Retailers Adjust to Changing Consumer Shopping Habits

As states across the country begin the process of reopening their respective economies, retailers are coming to terms with the financial and social impacts of COVID-19 on sales and consumer shopping habits.

Retail Sales Slowdown

The month of April saw an estimated $150 billion loss in retail sales. Those businesses and retailers deemed “essential” during the pandemic—think supermarkets, pharmacies and big-box stores like Target and Walmart—fared better than their non-essential counterparts. The relative success of essential retailers throughout the COVID-19 pandemic has helped offset struggling retail sectors. Movie theaters, health and fitness retailers, childcare centers, enclosed shopping malls and casual dining restaurants have all suffered during this extended national lockdown period.

Case Study: Best Buy

In the midst of the COVID-19 pandemic, the electronics and home appliance retailer Best Buy has shifted to something of a hybrid retail model. When the retailer voluntarily closed all of its stores on March 22, Best Buy pivoted to a curbside pick-up model that complemented its home delivery services. Best Buy’s curbside business model led to triple digit gains in its e-commerce channel. In late May, company executives reported that Best Buy was able to retain at least 81 percent of its sales volume and saw a staggering 155 percent increase in its online sales.

With states easing stay-a-home restrictions, the number of businesses that are now open to the public has started to increase. Best Buy has chosen to reopen select stores for appointment-only shopping, and stores that remain shuttered still offer curbside pick-up of online orders. Store remodeling plans of at least $800 million have been put on hold. Instead, Best Buy plans to spend at least $650 million on investments in technology and automation.

The Future of the Retail Experience

Best Buy’s successful hybrid retail model could be a blueprint that retailers can use in a post-pandemic world. COVID-19 has caused a majority of shoppers to adopt new behaviors, from utilizing e-commerce to buy non-essential items to limiting grocery store visits to once per week. Common practices during the pandemic like social distancing, limited in-store customer capacity and adjusted store hours are likely to be adopted by retailers for the foreseeable future.

In fact, the way retailers do business may never be the same again. Brick-and-mortar store layouts will inevitably change to accommodate new safety protocols. Fewer customers shopping in-store could lead to a shrinking retail workforce. Landlords and property management companies will undoubtedly seek new approaches to filling in vacant spaces in smaller shopping centers. Brands that have shown increased awareness of product and consumer safety during the pandemic are likely to gain more loyal customers. All of these and more will contribute to the ever-changing retail landscape, both in the United States and across the globe.

How can Ground + Space help?

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy. We are committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The market changes daily, so please contact one of our brokers for specialized guidance during this time.

How can I stay informed?

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.


The Future of the CRE Market

The United States economy is feeling the effects of COVID-19 since all non-essential sectors have been in a near-total shutdown since mid-March. Most states around the country won’t be lifting lockdowns and shelter-in-place orders until at least the end of May. The COVID-19 pandemic has sent the country’s unemployment rate soaring to a record 14.7 percent, a level not seen since the end of the Great Depression.

Over the course of the next few weeks, many retailers will slowly begin to open their doors to customers for the first time since the pandemic began. While this is a good sign, the success of any reopening effort will be determined in part by the average consumer’s willingness and ability to venture out to purchase more than essential items like groceries and gasoline.

Economists do not have an answer as to what the full impact of COVID-19 will be on the U.S. economy. However, most economists do agree that there will be a significant negative effect, both in the U.S. and across the globe. How will all this economic news affect the commercial real estate (CRE) market? Let’s take a look.

Sharp Spike in E-Commerce Sales

Several major retailers have been hit hard by the effects of COVID-19. Those retailers who had yet to adjust to changing consumer habits have had to turn to bankruptcy and outright closure over the past few weeks. Some of the retailers affected most by the pandemic are J.C. Penney, Neiman Marcus, Stage Stores, J.Crew and Pier 1 Imports.

On the other hand, retailers like Kohl’s have seen a spike in digital sales even as their brick-and-mortar stores have been closed for at least two months. Online sales grew to a staggering 60 percent of the brand’s total sales in the month of April, and that trend is expected to continue. Walmart has also seen skyrocketing digital sales, led by strong results for grocery and delivery services. Walmart also benefited from being designated as an “essential business.” Throughout the pandemic, all of the retailer’s U.S. stores remained open.

The Health of the CRE Market

The health of the CRE market going forward will be determined by the approaches retailers take to reopen storefronts and the impact of increased e-commerce adoption rates. Many economists anticipate that consumers will continue to rely heavily on e-commerce transactions. Retailers both large and small that can provide customers with a digital shopping platform will fare better than those with no online presence. While standalone retail assets should bounce back to pre-coronavirus levels once treatment plans are in place for COVID-19, many mall anchors, full-priced apparel retailers and mom-and-pop stores in small strip centers might not be so lucky.

Sales activity in the CRE market has fallen by approximately 17 percent since the pandemic began. Despite this sharp decrease in activity, capitalization rates have remained steady. Rates have fallen by only about seven basis points according to CoStar data. Most investors and landlords are focusing on rent collection and vacancy concerns for the time being, but there is still a demand for high-quality SNTL retail.

Experts in STNL Retail

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have several outstanding retail assets on the market right now. Our CVS Pharmacy listing features a NN corporate-guaranteed lease that was recently extended by 20 years. The Tire Choice property that is currently available is situated within a dense retail corridor in The Villages, Florida and boasts a brand-new 20-year NNN lease. Our team is committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The market changes daily, so please contact one of our brokers for specialized guidance during this time.

Stay Informed

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.

