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Update #14: It May Not Be Pretty

Update #14: It May Not Be Pretty

Dear Clients & Colleagues,

Every call or video chat we have these days, regardless of agenda, starts with a question directed at us that is something similar to: “So, before we jump in, what are you all seeing out there?” While the conversations that follow are never identical, our response these days typically convey the following:

  1. We are extremely nervous about fall and winter and anticipate at least a six or seven month period wherein things get worse (again) before they get better (for retail, and especially for restaurants).
  2. All retail real estate has been profoundly impacted by this crisis, but it’s the (i) central business districts and (i) indoor malls that have been hit the hardest.
  3. Despite a strong desire from both Landlords and Tenants to revise lease agreements and look to the future, uncertainty remains omnipresent and makes planning really, really difficult right now.

1. Fall/Winter Outlook

Workers still aren’t back in the office, sporting events and concerts are a no-go, college campuses will not be near capacity anytime soon, conferences and trade shows are cancelled for the foreseeable future, PPP funds are just about gone, outdoor dining doesn’t work particularly well in New England after September… And an increase in COVID-19 cases is all but certain based on the past few months of eased restrictions and failure of large swaths of the general public to practice proper spacial distancing and mask wearing protocols. All of this spells bad news for retail, especially restaurants, and we expect a significant uptick in restaurant closing this fall. We also anticipate more trauma to global supply chains, coupled with continued stickiness/appeal of online shopping, which combined will be a death-blow to many non-food brick and mortar retailers that don’t have the wherewithal (or desire) to continue pivoting and innovating.

Further, many (but certainly not all) of the retail entrepreneurs we are talking to of late are expressing intense fatigue and fleeting optimism regarding carrying on. Recently I am hearing a lot more “Do I want to stay open?” v. “Can I stay open?” from shopkeepers. There will be a lot of folks that can’t stay open and will close for good. And there will be some folks that simply chose not to stay open.

2. Hardest Hit: Malls & CBDs

We are going to experience a historic reduction in mall SF over the next few years in America. From decades-old suburban malls to shiny new developments in urban centers, the loses continue to mount. The big news of last week was Neiman Marcus announcing the closing of its brand-new 180,000 SF flagship at Hudson Yards and just this past weekend Lord & Taylor officially filed for bankruptcy. As the mall anchors go, so too does the mall as we knew it. But the collapse of the American mall isn’t a surprise… rather, it is the lightning fast collapse of retail in central business districts across the country that has caught many of us by surprise.

Central Business Districts were the darling of the food and beverage industry since the last recession: lunch crowds, after work drinks, private events, catering, expenses accounts — gone, gone, gone, gone, and gone. Current occupancy rates in Downton Boston office buildings are in the single-digits compared to pre-virus times (we have heard numbers as low as 2% to as high as 8% for Class-A office buildings during the month of July — The Boston Globe recently reported 5% in this article that ran last Friday). Data from New York City, San Francisco and many other cities with previously robust CBDs are reporting the same. Numbers may creep up a bit after Labor Day, but by all accounts they will remain significantly depressed through 2020. And, just to drive this point home, that 5% number noted above means the high-rise office tower that once had 2,000 workers in it every day in summer 2019 now averages 100 people per day in summer 2020. Nuts.

More people will return to their urban offices in 2021 and 2022, but we do not expect retail real estate demand nor rents in these central business districts to return to where they were pre-coronavirus anytime soon, if at all. The impacts here are huge for our cities. And the impacts here are huge for our work at Graffito.

3. Uncertainty… Still 

Running any business right now that touches retail real estate is just so damn hard. Tenants and Landlords are struggling with the same set of challenges (and unknowns) and many are locked into adversarial dealings where there is no clear path forward. Landlords need rent; Tenants need revenue; we all want to be out of this mess; and we aren’t.

One of the things that I cherish the most about our work at Graffito is being a translator between landlords and tenants. But this work is wildly challenging right now. Wins are hard to come by. And the dire warnings we shared with you all back in March/April via these updates and our blog now feel like they may in fact have been too gentle. But at the same time, I realize using these updates moving forward to continue to hammer you with our concerns and fears isn’t all that productive.

As a team we’ve taken some time off from the blog these past six weeks, and this is my first update to this list since the end of June. The break has been good. It has given us the chance to step back from what was a pretty steady outward flow of information and perspectives from us (and generally a super intense spring), to a place of evaluating what we actually want to be saying; in what format; and how regularly. Here’s where we ended up:

  • The blog should indeed continue to be a priority in our commutation strategy, but it cannot be dominated exclusively by COVID-19 related information and ruminations.
  • We have the desire to share a lot of really interesting perspectives that touch our built environment, but our usual platforms (GSP blog, instagram, zoom and webinars) aren’t always the best format for broadcasting such, so we’ll be launching a podcast this fall.
  • These email updates will resume in the fall, but they’ll be monthly instead of weekly.
  • Our commitment to building a more anti-racist business at Graffito remains at the forefront for all of us and we must continue to share outwardly our successes and failures. We have a lot to learn, a lot of listening to do, and a lot of work ahead of us. We have allocated $20,000 for this work during the second half of 2020, which while just a start (and I wish we had more money to hire more professionals to guide us), feels like an appropriate investment for a seven-person team during what is the most economically challenging time in Graffito’s history. But this work cannot wait and we know we need to invest time, money and energy to it. We hope other businesses, big and small, are making similar investments and we are happy to swap notes with all of you.

More on all of this from me in September, and please frequent our blog in the meantime (email list sign up here)

And finally, don’t stop asking us about what we are seeing out there — it may not be pretty, but we’ll always give it to you straight.

Have a great August and thanks for reading,

/Jesse

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Comment ( 1 )

  • Eric Howeler

    Hey Jesse, Always appreciate your take… and I kinda missed the updates the last month or so. In any case, we’re still in the hood, and keep walking by your space and wondering how you’re doing. Best,
    Eric

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