In retail real estate, only the strong will survive

A pattern emerging from the Covid-19 pandemic is that the economic shocks are being borne primarily by the most vulnerable, while those better off have continued to thrive. This appears to be the case for commercial real estate as well.

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Larry Antonatos, managing director and portfolio manager at Brookfield Asset Management’s Public Securities Group in Chicago, says the pandemic’s impact on retail real estate will be “bifurcated.”

“Strong retail real estate will become stronger as retailers concentrate their physical presence [in locations] with high sales, high traffic, and strong population and income demographics,” said Antonatos, who manages the Renaissance Real Assets Private Pool.

In those locations, brick-and-mortar stores will remain important places for retailers to manage relationships with customers and boost their brand image, he said in an interview early this month.

“Conversely, we believe weaker retail real estate will continue to get weaker.”

Lockdowns earlier this year to contain the spread of Covid-19 may have accelerated consumer shifts to online and omni-channel shopping, which combines online and physical stores, Antonatos said.

“This shift has been happening for decades, but the lockdowns forced late adopters to adopt or suffer,” he said. “Retailers with online presence scrambled to accommodate increased online activity, including buying online and pickup in-store or curbside, while retailers with no online presence had no revenues.”

Entertainment and dining venues had fewer options. Theatres were forced to close, while some restaurants were able to shift and offer takeout.

While some retailers will suffer due to consumers’ “long-term behavioural changes” hastened by the pandemic, Antonatos believes traffic will eventually recover to pre-lockdown levels for theatres and restaurants.

As a result, he said public real estate companies “with outstanding retail portfolios in markets with strong demographics are trading at significant discounts to real estate asset value.”

As an investment opportunity, though, it’s not without risk.

“In the short run, we could have increases in Covid-19 infections and renewed lockdowns,” he said. “In the medium run, the return to out-of-home shopping, entertainment and dining may be slow. But in the long run, we believe strong retail will become stronger and stronger over time.”

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