 


Opportunity Zones: A New Way to Invest

The Opportunity Zone (OZ) program is relatively new, having been created by Congress as part of the $1.5 billion Tax Cuts and Jobs Act of 2017. The Internal Revenue Service (IRS) added two new sections to the Internal Revenue Code—Sections 1400Z-1 and 1400Z-2—to codify this new program. The program was designed to encourage robust, long-term capital investments in low-income and economically distressed communities across the nation. There are currently 8,700 Opportunity Zones across the United States and in territories like Puerto Rico. The OZ program is the first new community development program to be created that utilizes tax incentives since the New Markets Tax Credit Program of 2001.

How Does an Opportunity Zone Investment Work?

Like a 1031 Exchange, an OZ investment provides an investor with significant federal tax benefits and acts as an important tool for managing tax liabilities. Any OZ investment requires the investor to procure the investment via a legal entity—like a limited liability company (LLC) or a corporation—or directly into a Qualified Opportunity Zone (QOZ) business property. Most businesses qualify as an OZ business, although some exceptions do exist, including golf clubs and courses, gambling establishments, country clubs and the like. While QOF investments are not limited to real estate, all QOF investments must be in a designated OZ. Twice yearly, the Opportunity Zone Funds (OZF) must certify that a minimum of 90 percent of the funds’ assets are being held in an OZ. The capital gains on the property must then be rolled over into a QOF within 180 days of the realized gain. There is no limit to the amount of capital gains that can be reinvested through a QOF using this program.

What are the Tax Benefits of a Qualified Opportunity Zone?

OZ funds allow for the elimination of any capital gains taxes earned from the OZ investment under certain circumstances. There are two key incentives for OZ investments: Firstly, all capital gains used to fund investments into an OZ are currently eligible for tax deferral until 2026; secondly, if the OZ investment is held for a minimum of 10 years, the gains generated from the OZ are tax-free. Therefore, an investor who opts for an OZ investment can both defer and reduce the initial capital gains bill while also eliminating the payment of any capital gains taxes, depending on the circumstances of the transaction. (However, the elimination of subsequent capital gains taxes is dependent upon the value of the underlying investment in the OZF increasing over time.) If an investor has basis in the property sold, that investor can invest the capital gain—the difference between the sale price and the basis—in the OZF to receive the maximum tax benefits. This provides cash to the investor along with liquidity for the basis of the property sold.

What Determines a “Good” Opportunity Zone Investment?

In many ways, OZ investments are like any 1031 Exchange investment, so potential investors should stick to core investment parameters when making a new OZ investment. Instead of focusing solely on the tax advantages of an OZ investment, factors like supply, location, population density and income growth patterns should carry more weight in the decision-making process. Investors should seek out OZ investment opportunities in areas that are historically resilient when the economy slows down. This is especially important since the minimum investment horizon for an OZ investment is 10 years.

Opportunity Zones in North Carolina: Where Are They?

In North Carolina, there are a total of 2,195 Census tracts. At least 252 of those tracts are designated as Opportunity Zones (roughly 11.5 percent). These Opportunity Zones are scattered throughout the state. Areas considered Opportunity Zones represent a total population of more than 1.1 million, along with over 50,000 business establishments. Land in the downtown centers of both Raleigh and Durham have received the OZ designation, as well as parcels along Franklin Street in Chapel Hill.

Interested in maximizing your Opportunity Zone investment opportunities? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to learn more about the Opportunity Zone opportunities in North Carolina and beyond.


The Need-to-Know Considerations of a Triple Net Lease Investment

A triple net lease, often called a net-net-net (NNN) lease, is a commercial real estate agreement in which the tenant agrees to cover the net real estate taxes, building insurance, and maintenance fees in addition to the agreed-upon rent. Every triple net lease is different, however, and typically has unique scenarios and parameters. Accordingly, an investor, landlord or tenant must perform a thorough assessment of the agreement before proceeding. Below are the most applicable considerations regarding triple net lease investments.

Unit Economics

Unit economics outline the direct revenue and cost associated with the business model within the space. A proper unit-economics assessment enables the investor to determine the relative likelihood of lease renewal as well as predict potential profits. The type of tenant and operational expectations will greatly affect the unit economics, and thus the parameters and considerations of the NNN lease. A Starbucks has different operational expectations than a Mattress Firm, for example, and may want to negotiate a different NNN lease structure. Unit economics analyses are also helpful in comparisons between similar or neighboring locations.

Tenant Quality

Tenant quality in commercial real estate refers to the expected reliability, character and performance of an occupant. Low-risk tenants are typically favorable, primarily because NNN leases often involve single-tenant properties. An investor cannot risk the possibility of losing all forms of cash flow to cover expenses if a high-risk tenant fails and declares bankruptcy. High-risk tenants, however, offer the potential for higher cap rates and higher cash-on-cash returns, and different investors may prefer different levels of risk.

Rent and Term Length

Long-term triple net leases provide stability and longevity, but an investor must pay careful attention to ensure adequate stipulations and predetermined rent raises to account for inflation. Neglecting to account for the gradual decrease in the value of the dollar can cut into profit margins or offset them entirely, depending on the length of the NNN lease. Additionally, triple net leases can include renewal options, which provide investors, landlords and tenants with a viable alternative to a long-term contract. Triple net leases with renewal options are worth considering for less-proven business models.

Early Termination

An early termination clause gives the tenant the ability to sever ties before the lease term is completed and results in a severe risk of cash flow loss in an investment. A tenant is typically required to give ample notice of early termination accompanied by a lump sum payment.

Co-tenancy

A co-tenancy clause is a provision of a retail NNN lease agreement that specifies terms for the potentialities of neighboring businesses. Co-tenancy clauses offer the tenant some form of protection against a major competitor moving next door, or if an anchoring, adjacent business ceases operation or relocates. These types of scenarios can result in a significant change in consumer traffic and tenants may negotiate a co-tenancy clause as a precaution.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!