Welcome to X Team Insights | 2025 Issue

The 2025 issue of X Team Insights is here! At X Team Retail Advisors, we remain steadfast in our mission to build a nationally integrated platform of best-in-class retail professionals. In a rapidly evolving market, our strength lies in the depth of local expertise paired with national reach—allowing us to anticipate trends, navigate complexity, and deliver results across every phase of the retail lifecycle.

As you’ll see throughout this issue, the geography of opportunity is shifting. While population growth once dictated retail momentum, 2025 tells a more nuanced story—one shaped by shifting migration patterns, rebalanced demand, and increasingly strategic site selection. From suburban reshuffling to the recalibration of Sun Belt hotbeds, we’re tracking the trends and delivering perspective you can act on.

Let’s get into it.

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The Promise and Challenge of Artificial Intelligence and Retail Real Estate

According to a recent Forbes article by VTS’ Ryan Masiello, “it’s no surprise that AI has emerged as the next frontier in real estate technology.”

CRE retail experts don’t disagree with this assessment.

“AI has come a long way in retail leasing over the past five years,” said Brent Loomer, Lead Managing Consultant of RealFoundations. “What used to feel like a future-facing concept is showing up in practical, everyday ways across the leasing process.”

At the same time, Loomer and other experts told Connect CRE that artificial intelligence won’t replace jobs, and it isn’t effective without the human factor.

Legend Partners’ Managing Partner Tanner Olson said that AI helped cut his workload by 1% to 10%, depending on the transaction. “I think it’s making agents more efficient, but it’s certainly not taking off the workload that a lot of people might think it possibly could,” he added.

Upsides and Downsides

There’s no doubt that AI has evolved from basic data analytics to wider-range capabilities. “These advanced systems can now predict market trends, compare lease terms, provide lease abstracts, and even assist in tenant matching,” according to Jon Brecher, JLL Vice President.

These days, artificial intelligence supports real estate transactions in the following areas.

Documentation

Paperwork is a given with real estate. AI can help reduce the red-tape redundancies.

“You can take a 50-page lease and ask AI to do an abstract,” Olson said, adding that 15 companies right now are building AI platforms for abstracting leasing. While fact-checking is essential once the job is done, “AI does expedite that process a bit,” he said.

Mark Sigal, CEO of Datex Property Solutions, went a step further, pointing out that tools like MRI Contract Intelligence and Prophia use a combination of OCR, AI and machine learning to find leases’ key provisions, categorize them based on logic and data, and report by portfolio, property or national tenant.

Additionally, “a fairly standard tool is the use of Chat GPT for structuring and crafting narratives,” Sigal said. “This can add value to both the retail lease drafting process and the deal proposal process.”

AI can also help generate lease addendums. “You can feed an AI a lease and then have it create a drafted addendum or five-year extension,” Olson said. The process saves time, as the addendum can be presented to an attorney for review rather than the attorney drafting one from scratch.

But Sigal cautioned that AI documentation needs to be watched. “The technology is at the proverbial 80/20 stage,” he explained. “Automated abstraction works 80% of the time in terms of covered use cases, but the 20% of the cases not covered are so human-capital intensive, it mutes a large portion of the value for retail.”

Data and Analysis

Sigal pointed out that artificial intelligence can be useful for analyzing a retail leasing deal’s numbers, including net present value, net effective rent, gross profit multiple and related job costs.

Brecher agreed, noting that tenants and landlords rely on artificial intelligence to “analyze customer trip patterns, shopping behaviors and specific demographics.”

However, the experts expressed caution with AI’s resultant data. For one thing, artificial intelligence output is only as good as the available input data. As such, data governance and stewardship continue to be long-standing issues. “Clean, well-structured data results in smarter models,” Loomer commented. “Without it, AI is just automating bad assumptions.”

Stephanie Skrbin, a broker with Axiom Partners, added that not all data eggs should be put into an AI basket. “Dealmakers only share information with people they trust, so AI won’t have the full scope of market info that a human with boots on the ground does,” she said.

Then, there are the privacy issues involved with AI. “These have led to restrictions on using certain AI applications on company platforms due to security concerns,” Brecher said.

