Update #5: Uncertainty & Flexibility
Dear Clients & Colleagues:
As we enter this 5th week of coronavirus shutdowns here in the Northeast, many of us are starting to shift from crisis reacting to crisis planning. This is a welcome development and has been a positive change to many of our conversations with some of you this past week. We are also moving into new territory wherein our collective decision making can be guided by a tad bit more information about tenant plans, duration of impact, and scale of impact. The news here isn’t great of course, and it’s clouded by intense uncertainty (more on that below), but there are indeed certain realities that we can reasonably rely upon in evaluating and brainstorming next steps:
- Restaurants will eventually reopen, but seating counts will be reduced, delivery and takeout will remain a central fixture for a while, and customers will be slow to return to pre-coronavirus numbers until we have a vaccine or other medical solution;
- Sporting events, beer gardens, music festivals, and other gatherings centered on arts and entertainment will be limited (in both scale and number of events) for the remainder of 2020 and into 2021;
- In-store retail sales across all sectors other than essential services will be sparse for the remainder of year, driving many brands to immediately double-down on online functions and digital messaging;
- There will be less money in the economy to fuel a full retail sales rebound anytime in 2020 (driven by a recession, related unemployment, and the actual public health crisis);
- There will be significantly fewer shops and restaurants left standing at the end of 2020 than existed at the beginning of 2020 (driven by a recession, supply chain disruptions, and many small businesses inability to recovery from spring 2020 closures); and
- Sales at essential businesses (grocery, pharmacy, liquor, pet supply, hardware/home improvement) will continue to be strong.
The above expected realities will change and evolve in the weeks/months ahead and we continue to believe the best source of information to best understand the nuance of all this are the actual entrepreneurs at the helm of actual retail businesses. So I’ll remind you again this week: talk to your tenants, know their plans, push them for details, and plan with them.
As our tenant’s businesses change and evolve, so too will each of our own businesses. Here at Graffito we are spending a lot of time thinking about needed shifts and tweaks to our business model in the post COVID-19 world. I feel strongly that assuming it will be business as usual again in 6 months, 12 months or 18 months is a trap. Our world will be changed coming out of this. Cultural, social, economic and political shifts will impact our thinking around urban design, retail leasing, property management and development, master planning, communications, and branding.
Embracing this COVID-19 world (and post COVID-19 world) requires comfort (or maybe just acceptance) with uncertainty. This is not something many of us are good at. In fact, most of our respective businesses rely on an awkward presumption of certainty — proformas and economic models that tell us what 2024 NOI will be, capital that we assume will be there when needed, tenants whose core businesses won’t change for years (and leases that lock them into such for years), and risk management strategies that are largely biased towards past circumstances and occurrences.
This crisis will serve as a wake up call for many of us (it has for GSP) that we need to better bake flexibility into our own business plans and require it from our partners, tenants and collaborators. The alternative is to just assume things will return to “normal” as time passes, there’s a vaccine, and our short-term memory takes over. Many people are talking like this and suggesting an eventual and inevitable return to business just as we knew it pre-coronavirus, but I don’t buy it — not in retail real estate.
At Graffito we are not thinking about a return to pre-2020 norms. Many of our clients and collaborators understandably will though — and that’s OK, it’s what will make us a great partner to some of you and will balance things out when one of us skews too far in one direction — but I stress that at least for the next few months you should consider the need for a new mindset; a mindset for now I’ll label as my friend Vaughn has titled his weekly newsletter and forthcoming book: “The Uncertainty Mindset.” So I’ll leave you today with something I shared on the blog yesterday directly from Vaughn’s newsletter last week. It is excellent and a must read for all of us:
More from us this week on the blog and back to you next week in update #6,