vacancies, which could result in prime locations hitting the street at lower rates.
“Landlords will be motivated, and those that survive this are going to be looking for opportunities to expand to try and gain back some of that revenue that they just lost over the last few months,” she added.
With the rest of 2020 dedicated to digging out, Spaulding said the focus on drive-thrus, new pickup windows and even repurposing valet spaces for delivery drivers is likely to stick. In many cases, physical changes to buildings require municipal approval, meaning cities will need to work with small business owners and, as Spaulding put it, be more flexible after years of “far too many restrictions placed” on business owners “that just don’t make sense in our consumer world.”
Cushman & Wakefield: Beware the retail bankruptcies
As vice president of retail intelligence for the Americas at Cushman & Wakefield, Garrick Brown is one of the most plugged-in retail experts. With an ear to the ground listening for the next bankruptcy or shift in strategy among big-name retailers, franchisees and restaurant groups, he’s pessimistic as a growing number of mega brands find themselves on bankruptcy watch lists circulating among the tightest commercial real estate circles.
Referencing the Great Recession, Brown said what he’s most worried about this time is the outsized impact of retail on the overall economy, with consumer spending comprising nearly 70 percent of the U.S. GDP.
So far in 2020, more than 5 million square feet of retail space has come back on the market, much of that attributed to Pier One, which filed for bankruptcy protection in February.
Adding brands such as JCPenney, J Crew and Nieman Marcus to that list—with more rumored to file this year—Brown suggested vacancy rates will spike, especially in malls.
He seconded the belief that the United States is “over-restauranted” compared to our European peers. By Cushman & Wakefield’s stats, there are 900,000 individual restaurants in the U.S., with 100,000 added in the last decade alone. With restricted and closed dining rooms, Brown said that equates to “an awful lot of businesses that don’t have any reserves” to make it through this extended crisis.
Brown predicted a 50 percent failure rate in fine dining, since “only 5 percent of their sales went to takeout or delivery to begin with.” He added that the biggest growth story in the post-COVID era would likely be the rebuilding of the restaurant industry after a dramatic thinning of the herd.
Brown said players that are “well capitalized and built for” an off-premises model will be in the driver’s seat going forward in negotiations. That means concessions, possible tenant improvement dollars and negotiating power to lower rents where possible.
“It will be a tenant’s market, and you will have vast expanses of areas where the independents, the mom and pops and your competition has been thinned—it’ll be an ideal marketplace for expansion,” he added. “If the best restaurant left standing is Olive Garden, good for them, they’ll have a marketplace where they can expand, but a lot of us are going to be frustrated with that.”
Mid-America Real Estate: Get the inside track
Johnny Reimann, Mid-America Real Estate Group’s Minneapolis-based vice president, was in his 20s during the last recession. Now more seasoned and with a book of national and local clients in retail and restaurants, he said the pandemic is already making itself known, especially in the sit-down restaurant category where “a major percentage of the universe of that space is not coming back and not reopening.”
Reimann speculated that anywhere from “30 percent of restaurants not opening to upwards of 50 percent” is the current assumption, since so many restaurants lack the drive-thrus and patio space.
“You’ve got landlords that are inundated by requests for rent abatement or they’re just scrambling to figure out what they’re going to do to shore up vacancies that they’re anticipating,” he said. “You’ve got tenants that I think are feeling like there should be a ton of opportunity and blood in the water relative to the kinds” of spaces “that they’re going to be able to get coming out of this. But what’s yet to be determined is where does that level off.” Not to mention construction costs haven’t decreased and landlords are worried about stopping the bleeding within their own portfolios.
Tenants who are still active, he said, are now expecting a better deal than they could have received at the start of the year, which means we’re months out from figuring out where lease rates will level off compared to recent times of normalcy.
If spacing and restrictions persist in the restaurant world, Reimann said footprints are certain to shrink and a new battle could arise between restaurants and cities that had previously soured on drive-thru lanes, only to see them become the hot new commodity.
“It’s not just the Starbucks and Caribous and Pizza Huts of the world,” he said. “Chipotle wants drive-thru now, sandwich shops want drive-thru, and all types of food and beverage seem to be migrating toward wanting to have that as part of their business, and it’s contradictory because I see a clear trend that the percent of their business is more and more going to sales out of that drive-thru, while the cities seem to be delivering this message that the residents in their communities don’t want drive-thru.”
As lease rates tick down in the coming months, Reimann predicted a “flight to quality” for those looking for a larger, more visible space they previously thought were too expensive. With so many national and local brands likely to fail, he said working with local brokers for the inside track on soon-to-be-available locations will be vital.
“There’s going to be an opportunity that hasn’t necessarily been there for growth … because of how good it’s been for so long,” he said. “That makes me optimistic for those businesses and operators that have been able to hang in there and that are going to come out of this.”