Negotiation Support

When properly used, AI can help with negotiations. Loomer indicated that the technology can surface “prepared clause language based on past deals, helping teams enter discussions with better context and more consistency.”

Sigal agreed, pointing out that Chat GPT and Anthropic can coach stakeholders in areas like negotiation strategy, competitive and market gap analysis and new client pitches. “Reid Hoffman, founder of LinkedIn and investor-founder of a number of AI startups, calls this dynamic of AI an ‘Intelligence Amplifier’ and argues that every professional should be using AI deeply to realize this cognitive gain,” Sigal added.

However, AI results are only as effective as human interpretation. “Remember, AI is not a substitute for human judgment,” Loomer said. While AI can focus on trends and opportunities and help accelerate analysis, “it still takes experienced professionals to apply context and make sound leasing decisions,” Loomer pointed out. “The art of the possible still requires human reasoning.”

Current Issues, Future Potential

Additional AI challenges include the cost of implementation as well as integration with existing systems. Furthermore, “there’s always the potential for bias in AI algorithms,” Brecher said. He advised that retail tenants and landlords understand the need for data verification and human oversight when handling AI outputs. Also necessary is “an understanding of the legal and ethical implications of AI-driven decisions,” he added.

Furthermore, AI shouldn’t replace legwork or relationship-building. According to Skrbin: “AI can certainly be a valuable resource, especially as the technology advances. But it should never replace picking up the phone and talking to people.”

Even with the challenges related to artificial intelligence, the experts believe that the technology is here to stay and will continue to evolve and improve.

 “Predictive analytics will continue to advance, giving teams the ability to model expected sales performance and occupancy costs with greater precision, ultimately supporting stronger deal structuring, smarter tenant selection and more informed long-term portfolio planning,” Loomer said.

Brecher added that AI progress could consist of improved tracking, note-taking, follow-up tasks and more efficient email summarization. “These advancements have the potential to create more efficient data-driven and personalized leasing processes in the retail sector,” he said.

Still, the experts explained that artificial intelligence is a tool to assist rather than a replacement. Said Loomer: “By removing manual bottlenecks and surfacing smarter insights, AI gives leasing professionals more time and better information to apply their experience, intuition, and creativity to each deal.”

Digging into Drug and Dollar Store Occupancy Costs

Cost issues like the monthly rent, capital improvements and maintenance expenses are often at the forefront of tenant strategy when considering double or triple net-lease arrangements.

However, an additional expense—occupancy costs—are just as important. “Occupancy costs is a metric that helps quantify a tenant’s merchant health, especially relative to their operating performance, within their merchant category and over time,” according to Mark Sigal, CEO of Datex Property Solutions.

However, the occupancy costs metric is on the rise for retail pharmacies and dollar stores. Connect CRE asked experts why this data point is expanding and what potential solutions are to arrest the increase.

What Are Occupancy Costs?

Here’s what the occupancy costs metric is not: It doesn’t measure buildout or tenant improvement expenses.

“Tenant improvements and build-out costs are capital expense items and typically one-time outlays prior to opening,” explained Axiom Retail Advisors Broker Paul Bartlett. “They, along with other items like furniture, fixtures and equipment (FF&E), become the depreciation expense line in the profit and loss but aren’t considered occupancy costs.”

Here’s what occupancy costs measures: “It involves rent, landlord marketing contributions, common area maintenance, taxes and insurance,” Bartlett said.

Occupancy costs is a percentage that is calculated as follows:

Tenant Base Rent + Pro-Rata Share of NNN Expenses/Tenant Reported Sales

Going further, Sigal pointed out that the opportunity costs metric:

“Because occupancy costs examines the relationship between the real estate costs and the sales lift provided by a superior location, it’s a cleaner metric than retail sales per square foot data alone,” Sigal added.

Occupancy Costs on the Rise

As with most tenant expenses, a lower occupancy costs metric is desired. During the pandemic, drug and dollar stores were considered “essential businesses.” According to Datex’s numbers, their occupancy costs stood at 2.19% and 9.42%, respectively.

