Unfortunately, many of the markets with the highest share of retail employment were also 2019’s underachievers. For instance, Myrtle Beach, SC and Flint, MI have the highest share of retail employees compared to nonfarm employment in the country, while at the same time ranking among the highest retail property vacancy rates in 2019.
Despite record-breaking economic growth in recent years, high vacancy rates and tepid absorption pushed asking rents down in many metros. Again, small metros in the South with a high concentration of retail employment, such as Cape Coral, FL, and McAllen, TX were already experiencing declining rents.
Retail Investment in Large Metro Areas Somewhat Insulated, For Now
Retail property investors and landlords in America’s major metros still have plenty of cause for concern, but certain structural elements of these markets may provide some degree of insulation to the pandemic.
By virtue of their sheer size, larger markets tend to be more diverse: These economies are much less dependent on the success of any one industry compared to their smaller neighbors.
Much of the retail square footage in large metros is also occupied by big box stores, which also have established ecommerce operations and, depending on the outlet of course, much greater access to capital reserves. This is perhaps why the CRE retail sector in markets like Houston and Chicago have better withstood the widespread secular decline we’ve seen throughout the industry over the past decade.
Policy Considerations and the Upshot for Investors
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes several safeguards for small businesses, including the Paycheck Protection Program, which is intended to stem the tide of widespread unemployment. While some tenants may use these funds for staying current on rent, they are not required to do so, and are in fact protected by eviction moratoriums extended to both residential and commercial tenants.
Commercial landlords may find some relief by working with their lender for a loan modification, but this is assuming that the property is leveraged and does not address the burden of other carrying costs not associated with the loan.
Of course, these stop-gap measures are designed to help business owners and, by extension, commercial real estate investors absorb the immediate shock generated by the pandemic. There is no telling what the long-term effects will be on CRE investment and the retail sector in particular. While the pandemic will touch everyone regardless of industry or asset class, investors who built highly diversified portfolios, especially geographically, will be thankful they did so.