CREJ

Page 12 — Retail Properties Quarterly — May 2021 www.crej.com A nyone who has followed the commercial real estate sector over the past year is aware of the hit that the brick-and-mortar retail sec- tor has taken since spring 2020. As our nation and the world went into a series of pandemic-driven lock- downs, online retail giants such as Amazon saw dramatic increases in sales and revenues, while smaller, brick-and-mortar retailers struggled with reduced foot traffic – and some closed down altogether. Now, a year after the pandemic began, real estate industry professionals, business own- ers and local governments are getting a better picture of where the retail sector might be headed after the pandemic is behind us. In April 2020, as part of a series of client alerts about the impacts of COVID-19 on the real estate market, we published an alert discussing the COVID-19 pandemic’s effect on the already-struggling retail sector. We noted at the time that the pandemic was likely to exacerbate many of the trends we had been observing for years, including a shift to online sales and reduced demand for brick-and- mortar retail space in our communi- ties. Our predictions turned out to be largely accurate, although the result is not without nuances. Real estate trends data provides some insight into the pandemic’s effect on the retails sector. Nationally, retail sales in 2020 did not dive to the extent initially expected – in fact, a recent Forbes article noted that brick- and-mortar retail stayed flat. While e-commerce grew substantially, it did not skyrocket as much as many experts predicted; according to data from the U.S. Cen- sus Bureau, 14% of retail sales in 2020 were online. Of course, not all types of retail were impacted evenly. Declines in retail sales of clothing, gasoline, furniture and personal ser- vices were largely offset by increases in grocery and food sales, home improvement and sporting goods. Traditional depart- ment stores like JCPenney – already struggling in recent years – were hit hard by the pandemic. Further, some retailers were more easily able to adopt a hybrid model, where con- sumers order online and pick up at the store, than others. Smaller, local retailers that lacked an online pres- ence, or whose business is reliant on foot traffic in commercial areas, also were heavily impacted. It thus appears that COVID-19 has not yet brought the full-scale brick-and-mortar retail apocalypse that was initially feared. Emergency federal assistance, including the Paycheck Protection Program, likely eased some of the pain. However, the degree of impact has varied by region, and with local governments in some states – including Colorado – gaining more control over COVID-19 regulations, it remains unknown how different areas will recover. Recent CBRE data shows that greater Denver’s retail sector remains affected by the pandemic, but appears to be headed toward recov- ery. In the first quarter, sales vol- ume of retail space was down 20% from first-quarter 2020. Only 57% of jobs lost have been recovered, and retail construction reached a 10-year low. Still, 2020 was not as bleak as once feared. Tax revenue far exceeded expecta- tions, and trends in recent months have been positive. Vacancies – averaging around 8% and still higher than in recent years – are leveling off, and foot traffic is increas- ing. These data points, which undoubt- edly are welcome for landlords and business owners, also are likely to be good news for local governments. In the early days of the pandemic, local governments were called upon to assist in emergency responses while simultaneously experiencing declines in sales tax revenues. Now, however, with all Colorado adults eligible for a vaccine, control of restrictions in the hands of local governments, consum- ers eager for a return to normal, and sporting and other events returning, encouraging trends are expected to continue. The recently passed federal stimulus package has the potential to further boost recovery. With signifi- cant funds for state and local govern- ments, the package will replenish lost revenue and help fill gaps in budgets. Further, Gov. Jared Polis’ proposed Colorado Recovery Plan would chan- nel funds to small businesses, some specifically in sales tax relief. Still, the future of the retail sec- tor remains uncertain. Although the U.S. – and Colorado in particular – has enjoyed a strong vaccine roll- out, it remains to be seen whether we will reach the 70% vaccination level necessary to attain herd immu- nity. Despite consumers’ eagerness to return to normal, and despite positive projections for growth, it is unlikely that the end of 2021 will look like the end of 2019. Some forecast- ers suggest the hybrid e-commerce/ brick-and-mortar model discussed above is here to stay, some expect that brick-and-mortar will have a strong comeback, and others project that e-commerce will continue to grow. For now, it appears that the pan- demic’s impact on retail has been largely to accelerate existing trends. Since the 1990s, e-commerce has grown steadily, and brick-and-mortar retail increasingly has faced chal- lenges. Brick-and-mortar retail has shifted to smaller stores, more focus on personal services and restaurants than sales of goods, and also has responded to cultural changes toward walkable, downtown-like shop- ping experiences. Now, malls that had anticipated the eventual loss of anchor stores may be more actively exploring redevelopment, and down- town storefronts may be seeking creative ways to draw customers. The coming months and years will tell how exactly Colorado’s retail recovery will pan out. s bconnolly@ottenjohnson.com ahaggarty@ottenjohnson.com Evaluating COVID-19’s effect on retail, 1 year later Market Outlook Brian J. Connolly Attorney, Otten Johnson Robinson Neff + Ragonetti PC Alexandra A. Haggarty Attorney, Otten Johnson Robinson Neff + Ragonetti PC