But that was then. Within the past five years:

Jason Maier, Northmarq’s Senior Vice President of Investment Sales, commented that, in his estimation, 4,000 square feet of every retail pharmacy location loses money. “The average store is roughly 14,000 square feet,” he said. “This means that at least 30% of the space they occupy is either not generating enough revenue per square foot, or even worse, is losing money.”

Additional Factors Driving the Uptick

There are multiple reasons why occupancy costs rocketed upward.

Increased Tenant Costs

“On existing stores, we can attribute lower levels of profitability and higher occupancy costs on repairs, maintenance, taxes and, in many states, rising insurance premiums,” Maier said. “For the most part, these tenants self-insure for a large portion of the coverages required under the lease.”

Additionally, a double or triple net lease means tenants have to spend more to keep current. “To remain competitive, tenants must refresh the stores, maintain the buildings, parking lots and HVAC systems,” Maier said. “All of this leads to higher occupancy costs in a high inflationary market.”

Meanwhile, the increased frequency and severity of natural disasters boost insurance expenses. “Rising replacement and repair costs are inflating the cost of claims,” Bartlett said. “Added to that are more stringent underwriting and risk aversion by insurers.”

Higher Rents

Richard Rizika, agency partner and co-founder of Beta Agency, said higher base rents have been common for many tenants, including retail pharmacies and dollar stores. “There is also a shift in lease terms that often favor landlords, given historically low vacancy rates,” he explained.

Furthermore, while landlords are negotiating better lease terms, they’re passing along shopping center operating expenses. “These can include marketing and technology spend, and they’re pushed into the reimbursable triple net bucket,” Sigal explained. This, coupled with an inflationary environment, has put upward pressure on occupancy costs.

Sales Decline

As rents expand, sales decline. According to Datex figures, drug store sales declined by 22.78%, while dollar store sales weren’t far behind, logging a sales decline of 19.18% since the pandemic.

Additionally, an increase in theft is impacting profitability. “In some markets, stores need to lock up their products, which negatively impacts the shopping experience and can lead to store closures,” Maier commented.

Sigal agreed with the assessment, adding that “there’s the argument that by failing to deliver ‘differentiated retail’ experiences, both categories opened the door for more dollars to shift to Amazon and additional Merchant Categories,” Sigal observed.

Then there is increased competition.

“During the pandemic, folks switched to online, and while shoppers have returned to most brick-and-mortar businesses in general, many of those who switched to online pharmacies haven’t returned to brick and mortar,” commented Stephanie Skrbin, a retail broker with Axiom Real Estate Advisors. “Consumers are finding that online purchases tend to be less expensive and more convenient,” she added.

“Today’s shoppers have more options for purchasing school supplies, office supplies and greeting cards, including online and delivery,” Maier added. “The delineation between pharmacy revenue and convenience revenue has become skewed.

The Results?

Higher occupancy costs are driving drug and dollar stores to act by closing down unproductive locations. “Cost pressures, combined with falling foot traffic and competition from online and discount retailers, make it difficult to justify continuing operations in locations with increasing occupancy costs,” Rizika pointed out.

At the same time, tenants are renegotiating leases and downsizing their footprints. “Some are also focused on growing online and operations to reduce reliance on physical stores,” Rizika said.

Those stores that haven’t closed down have been taking other steps. Said Sigal: “Many operators are reducing in-store staffing, which has resulted in poorer merchandising and a rise in in-store theft, which has led to more lockdown of inventory, further diminishing the retail experience in these categories.” Unfortunately, this path means consumers might flock to competitors. “Merchants that fail to deliver a worthwhile consumer experience are doomed to fail,” Sigal commented.

What’s the Solution?

The experts explained that higher occupancy costs shouldn’t be a retail death knell.

Bartlett suggested that tenant representatives should educate tenants about the current cost environment and ways to lower expenses. Meanwhile, “landlords and landlord reps should be prepared to backfill Rite-Aids, Walgreens and CVS stores now, rather than wait and see what happens,” he advised.

Co-tenancy could also help reduce opportunity costs. “A key benefit of multi-tenant retail is the cross-leverage of different tenants at a shopping center, especially anchor tenants,” Sigal observed.

