WILL SOCIAL DISTANCING MAKE TENANTS OR RETAILERS LEASE BIGGER SPACES?

September 16, 2020

Lockdown and Social Distancing have become the buzzwords due to the ongoing pandemic. Disruption is being faced across businesses due to this black swan event, creating ripple effects, falling demand for goods and services, job losses, thereby forcing businesses to take additional precautions for surviving “The New Normal”. One of the most severely hit sector due to this, is the retail business.

LOCKDOWN, UNLOCK AND IT’S IMPACT ON TENANTS AND RETAILERS

According to Wall Street Journal’s article, “the economic ripple effects of retail sales”, the impact due to Covid-19 outbreak has led to a loss of about 2.3 million jobs in the retail sector. This trend continued for the greater part of the year and is slowly tracing the path towards recovery, with people beginning to commute on a daily or weekly basis, a rarity since the onslaught of the pandemic.

Perhaps the last phase of this recovery will be people going back into stores, shopping malls, enclosed places and feeling comfortable doing so. This raises concerns about the existing retail lease, as to how relevant the clauses are with regards to the needs of the day. Negotiations on the lease agreement is the main focus everywhere, as businesses try to sustain their operations and ensure business continuity, amidst stringent regulatory compliance and safety standards that add up to the operating expenses.

The lease agreements are being scrutinized, negotiated and amended to serve the needs of “the new normal” and “the next normal”. Effectiveness of these amendments refined through numerous decision-making scenarios, will pave the way for making or breaking your business.

Decisions related to safety standards, frequency of sanitizing your office / retail premise, retail display and shelving decisions, space markers, user traffic during the new normal, and lots more to be factored in while framing solutions to tackle a force majeure scenario and getting into negotiations. Hence businesses have to focus on not only the business sustainability plan, but also the business continuity plans that serves as growth drivers in the next normal.

MANAGING FLOOR SPACE AMIDST CHALLENGES

User traffic rate, availability of floor space and regulatory compliances that existed at brick and mortar stores in the pre-covid era are largely becoming vital to be considered while negotiating or framing your lease agreements. The need for floor space may become more for clothing and accessories outlets and hypermarkets to ensure social distancing norms and manage user traffic. But if the management is looking at keeping their operating expenses at par with their quarterly forecasts, then the focus will be on effective utilization of resources and available real estate as lease rent form a major part of your operating expenses.

Thankfully there is a bright side, as recent surveys conducted by the National Association of Realtors and other corporates shows that it is not in the best interest of the landlords to shut the doors and start looking for replacement tenants. Though moratorium was announced by many financial institutions across the world, especially during Q2 of 2020, municipalities and banks need their realty taxes and mortgage payments to be duly paid going forward, and those ultimately come through the commercial space user, as small businesses are still the engine for economies. Hence the win-win situation is to negotiate a deal that proves favourable for both the landlord and the tenant. But the business continuity decisions need to be finalized to get a better picture on the floor space needs.

REDESIGNING YOUR FLOOR LAYOUT

In order to sustain your business with available floor space, or even opt for lesser floor space to effectively run the business amidst challenges, the following areas are to be focused:

  • Focusing on increasing the space productivity index
  • Planning your space mix
  • Identifying traffic builders, profit builders, star performers
  • Buying behaviour of customers
  • Product shelving
  • Determining the load factor and base lining the user traffic rate

    • If you have a small store and want to give people enough space, you’ll need to be more creative with your product placement and position. Doing this starts with the right equipment and shelves. Remember that you are not just designing a space for your products; you also need to incorporate health and safety standards into your retail space planning. This includes identifying high touch areas and making room for social distancing, sanitizer placement, as well as equipment like Plexiglas.

    CONCLUSION

    Typically, the needs of commercial real estate today leads to an increase in cost or retail lease rents if businesses choose to lease bigger spaces. But, in order to reduce operating expenses, the trend that is observed is that the retailers / tenants seek to operate from smaller spaces with all necessities for sanitization and safety, thus adhering to government norms.

    By Raghu Ramachandran

    Raghu is the President for Sybrant Real Estate, a leading private real estate / property management services firm based out of Chennai, India that has global customers. Raghu has decades of hardcore experience in Real Estate and Property Development business. In this place he will share his thoughts on real estate as a business, technology, entrepreneurship, and anything else that piques my interest.