Part 6 of an SCT series lending insight into the year ahead

COVID-19 cast into even sharper relief the gulf between demand for retail space and the outsize supply at shopping centers and malls, according to Gordon Brothers president of real estate Thomas Pedulla. Over the decades, retailers’ unreflective focus on top-line growth — and Wall Street’s eagerness to reward it — created that disconnect, says the 30-year real estate veteran. And in the year ahead, it could become even more obvious that e-commerce operators are doing essentially the same thing.

During the pandemic, Pedulla explains, millions of shoppers made a habit of ordering anything they wanted from online sellers, expecting rapid or even same-day delivery at no cost beyond an annual fee. “I may order one thing on Monday, another on Wednesday and maybe some other item on Thursday,” Pedulla said, “but you can’t make money sending an Amazon truck to my house three or four times a week. It’s not going to work.”

Just as retail’s oversupply of gross leasable area ultimately was unsustainable, the massive shift to e-commerce eventually will require a correction, Pedulla argues. That could come in the form of big fee increases, sharp limitations on ordering and returns, or some combination. “The consumer right now is enjoying this convenience, which is becoming like a minor addiction — 'This is so much fun to order this and then that’ — but what happens when the rug gets pulled out from underneath you?” Shoppers might incur higher costs, for example, unless they’re willing to truck returns to physical locations like a Kohl’s or Whole Foods themselves. “Right now, the reverse logistics are crushing some of these e-commerce operators,” Pedulla said. “That can only go on for so long.” He added: “The consumer is going to have to participate financially in the delivery aspects and perhaps even the returns.”

Brick-and-mortar’s reckoning isn’t over, either

In retail real estate over the next year, retailers and landlords will continue to seek the right balance between leased retail space and consumer demand, Pedulla says. Sellers of formal wear and business attire, in particular, may face tough sledding, as Zoom calls will continue until the pandemic is over, plus some more time. “We aren’t all going to go back to the office right away,” Pedulla notes.

By some estimates, 10,000 to 14,000 stores closed in 2020. Gordon Brothers sees something similar occurring in 2021, Pedulla adds, and the first wave may make headlines soon. “In the mall sector, lease expirations tend to be around Jan. 31, and so you may have healthy retailers that want to rationalize their portfolios. They’ll say, ‘Look, the lease is up at the end of January. We’re just going to close that store.’”

Read more from SCT’s 2021 look ahead series

The restaurant sector is planning for a comeback
Plan for omnichannel; don’t wait for certainty on 2021 shopping behavior
Too soon to plan for the end of COVID, so what will a healthy center look like?
Which chains will be expanding
Faster and more collaborative style for retail real estate companies