As Retail Industry Adapts Post-COVID-19, “No Vaccine is Going to Cure the Rise of E-Commerce”

Cumbelich & Associates, The Plant, Toys R Us, Orchard Supply Hardware, Lowe’s, San Bruno Towne Center
Courtesy of Blake Wisz

By Meghan Hall

The retail industry has battled hard over the past year as a result of COVID-19, but the sector’s troubles began far before the rise of the pandemic. For experts in the sector, while retail is beginning to recover and is seeing increases in activity, the industry will continue to face many of its demons even after the pandemic is over.

“I feel like the market is in a bit of a breakout,” said John Cumbelich, founder and chief executive officer of Cumbelich & Associates. “There were so many users that moved to the sidelines during COVID-19, and what we saw really start to become manifest in the first week of January of this year when we finally had 2020 behind us…we saw users coming off the sidelines and ramping up demand. It takes a few quarters for that increased level or normalized level of activity to become evident in the data that we track.”

According to recent data released by Cumbelich & Associates, between 2014 and 2016, retail vacancy in the Bay Area hovered around two to three percent, reaching a peak of 4.27 percent in the third quarter of 2016. Retail fell again in 2017, sitting at just under three percent before beginning to climb again in 2018.

Just a year later, retail was already struggling with the pronounced effects of the rise of e-commerce. Occupancy dropped from 97 to 93 percent as a result of the Toys R Us bankruptcy. Orchard Supply Hardware was shut down by Lowe’s around the same time. Such closures highlight the impact of e-commerce and changes in consumer preferences even prior to the pandemic. Some of that space was quickly absorbed, while others, like space at The Plant in San Jose, have remained chronically vacant.

“It is very important to understand that the illnesses that are affecting retail long preceded the COVID-19 pandemic,” Cumbelich emphasized. “The more fundamental issue and the issue that no vaccine is going to cure, is the rise of e-commerce.”

Vacancies have remained, states Cumbelich, because there is a significantly smaller pool of large format retail users who have good credit and are actually expanding their reach. Over the past several years, many retailers were “eliminated from the scenes” because of consolidation, bankruptcy and other market sectors. Through 2019, fitness, entertainment and movie theater uses were able to fill open gaps. COVID-19, however, largely changed that.

“That gave the market this sort of artificial pallor of high occupancy, but it was with brands that had markedly less credit than the prior generation,” said Cumbelich.

On a more positive note, however, Cumbelich & Associates is beginning to see life return to the retail market. The third quarter saw the highest overall occupancy rate in the Bay Area since the outset of the pandemic. The vacancy rate dropped 1.3 percent over the past several months, and the Bay Area’s overall occupancy rate reached 93.46 percent. 

The North Bay continues to have limited availability, faring better than many other Bay Area submarkets. The North Bay saw a 1.59 percent gain in occupancy during the third quarter, reaching 97.72 percent–a “very healthy” level, according to Cumbelich. The amount of available space, consequently, declined to just 60,900 square feet. The East Bay also performed well, and saw 110,000 square feet of retail space absorbed, rising occupancy from 90.32 percent to 92.41 percent.

In the South Bay, occupancy declined by 1.23 percent to just 90.23 percent.  Palo Alto’s Ravenswood 101, San Bruno Towne Center, and others, are listed as a few of the retail centers with the highest level of vacancy. 

Moving ahead, shopping centers that continue to do well will be those anchored by “stalwart” brands like Target, Wamart, Costco, Whole Foods, and others. The future of retail will include fewer big box retailers with credit and it will take property owners potentially years to decide how to best reinvent their empty spaces.

On the plus side, however, no new inventory is really being built, said Cumbelich, giving demand the chance to meet up with current supply. Uptick in occupancy levels is expected to continue as users must choose from existing inventory and space. Retail experts should also keep a close eye on another emerging trend: the use of drive-thrus. According to Cumbelich, “cars are the new customer” in retail.

“I think there is a very interesting tension right now in the marketplace–which will likely play out unevenly–between brands who are automobile-oriented and [traditional] uses,” said Cumbelich. “All of these auto-centric uses have been able to very successfully navigate the pandemic. At the very same time, you’ve got a lot of municipalities who do not want more drive-thrus. I think that is going to be a dynamic that plays out [in the future].”

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