The COVID-19 outbreak has spurred an economic crisis like no other, and commercial landlords are feeling the pain. In the wake of the pandemic, dozens of retailers have filed for bankruptcy and are making plans to close stores, while others have stopped paying rent or are renegotiating leases in an attempt to stay afloat.
All of this is impacting commercial landlords in a very big way. Many are seeing a decline in cash flow due to paused or incomplete rent payments and are grappling with current or potential vacancies as retailers methodically close up shop. But the crisis isn't limited to run-of-the-mill retailers; it's expanded to upscale shopping areas as well.
In New York City, which is known for its numerous high-end shopping districts, rents are already falling in areas that are generally synonymous with luxury retail. And the fear is that the trend won't be limited to New York alone, but rather, it'll impact notable shopping areas throughout the country.
Even luxury shopping districts are hurting
During 2020's second quarter, 16 major shopping corridors in New York City saw a decline in rent, with the average cost per square foot declining to $688. That's the first time since 2011 that prices fell below $700 per square foot, representing an 11.3% drop from just a year prior.
Why the decline? Much of it boils down to less foot traffic. People who shop at high-end stores don't tend to do so out of a need to buy basics. Rather, it's an experience. While many retail locations have reopened, albeit at limited capacity, since the start of the COVID-19 pandemic, many consumers are still hesitant to enter stores. And those who'd normally be inclined to shop at high-end retailers may not want to do so with restrictions. After all, where's the joy in buying a $2,000 purse if you can't pick it up and touch it first due to coronavirus concerns?
Of course, it's not just wealthy locals who tend to frequent high-end shopping areas. These districts are also a major tourist attraction, but with travel plans being put on hold due to the pandemic, fewer out-of-towners are hitting New York City or other parts of the country where luxury shopping is normally a draw.
In fact, global luxury sales are projected to decline by about 29% in 2020, according to the Boston Consulting Group, a global management consulting firm. And it's not just New York City's high-end commercial landlords who stand to suffer. Other well-known shopping districts -- like Chicago's Magnificent Mile and Los Angeles' Rodeo Drive -- also stand to take a major hit as consumer behavior changes.
Compounding the problem is the number of lower-end retailers who have stopped paying rent to their commercial landlords in recent months, and those who are using the pandemic to negotiate new leases. Given that so many commercial landlords are desperate for revenue and eager to avoid vacancies, high-end retailers are now in a position of power, leaving landlords with less of a leg to stand on.
Will luxury shopping districts stage a comeback once the pandemic ends?
Luxury shopping has taken a beating since the COVID-19 pandemic started. Harvard researchers have found that high-income households are spending less than they were before the crisis began, thereby resulting in a major decline in luxury sales.
Once the pandemic is over, the wealthy may once again resume their old routine of midday shopping breaks and high-end purchases, so that alone could help boost luxury demand and put commercial landlords in a stronger position to negotiate better deals for themselves. Also, the end of the pandemic could spur a major tourism revival, and that too is likely to help. As such, landlords in high-end shopping districts may be looking at more of a temporary decline in revenue -- but one that hurts them nonetheless.