Monday Morning Scoop - Covid-19 Changed Consumer, Dining Habits — and Permanently Reshaped Commercial Real Estate

Covid-19 Changed Consumer, Dining Habits — and Permanently Reshaped Commercial Real Estate

The way consumers shopped and ate out (or, rather, in) during the Covid-19 pandemic has altered retail real estate permanently.

The lines between traditional retail and industrial have blurred, with soaring e-commerce sales bolstering demand for warehouse space faster than the market could supply real estate. While that surge has since tapered off, experts who track retail trends and in commercial real estate believe certain trends will be permanent.

Retail-industrial remix

Although online grocery shopping increased during the pandemic because of health and safety concerns, it’s a trend expected to stick around — and grow — in the coming years

It’s expected online sales will surpass 20% of the overall U.S. grocery retail market in the next five years, according to a fall 2021 study by Mercatus Inc. and Incisiv. Between 2019 and 2020, the share of grocery e-commerce sales went from 3.4% to 8.1%, according to Mercatus/Incisiv. That share increased to 9.5% last year.

Online grocery shopping has prompted unique needs for grocery real estate, including revamped retail stores to allow for easier pickup and an increasing reliance on cold-storage and dry fulfillment centers.

“Grocers are (implementing) different nodes around the country where they have large or micro fulfillment centers, to fulfill a lot of these orders and to make sure it’s done efficiently and to please their customers,” said Matt Walaszek, director of research at CBRE Group Inc. (NYSE: CBRE), specializing in industrial and logistics.

He pointed to, specifically, Cincinnati-based grocer The Kroger Co. (NYSE: KR), amid a national expansion of its automated warehouse network. Among other features, the facilities give Kroger additional capability to deliver merchandise directly to customer households.

Traditionally, the cold-storage market — a niche subsector of the broader industrial space — hasn’t seen a lot of new development unless on a build-to-suit basis because of the high costs associated with building such a facility.

More recently, though, investors have entered the field, owing to demand from grocers and other users needing cold space, which is prompting a wave of speculative temperature-controlled warehouse development. Right now, there’s about 3.3 million square feet of speculative cold-storage development across the U.S., up from 300,000 square feet underway in 2019.

Inflation has hit grocery bills especially hard, with food-at-home prices rising 11.9% annually between May 2021 and May 2022, according to the U.S. Bureau of Labor Statistics. A recession may slow online grocery shopping and the cold-storage sector’s trajectory but, ultimately, groceries are purchases most consumers have to make, regardless of economic conditions.

“People might shift to generic-brand foods or … they might try a discount grocer instead of a high-end grocer,” said Brandon Isner, head of retail research at CBRE. “If people can figure out how to get goods still for a reasonable price through online, then that’ll work. But if delivery fees go up, it could be a blip.”

Cold-storage projects proposed or in planning right now may not get built because of economic uncertainty, Walaszek said. But with the U.S. cold-storage market measuring about 225 million square feet, with an average vacancy rate of 3.1%, it’s forecasted tenants will lease spec projects underway now because the market is so tight.

There are several new real estate developers that’ve jumped into cold storage because of the ramp-up in online grocery sales.

“Time will tell whether these new players are going to be able to withstand some of the challenges (such as) making sure to find a tenant in a space where user requirements are highly specific,” Walaszek said, adding that’s why the market has historically been build-to-suit development.


When people couldn’t dine inside restaurants, demand for online ordering, delivery and drive-thru services exploded.

Between February 2020 and February 2022, food delivery increased by 116% and drive-thru grew by 20%, according to April research from Port Washington, New York-based marketing-research firm The NPD Group Inc. Digital ordering grew by 117% in that two-year period, although digital and non-digital carry-out restaurant orders declined by 2%.

At the onset of the Covid-19 pandemic in 2020, some U.S. operators of New York-based fast-casual restaurant Shake Shack Inc. (NYSE: SHAK) set up tents outside of restaurants and had staff run food out to cars, said Andrew McCaughan, chief development officer at Shake Shack.

