“I believe that the pandemic may have saved the retail real estate asset class,” explains Charley Margosian, a second generation commercial real estate professional whose family’s business largely owns and operates retail properties.
While discussing both the intended and unintended consequences of the stay-at-home orders, social distancing rules, and various mandates that led to mass isolation for much of 2020 and parts of 2021, Margosian’s takeaway may seem counter to the narrative about how hard the retail asset class has been hit by the pandemic.
“I think a lot of people saw what it was like to not be able to go to a store and only have e-commerce available, and they decided it wasn’t such a great situation,” he continues. “You know, it turns out that people like to go out and see things and feel and touch them.”
But it’s not only physical goods that people like to venture out of the home for. After months of restaurant dining room closures and ordering delivery online, people want to experience the feeling of going out for dinner or drinks, Margosian adds.
Highland Management, the company that Charley operates with his father, Charles Sr., has been in business since 1985 and maintains a portfolio of properties totaling 1 million square feet. Roughly 80% of the family’s properties are retail, Margosian says.
But at this point in time, as much of the country (and world) has gone back to business as usual, the retail world is also seeing renewed interest. This is particularly so for strip centers with major anchors.
“For transaction activity, it seems like we’re back at record pricing both on a per square-foot and cap rate level,” Margosian says. “The properties that are trading are the high-quality assets, such as the grocery-anchored and the well located properties are trading at very low cap rates.”
Private equity has flooded other asset classes since the pandemic started, particularly multifamily and industrial, both of which have witnessed booms in Chicago and other major cities. And while e-commerce, transportation and logistics businesses are the main driver behind the current industrial boom, there will always be a place for brick-and-mortar, Charley believes.
“During the pandemic, we adjusted our investment model to look for shopping centers that were internet-resistant, which means restaurants, services like dry cleaners, medical or physical therapy, and we have been actively trying to target those tenants,” Margosian says.
However, there was a caveat to this strategy, unfortunately. At least for a period during the height of the pandemic scare.
“As it turned out, what was an internet-resistant strategy was a very pandemic-sensitive strategy. So, we saw a lot of those retailers struggle through the pandemic,” he adds. Just like landlords in the residential and office worlds, the Margosians worked with struggling businesses by offering rent deferrals or other measures.
But at this point, Margosian believes that even with subsequent waves and variants, there may simply not be enough political or social will to bring back mass business closures and stay-at-home orders, especially as northern Illinois continues to increase in overall vaccination numbers.
David Strusiner, VP of Leasing with Craig/Steven Development Corp, sees retail pivoting even more towards service-oriented businesses after the pandemic.
“The definition of retail is gone. And it’s been gone, even before the pandemic hit,” he says. “You know, there’s doctors, there’s dentists, there’s physical therapists. It’s fitness and it’s food. And those have been the driving forces in my opinion.”
The new face of retail is perhaps not as focused on sales tax-generating businesses, as it’s more focused on niche services or the food and beverage industry, Strusiner suggests. For better or worse, this is the new reality and landlords are adapting to keep up with the evolving nature of the asset class.
“People are pivoting and thinking out of the box more than they’ve ever done before,” he says. “For instance, we have a retail center that we’re turning into a service-oriented center, not because that’s what we built it as, but because that’s what’s coming to us and we’re okay with it.”
Even with the massive amounts of capital being invested into commercial real estate in the current moment, Strusiner says that his company is holding. However, those who do want to sell could stand to do well when exiting their position in retail assets.
“If you want your portfolio to be just single-tenant triple-net buildings, and that’s the game that you play, yeah, there’s a lot of money out there,” he says.
One really important indicator of a more sustained retail recovery is the sense that there wasn’t as much of an economic fallout from the latest variant and subsequent COVID waves.
“We did not see a pronounced slowdown in leasing activity that corresponded with a Delta surge, so I think as the broader economy continues to recover, and we make it through some of these things like these supply chain issues, that we’re going to have a period here for the next couple of years of economic prosperity,” Charley Margosian says.
And as residential housing continues to remain competitive and in high-demand, pushing businesses and workers further out to the collar counties, we could even see some new retail construction in the area.
“And with that consumer prosperity and demand for retail. Overall, I’m very optimistic about the next couple of years in the retail real estate world,” says Margosian. “I think that we’ll start to see something we haven’t seen since 2006 and 2007, which is new retail development.”
This article also appears in the December 2021 issue of Illinois Real Estate Journal.