Then there is technology. “Savings can be found in automation like self-checkout-drones and robots in inventory management,” Bartlett said. Utility expenses could also be reduced by improving fixtures and equipment and adding solar systems, he added.

In all, dollar and drug stores are in a period of transition, much like other retail sectors. Maier noted that during the next five to seven years, as lease deals come up for renewal, there will likely be more store closures and consolidation. This could represent opportunities for investors and owners.

“Unfortunately, there will also be many locations where the current occupancy costs are too high to support the valuation and will be sold at steep discounts,” Maier added.

Beauty, Grocery and Fast Food Space: Demand Versus Supply

Once upon a time, grocery, quick service restaurants (QSR) and beauty retailers were considered on the edge of being obsolete. Many things were available online, including lipstick, eyeshadow and perfume. Furthermore, delivery services became available to bring cooked and uncooked food to folks at home.

Then, a funny thing happened after the COVID-19 shutdowns. Consumers wanted a dollop of experience with their retail experience. Bricks-and-mortar became popular once again.

“We are seeing an increased focus on experiential retail that offers personalized services,” according to Richard Rizika, partner and co-founder of Beta Agency. “Retailers are placing more emphasis on stores to create experiences that are more challenging to provide online.”

However, Rizika and other retail experts tell Connect CRE that while demand has been robust, supply not so much.

Does Size Matter?

One question that comes to mind is what the grocery, beauty and QSR tenants are looking for in their space. According to Stephanie Skrbin, it depends.

“A coffee tenant like Dutch Brothers does more of a kiosk location and only needs about 1,000 to 1,500 square feet,” said Skirbin, who is a retail broker with Axiom Retail Advisors. Meanwhile, the QSRs look for additional space, which can be anywhere from 2,000 square feet to 3,200 square feet.

Datex Property Solutions CEO Mark Sigal added that fast-food restaurants also like drive-throughs, “but in many markets, this is a scarce option and subject to zoning and usage restrictions.”

Meanwhile, some beauty product retailers—think Ulta Beauty—prefer larger formats up to 12,500 square feet, while others—think Sally Beauty—prefer smaller footprints of 3,000 square feet or less, Sigal said.

Then there are the grocers. Sigal pointed out that grocery chains cover a range of square feet, with Trader Joe’s seeking an average of 12,500 square feet, Sprouts and Whole Foods looking for 25,000 to 30,000 square feet and traditional markets interested in 75,000 square feet.

Chris Premac added that discount grocers are targeting former large retail pharmacy spaces, like former Rite-Aid locations. “They can take advantage of the size and prime corner locations,” observed Premac, who is Coreland Companies’ Vice President.

Additionally, the downsizing and departure of big-box retailers have provided interesting opportunities for grocers. “While supermarkets still prefer to build their prototypical footprints, with all the recent vacancies from big-box stores, there have been a lot of opportunities for grocers to take over these larger spaces,” said Sean Unsell, RDC Associate Principal. “It’s quicker and more sustainable to renovate an existing building than to build from the ground up.”

However, retail isn’t just about size. Keisha Virtue, JLL Retail Research Manager, explained that fast-food retailers focus on stand-alone locales with the above-mentioned drive-through lanes. Meanwhile, grocers look for space in centers that are close to high-density neighborhoods. “Beauty retailers perhaps have the most flexibility,” Virtue observed. “They typically take space in malls, community and neighborhood centers.”

In some cases, beauty retailers might end up with shop-in-shop arrangement with another retailer. Ulta Beauty taking space in a Target store and Sephora’s setting up shop in a Kohl’s department store are a couple of examples.

Can They Find The Space?

There’s a large gap between what grocery, beauty and fast-food retailers want in a space and their ability to get it. Similar to the entire retail sector, quality square footage has been difficult to find.

“There is a scarcity of available space, a scarcity of new development,” Sigal observed. “Furthermore, only a subset of the available spaces will fit the footprint and market needs of a given retailer in these categories.”

But what about the bankruptcies taking place in retail? Virtue acknowledged that store closures could bring more than 150 million square feet of retail space to the market. However, “there will not be anywhere near perfect alignment of vacated space and demand,” she said.

