Reclaiming Retail: From Buying In-Person and Socializing Online to Socializing In-Person & Buying Online
8 weeks ago I had to restock my t-shirts and sweatpants (in retrospect, a fortuitous purchase considering COVID) in DC. I went to Marine Layer in Georgetown, my California-boy staple, which was maybe 700 square feet of high margin items with two people on staff and bought a few shirts, with 3–4 other people browsing in there at the same time. And then I went to The Gap around the corner and was shocked to find 3 full floors of clothes, probably around 20,000 square feet, 6 or 7 staff members, and less customers in the space than in Marine Layer.
One thought crossed my mind — The Gap is wasting SO much money on prime retail space that clearly isn’t being used efficiently.
COVID is starting to force retail stores to reckon with their large and often inefficient real estate footprints — according to CNBC, retail store closures are expected to go from 9,300 to 15,000. WeWork and other major companies are just stopping paying rent to renegotiate their leases.
This reckoning was already a work in progress — in San Francisco there is a vacancy tax being implemented that will impose a tax on commercial properties that remain vacant for more than 182 days in any given tax year, prompted by the flux of vacant storefronts on main streets in the Marina and Noe Valley.
This trend, and the effect COVID will have on it, reminded me of something I read recently: “During the SARS scare of 2003, people got hooked ordering stuff online while being forced to stay home from public places.” The estimate I heard was that China was 5+ years ahead of us when it came to food delivery options and habits, because SARS had forced the Chinese to adopt new habits.
Crises like COVID don’t cause change, they accelerate it.
The decline in Brick and Mortar retail has been long coming, but vacant storefronts still abound. And it’s not only in retail.
NFX did a study of startup companies and 20% are considering remote work for the long term, 30% have already decided to incorporate it long term, 51% are shedding office space as a way to cut costs at least temporarily(the single biggest action founders were taking in the survey) and 23% are ending their office leases all together. Clearly many founders have realized that real estate is a lot more optional than they thought.
During Maxwell’s real estate search we continually found unreasonable landlords of properties that had been on the market for 6 months, often sandwiched by vacancies, who wanted ridiculous rents that were wildly out of proportion with where the market was clearly going.
Rent Roll & Vacancies?
We were told the explanation is quite simple —a term called Rent Roll. Essentially landlords who have been looking to sell their property didn’t want to sign leases at lower rates — if they signed at 20k a month instead of 25k a month, that could mean their property would sell/be valued at 20M instead of 25M one day. And landlords would rather leave 300k on the table in yearly rent than value their property at 5M less if they think a sale is happening anytime soon.
Even after signing they’d to all types of things to get that rent roll up — give you 12 free months of rent instead of 6 so that they are getting the exact same amount of money over a 10 year lease, but the monthly rent price appears higher . . . a lot of creative accounting basically.
So a lot of real estate stayed vacant as they held out for something better.
We think that’s about to change. Any hope of selling your property at a premium in this market has gone out the window.
You don’t need to be a savvy investor to realize there is about to be so much commercial real estate coming onto the market that landlords are going to have to start being more flexible. We believe that we’re in the middle of a massive realignment and the fever is about to break.
With the invention of chat rooms, Tinder, Facebook and more we’ve continually moved more of our social life online over the past 20 years, but we’re starting to see that reverse as people prize in-person social interaction more.
I expect that this crisis will finally break the fever — commercial real estate will realign and become more affordable as retail leaves en masse, and new social spaces will fill the gap, with Maxwell on the forefront of it all.
This is already starting to happen, American Dream, owner of a major NJ shopping mall, announced that instead of a 55–45 Entertainment to Retailer split, it will instead be 70–30.
“The roughly 3 million-square-foot development that sits alongside a bustling highway in East Rutherford, New Jersey, is morphing into more of an ultimate amusement park. More like Disneyland if it fit under one roof. With shifts in strategy over time, retail is becoming even more of an afterthought, while entertainment takes center stage.”
Don’t believe me? I wrote the draft of this piece a couple weeks ago, and in that time an article came out about This Is How The Gap Dies.
“Retailers are in a “radically different position” than they were just a couple of months ago, says Jordan Elkind, vice president of product marketing at consumer data analytics firm Amperity, which works with a number of major brands: Instead of figuring out which locations to close, they’re deciding which to bother reopening. He declined to comment on The Gap specifically, but continued: “We’ve been in scenario planning and war-room sessions where the calculus has flipped. Now it’s ‘If we were to only reopen 25 stores of the 300 we had, what would the top 25 be — or the top 50 or 100?’” Many of his firm’s clients, he continued, “view this as a kind of reset.””
We expect what this reset holds for our social life to be pretty exciting.