Changes To Properties
Similar to the forced changes legacy retailers have undergone during this crisis, we believe there will be a number of changes and emerging trends to the properties themselves that have implications not just for consumers but also for debt investors. From the demand side, just as we expect physical retailers to spend more time and energy expanding their online presence, we believe online-only retailers will spend more resources building out a network of physical stores to complement their online presence. Sometimes referred to as omnichannel retailing, we think this could become the dominant business model and contribute to higher occupancy rates at select locations. Warby Parker, Tesla and Casper are examples of companies that have begun this network buildout. Similarly, big-box retailers such as European grocery chain Aldi and Dollar General are examples or retailers whose business have not been negatively impacted this year. Both chains have announced plans to add hundreds of locations over the next two years. We believe that retail owners need to ensure that their properties are well suited to be considered candidates for both types of demand.
Even with some expansion plans by existing retailers, retail properties and especially malls will need to become more creative with their space and tenant roster to survive the current environment. One example of “new rules” is to target non-traditional users. Converting big-box space formerly occupied by a department store to warehouse space that can be used as a local distribution hub is something we expect to see a lot more of in the near future. We also expect some shopping centers to expand their roles in their communities and serve not just as a place to get new sneakers and a sandwich but also to be a destination. New tenants such as urgent care centers are not subject to the same economic pressures as traditional retailers; they need a lot of square footage and add value to the community. Co-working office space is another example of a potential new demand driver.
Last, some properties, particularly malls, can transform themselves into serving as entertainment hubs. Some struggling malls have added indoor sports facilities, parks or converted to lifestyle centers. New properties like the 3+ million square-foot American Dream complex in New Jersey is expected to have the majority of its tenants be entertainment focused. The property features an amusement park, indoor water park and North America’s first indoor ski slope among other attractions.
Harris A. Trifon is portfolio manager and co-Head of mortgage and consumer credit at Western Asset Management.