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What is the future of shopping malls?

What are up to now the real consequences of Covid-19 lockdown for landlords and physical real estate? There are arguments that malls and even offices will soon become thing of the past, or will dramatically shrink and change. About this topic we are discussing with Alex Linchev, Mall Manager at Ada Mall.

“Covid-19 was something the modern retail, office market and humans have not experienced in modern non-warfare time, especially when it comes to the wide-spread social distancing restrictions and lockdowns. As such it will certainly have a bigger mark on the world economy and consumer behavior.

For the retail world, my reckoning is that the online shift and digitalization of the shopping experience will be further enhanced but this should not be seen as an omnipotent trend. The recent speedy utilization of online and delivery exposure adopted by more and more retail brands served only to show that this platform also has some serious limits and drawbacks. As stores closed worldwide, digital sales soared at unprecedented level but at a high operational cost. Even Amazon, for instance, which grappled with soaring demand due to the pandemic in the first quarter of 2020, saw costs wipe away profits, as it also scrambled to get items to customers in its usual timely fashion.

But there are other restraints to the online as opposed to the brick-and-mortal retail. Retailers selling discretionary goods depend on discovery, which is best accomplished in physical shops. Think of an H&M or Zara store, how often do you get in one to buy a specific pair of trousers in a specific color and design?! Most often you get in the store, you roam among the merchandised shelves, your eyes detect certain tempting garments, you try, you touch, you experiment, you explore.

Not only retailers, but customers too are coming to terms with the online retail limits: painful experiences of having to return the online product, and in more developed countries, wide spread public concern about the environmental impact of the excessive packaging accompanying deliveries and the traffic clogs and emission spikes from delivery vehicles all come into play.

As to the office market, it is far too early to judge. Both employees and employers are seeing the benefits of working from home – smaller running costs for companies; for employees less time and money wasted in commuting, not having to compromise between that spacious house in the outskirts and the overpriced crammed apartment in the central business district close to work, etc. However, people are starting to experience the inherent restraints of long term home-based work – weak or unreliable internet and electricity cuts (especially in developing countries), lack of socializing, weakened peer competitiveness and group brainstorming, inevitable distractions such as pets, crying kids, nearby construction works, noisy neighbors, etc. Nevertheless, I think that the office of the future would not be the typical four-walled corporate cube or open space we have seen so far. It would more likely be a combination of home-based, anywhere-based, inspiring shared office facilities and flexible leases.”

What are the consequences for brick-and-mortar retailers? Do you believe it is just a matter of time to swap to a predominantly online market?

Online market will bloom but brick-and-mortar will remain pivotal for the need of socializing, intrinsic to all humans. The crave for feel it, touch it, smell it, taste it experience will never fade away and it is the principle on which humans make decisions and commitments, including the ones involving retail purchases. I expect however, certain curbing on non-essential spending should the economy fail to form a V-shaped recovery or in case of a (fear for) second lockdown wave. Moreover, digital improvements to the online experience, loyalty programs and internalized online-sales sites will be the new norm among most sustainable retailers.

How have consumers reacted in terms of footfall and turnover since the malls’ re-opening?

That largely varies from country to country and even from asset to asset. For example, our Ada Mall in Belgrade saw its pre-Covid footfall restored and even surpassed in the 3rd week post re-opening. Our assets in Bulgaria, Poland and Croatia show different dynamics. Interestingly in Belgrade, turnovers in most fashion retailers started with -40% in the first post-reopening week compared to pre-Covid levels and went up to -5% towards the end of May. Surely, a big part of this speedy recovery is attributed to more aggressive discounts and hasty clearance of older collections as well as to a temporary spike in discretionary spending due to the lockdown halt. Nevertheless, our target audience in Belgrade has so far displayed more positive behavior than previously anticipated.

In countries severely impacted by Covid-19 such as UK, Spain, France and USA, consumers seem to remain more fearful and wary when it comes to spent on physical retail.

How do you expect the food and beverage, and entertainment industry will change? Who will choose a cinema and observe social distancing, when there is Netflix at the comfort of your home?

That is a difficult question. Although social distancing and its more permanent imprint on consumer behavior might lead us to think that restaurants, cinemas and entertainment would be most severely affected in the long term, I think such a conclusion might be too simplified and hasty. Truly, Walt Disney entertainment giant declared a loss of 1.4 billion dollars from the lockdown affecting its theme park parks and the cinema industry is predicted to lose some 5 billion dollars as a result of the pandemic. But this only underlines a pre-pandemic trend which had already started prior to Covid-19 outbreak. Entertainment parks and stand-alone cinemas have been forced to shift from their old core business and integrate new trends such as streamline services (as Disney has already launched its own streaming platform to rival Netflix), and retailtainment experience (as many cinemas are upgrading their concept, entering only into lifestyle shopping centres and rewarding their customers with bundle deals done with other mall’s tenants).