At the time, the burger chain didn’t have any drive-thru locations, having initially debuted as an urban food stand in the 2000s in Manhattan’s Madison Square Park. But by the end of 2022, Shake Shack is expected to have 10 drive-thru locations operating in the U.S., with the first one having opened in Maple Grove, Minnesota, seven months ago. The shift also concurs with Shake Shack’s geographic expansion to more suburban areas, where drive-thrus are more common.

McCaughan said Shake Shack had been mapping out a drive-thru concept since before Covid-19 but, like countless other things, the pandemic accelerated that initiative, in addition to efforts to bolster the company’s digital platforms, including self-service kiosks.

Not only does Shake Shack now have a drive-thru model, it has variations of the concept — including digital-only drive-thrus, such as one that opened recently in Indianapolis — to accommodate different locations and, sometimes, city requirements.

Heightened demand for drive-thrus has prompted a wave of complaints from people in cities and towns across America about spillover traffic onto main arteries. It’s a phenomenon not novel to the pandemic but increased usage of drive-thrus has exacerbated the problem.

Restaurant groups with drive-thrus are redeveloping land sites, buildings and traffic management to mitigate some of those issues. Shake Shack remains in learning mode with its drive-thru business, and is incorporating line-busting techniques that’ve been successful for other chains, including double lanes, to manage traffic, McCaughan said.

Another issue facing groups wanting to beef up their drive-thru footprint: availability of sites. New developments with drive-thru sites are very competitive right now, McCaughan said, which may prompt groups to have to consider older sites with more traditional drive-thru facilities and revamping those.

McCaughan declined to say how many drive-thru locations Shake Shack is planning beyond the 10 scheduled to open this year, or what percentage of its future locations will be drive-thru. In addition to refining the drive-thru concept, the company is, like most retailers, working to bolster its omnichannel fulfillment and technology.

Extra scrutiny in restaurant leases

Landlords have gotten pickier about what restaurant tenants they lease to these days, in the wake of the Covid-19 pandemic. Dining in restaurants nosedived in 2020 but has come roaring back. Data from San Francisco-based OpenTable Inc. shows the number of seated diners from online, phone and walk-in reservations across the U.S. has largely returned to pre-pandemic levels in recent weeks.

Even though the restaurant industry has come back, landlords with restaurant space have become pickier about who they lease to because of the pandemic.

“I think it’s a combination of credit, capital on hand and experience,” said Jeffrey Arsenault, principal at Avison Young who leads the retail services group at the firm’s Boston office. The local chef who had saved up some money to open his own restaurant but doesn’t have experience or established credit will have a tougher time negotiating a deal.

With some of the mom-and-pop operators Arsenault works with, he’s seeing higher security deposits, increased expenditures or more capital having to be put in by the operator. Instead of a $200 per-square-foot improvement allowance, for example, a restaurateur might get $100 per square foot, so they have more skin in the game, Arsenault said.

Brokers and industry executives are seeing key differences in how restaurant groups are evaluating locations nowadays versus pre-pandemic. Demand for business district restaurant space has slowed dramatically while urban neighborhoods and suburban nodes accessible to residents and office workers alike are even more popular now.

Outdoor dining space and clauses that provide some amount of rent abatement in the event of another government-mandated shutdown are also common for restaurant operators to want to negotiate into leases these days, Arsenault said.

But with the economy potentially heading for a recession, and inflation high, some retail and restaurant tenants are tapping the brakes on expansion for the next 60 to 90 days, he added.

“On the landlord side, I think there’s always going to be a level of scrutiny with regard to financial health and the ability to execute and open, regardless of economic conditions,” he said. “(For tenants), is it a speed bump or is this going to be more of a drawn-out process? Everybody that I’m working with is taking a step back.”

By: Ashley Fahey
Source: Austin Business Journal