Understanding Retail’s Resilience and Lopsided Recovery

No real estate sector has been hit as hard by the pandemic as retail. Shortened leases, struggling tenants, and protracted lockdowns created a recipe for disaster, but that disaster hasn’t come. Even in the face of the encroaching Delta variant, retail is proving to be more resilient than experts predicted. 

Mall operators are beating analyst expectations. Simon Property Group, the largest mall operator in America, said total sales for the month of June were equal to June 2019. Year to date through June, retail sales are 13 percent higher than the first half of 2019. At the other end of retail, National Retail Properties, a REIT specializing in NNN leases, reported a similarly rosy picture. Occupancy at the firm’s 3,173 free-standing single-tenant retail properties was at 98.3 percent, rent collection was at 99 percent. Both National Retail Properties and Simon increased their dividend in the second quarter on the back of improving performance. Boosted by increasing consumer spending, child tax credits, and back-to-school shopping, retail stocks are up across the board, especially stores catering to consumer discretionary spending. Retail sales are up for the 11th consecutive month, according to Mastercard SpendingPulse. Brick and mortar are fighting back against a year of e-commerce dominance. Data shows in-store sales made up 81.9 percent of the overall retail sales, up 15.5 percent year over year.

All of this is to say the retail doom and gloom may be hyperbolic. Retail is still in a hole after a shocking 12-months, but digging out appears to be going faster than Wall Street predicted. 

“The strategy we adopted in the height of the pandemic is playing out better than we could have expected,” Simon Property Group Chairman & CEO David Simon told investors on the company’s earnings call. “We made the right move. We got the renewals done. We accommodated the vast majority of retailers, assuming they were reasonable in their approach. We got the job done. We kept our properties functioning. We bet on the rebound. And we’re seeing the benefits of that.”

Retail’s recovery has not come without casualties. Major retailers like JCPenny, J. Crew, Neiman Marcus filed for bankruptcy, some like Pier 1 went out of business entirely. Major mall operators CBL Properties and Washington Prime Group were forced into bankruptcy. The truth is the pandemic didn’t kill any store that wasn’t already dying. Even before the pandemic, the retail industry was being battered. Retail closures have been accelerating since 2015. In 2019, more than 9,300 stores closed across the United States. Retail operators stumbling into 2020 took a final blow from COVID-19. Most major retailers were able to work out new strategies for survival via Chapter 11 restructuring. A Federal Reserve study found 2020 resulted in roughly 200,000 permanent closures above historical averages, totaling about 800,000 closures. That’s about 10 percent of all retail establishments and only 2 percent above yearly historical turnover rates. Mom and pop businesses have taken the biggest hit, accounting for two-thirds of additional closures. 

Understanding retail’s lopsided recovery comes down to specificity. The type of business makes all the differences. Leisure and hospitality closures were below historical rates. Accommodation, food services, arts, entertainment, and recreation beat expert predictions by substantial margins, according to the Fed’s in-depth analysis. Barbershops, nail salons, personal services, and full-service dining have been the biggest losers during the pandemic. Last summer Brookings predicted nearly 400,000 retail closures above average. Actual closures have been half of that grim estimate.

“Actual exit is likely to have been lower than widespread expectations from early in the pandemic,” the Fed report states. “Excess establishment exits below 200,000 during the first year of the pandemic—and excess firm exits below 150,000, if historical shares continued—with little associated excess job destruction would likely be a positive outcome relative to widespread expectations from early in the pandemic.” 

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Businesses that survived the pandemic did so through exerting corporate muscle, using the size and scale to refinance deals, taking out loans, and work with landlords. That much-needed medicine comes with a steep cost that is coming due. If the Delta variant continues to wreak havoc, businesses that extended themselves to cover 2020 may face overdue financial obligations as the U.S. slides back into crisis. The Fed sites liquidity contraction and distortions resulting from 2020 policies as a serious risk going forward. Retail’s continued recovery will be essential to cover the cost of business extension measures. 

Tracking retail data in real-time is tough, even for the Fed. A full recovery for the retail sector will depend on understanding how the delta variant is impacting in-person shopping habits. Initial indicators are worrying. CNN Business worked with the research firm InMarket to use cell phone tracking information to come up with real-time foot traffic data. The data show overall foot traffic at malls was 4 percent higher the week of July 4 to July 10 than it was the same week of 2019, but by the last week of July traffic was back down below 75 percent of where it stood during the same week two years earlier, a clear sign that retail’s recovery may be backsliding. 

There may be plenty of reasons for positivity around the state of retail, but the sector is far from out of the woods. Much of the hope of recovery rests on preventing a fourth wave, defeating the virus before more variants can continue to upend society and its shopping habits.