Having said that, entertainment is the only retail part that cannot be efficiently mimicked online – a physical karting ride, a bowling game, a trampoline jump, a gym exercise, a yoga session and a school class climbing competition is something no computer game can fully make up for. However such experiences, need to be mingled with classical shopping rather than left to stand alone in entertainment-only themed parks or buildings.

With regards to cafes and restaurants, I believe now more than ever having access to outdoor gardens and spacious terraces would play a big role. In countries like Serbia food deliveries for home still have room for considerable acceleration and I think they will catch up with the current trend in other European countries. Inevitably, that might put some restaurants out of business, but I believe this would be more like a natural selection of the fittest rather than a dramatic change all across the board.

Are Landlord jeopardized by endless rent pressure and should we expect big insolvencies on the international shopping centre market?

Well, legally speaking, landlords are in the majority of cases protected by the essence of the lease agreement, where rent obligation, being a financial lease, is not automatically waived just because the tenant has no access to cash or was forced to temporarily suspend their business. Of course, this is rather theoretical now and prudent landlords would need to find a common ground for mutual concessions with their tenants who were financially healthy prior to Covid-19. In addition, landlords, just like retailers, whose assets were having difficulties prior to Covid-19 would be further exposed to risk now. Over the past decade for most retailers digital sales represented a cannibalization of their brick-and-store sales, rather than significant increase in their total revenue. As a result, in many developed countries, some struggling malls closed or were repurposed as a large number of department store anchors and specialty tenants have closed. However, it is worth mentioning that this tendency is hardly applicable for countries like Serbia where the retail and malls saturation is still relatively low, just as is the consumer inclination to purchase online.

How do you see the office real estate market, when more and more people have become used to working from home? What long term effect will working from home bring about?

Initially, few workers will start to return. Those who depend on better IT support and faster broadband than they have at home will be back sooner. Banks in countries like Britain expect traders to work from either their regular offices or from disaster-recovery hubs. Also advertising, design and production staff who rely on colleagues’ collaboration or work with big files of high quality material will need the physical office. And then there are the people employed in the hospitality, entertainment and food and beverage industries, whose return will be gradually secured through the lockdown easement process.

Even with all those, however, most economists predict that till December 2020 as many as 50% of the workforce will either continue working from home or will combine it with an occasional trip to the office. Anything beyond this date is too difficult to predict at this point. My personal opinion is that from 2021 things for 80% of the office market will normalize, as long as there is no new wave of mass lockdowns. But still we might see some far-reaching changes. Some companies might be tempted to get rid of expensive city centre locations, imposing headquarter buildings might become things of the past, BPOs and call centres might accelerate their pre-Covid shift to flexible time sharing of their employees between home- and office-base. Some analysts believe that many previously considered prime real estate assets under construction will now be deemed overpriced and under a serious risk of remaining half-empty.

Working from home for a long term will lead to some positive developments but will also bring about new challenges. On the positive side, it will regulate housing prices as people would no longer need to cluster near work or in busy city locations. In the long run it will ramp up infrastructure improvements in the countryside. It will also facilitate companies as they would be able to recruit from a wider pool not being restraint by physical barriers between cities and even countries.

Working from home also poses some challenges. Managers might face more difficulty as home workers are harder to monitor and so trust becomes an issue. It will be harder on junior employees who need more mentoring, socializing and might have inferior living conditions. Anyone who has worked entirely from home during the past few months will appreciate the infringement on privacy and the frequent and inevitable nuisances such as demanding kids, unruly pets or loud neighbors interfering with the Zoom videos.

Are retailers going to opt for smaller shops and revised expansion? Do you think the retail market will witness more insolvencies and mergers?

I believe the retail market will be changed profoundly. Many smaller retailers will not survive, and the pre-pandemic trend of some underperforming department stores and anchor tenants going insolvent might be intensified. This is already visible in Western Europe and USA. Retail expansions might be revised to focus only on existing mall assets with prime location and balanced tenant mix. Some anchors might be pressed to reassess their existing shops’ performance and optimize or relocate those with chronically weak results.

Real estate funds with easier access to large cash might become predatory and acquire smaller developers or developers looking for an exit, a consolidation trend which has started back in 2016 and which might dominate the real estate market over the next couple of years. However, even this would very much depend on the international stock exchange optimism, the governments’ supporting schemes for businesses and citizens affected by the pandemic, as well as on people’s fear and anxiety of the pandemic and its potential resurgence.

How is your and retailers’ marketing effected in the post-Covid reality?

Conventional marketing for shopping centers and retailers I believe would be a thing of the past. For example, there will be a shift away from concerts, exhibitions and crowd-based events to more commercial, added value and loyalty campaigns. Retailtainment, or the infusion of experiential shopping and entertainment would be pivotal especially to large shopping centers and retailers selling discretionary good.

Izvor: BIZLife magazin

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