Wesfarmers’ Rob Scott became the latest in a line of listed retail company chief executives to foreshadow large-scale store closures on Tuesday when he said he didn’t see many of the Target chain’s 290 large-format stores being commercially viable over time. Store numbers and sizes would be slashed; discussions with landlords would be held.
Veteran retailer Solomon Lew shut down Premier Investments’ 1250 stores early on in the course of the pandemic and has suspended all lease payments. Premier, with about 70 per cent of its leases expiring this year, is inevitably going to put the screws to its landlords over future rents as part of a long-standing campaign to get them to share some of the pain the retail sector has experienced in recent years.
Premier isn’t the only large retailer to shut down and refuse to pay rent during the lockdown of the economy. It’s commercial suicide to continue to trade when there are no customers. The list of store closures is very, very long.
Inevitably, a lot of small discretionary retailers, restaurants, cafes, gyms and others won’t survive the lockdown despite the efforts of government to provide some life support.
If the larger chains and department stores do re-emerge as the economy starts to stir, they will have been badly wounded and have no choice but to rethink, far more aggressively and with far greater leverage over their landlords than pre-crisis, the nature of their physical networks.
Online retail has been given a boost by the lockdown and consumer habits will change in ways that will accelerate the growth of online retail and other services as a result of their experiences during the quarantining and social distancing, although that’s not necessarily a panacea for retailers, given for them it is an immature, high-cost and low-margin channel.
The ravaging of discretionary retail will produce permanent, structural change and therefore the days when retail property could count on ever-increasing streams of rental income by leveraging the imbalance in their relationship with tenants are numbered. There will be a re-set of rentals and the income of the A-REITs exposed to the sector.
The other factor that will impact retail property is the abrupt halt to travel and immigration. The Morrison government had, before the pandemic, already reduced the cap on permanent immigration from 190,000 to 160,000. That’s now irrelevant. It’s going to be quite some time before we see immigrants, or overseas tourists, returning.
Given that immigration has been the driver of our population growth and underwritten the ever-increasing demand for commercial space, that has implications right across the property markets.
If retail is the epicentre of the tides of adverse influences on a market that has had nearly three decades of stability and growth and turned the A-REITs into something akin to blue-chip, yield-generating bonds, it isn’t the only sector where the experiences of the pandemic will generate permanent change.
In announcing its $807 million provision for the initial impacts it expects from COVID-19, National Australia Bank said more than 30,000 of its staff were working from home and that it would use the experience to consider the future nature of its workplaces. It could have added that a rethinking of the way its people work will impact the workspaces it needs.
Most other businesses are having similar experiences and realising that, with their people properly equipped (which generally means not much more than a laptop and secure access to the company’s systems) their businesses still function perfectly well. The much-maligned national broadband network has come into its own.
That has implications for the options companies will be able to give employees once the economy reopens and for their space requirements.
The pandemic has demonstrated that white-collar workplaces can be far more flexible and fluid than might have been thought and that digital communications is easier and more effective than might have been appreciated.
Offices will, of course, reopen once there is a green light to return to them. In the immediate aftermath of that return, however, social distancing and safe workplaces will still be front-of-mind and those issues are likely to persist from quite some time and perhaps permanently.
Commercial tenants might well require less space in future, particularly if forecasts of double-digit unemployment this year and next were to be borne out, but they will require safer spaces. There will be some costs associated with the redesigning of workplaces for a post-pandemic environment and tenants will be in a stronger position in future to insist that the landlords foot those bills.
On the other side of the pandemic, or at least the worst of it, it is obvious there will be fewer retailers, particularly small retailers and service providers, whether in suburban strips or the big malls.
Beyond the retail apocalypse, closed borders, a significant reduction in travel even once borders re-open, minimal population growth, changes to the way we work and the nature of the workplaces for those who do work in offices doesn’t auger well for other landlords or investors in any of those markets.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.