For example, on the “eating out” side of retail, casual dining brands have gone out of business in recent years. Unfortunately, “these building sizes are often not convertible for a fast-food brand,” according to Mike Philbin, Northmarq senior vice president and co-founder of National Restaurant Group.

On the other hand, if the QSR developer has enough capital to work with, a larger casual dining restaurant could be demolished, replaced by a fast-food restaurant. “The advantage of the larger lot size is the ability for a larger drive-through stack or even multiple drive-through lanes,” Philbin said.

The Takeaway

The experts agreed that retail demand and supply depend on consumer demand. This isn’t really news, but it does add complexity to the retail decision-making process when dealing with size and location. “It’s not a one-size-fits-all scenario,” Unsell commented. “Brands need to know their customer base, and they need to stay competitive in the market they’re in.”

Hence, it’s important to keep an eye on consumer behavior. “In times of great uncertainty, consumers tend to stick to necessities and value-oriented retailers,” Virtue commented. “Hence the demand for less expensive restaurants and the emphasis on grocery.” Meanwhile, the demand for beauty has outgrown in other areas, including social media influencers.

In short, “the fast-food, grocery and beauty sectors have demonstrated resilience and adaptability in response to the pandemic’s challenges,” Rizika said. “By evolving with consumer preferences and strategically remerchandising stores, these retail sectors continue to grow.”

The Story Behind Fast Food, Grocery and Beauty Demand

Retail real estate is a study of opposites. At one end, there is a lack of space and very low vacancies. At the other end, there are bankruptcy cases and more bankruptcy cases.

However, retail encompasses many uses, products, services and space requirements. Metrics differ depending on the sector.

For example, according to Mark Sigal, Datex Property Solutions CEO, the strongest merchant categories in retail based on sales growth since the pandemic are:

Sigal and other retail experts shared their insights with Connect CRE, explaining the situation behind these three retail areas.

COVID, Grocers and Fast Food

But first, a little history.

In the years before 2020, e-commerce was starting to come into its own. Then the pandemic struck. While the subsequent lockdown imposed hardship on much of the retail sector, quick-service restaurants (QSRs) and grocery stores performed well.

“During the onset of the pandemic, grocery stores were deemed essential businesses, and we experienced panic buying products like meat and toilet paper,” said Sean Unsell, associate principal with RDC. People in quarantine were also more interested in buying food at the “deemed essential” grocery stores to cook at home.

At the same time, fast-food restaurants operated their drive-throughs as normal. “People wanted to get out of the house but were cautious about exposing themselves to COVID,” said Stephanie Skrbin, a retail broker with Axiom Retail Advisors.

Still, QSRs and grocers had to adapt to the changing situation. “Chipotle, Panera Bread, Starbucks and others all pivoted and primarily focused on drive-through locations,” Skribin commented. Added Coreland Companies’ Vice President Chris Premac: “Both grocers and QSRs had to adapt quickly and developed new delivery models and mobile pickups.”

According to Sigal, COVID ended up being a resurgence in grocery stores. “Many forget that when Amazon announced their plans to acquire Whole Foods in 2017, the market caps of the major grocery chains cratered overnight,” Sigal said. “The category was written off by many as the latest retail segment to get Amazon’d.”

However, JLL Retail Research Manager Keisha Virtue painted a somewhat different picture. In 2019, grocery chains experienced robust year-over-year sales growth. During 2020, pandemic quarantines put pressure on QSR growth. However, “as consumers prepared more food at home, grocery sales jumped 9.4% above 2019,” Virtue explained.

She added that fast food and beauty sales increased by 18.8% and 22.0% respectively in 2021.

And, Speaking of Beauty . . .

The beauty sector—cosmetics, spas, hair salons—faced numerous challenges during the pandemic. Beauty stores weren’t considered “essential businesses” at the time. In addition, “there was reduced demand for cosmetics due to remote work and social distancing,” explained Richard Rizika, partner and co-founder of Beta Agency.

Meanwhile, salons and spas were ordered to shut down to stop the coronavirus spread. “Some businesses risked fines for staying open and taking care of customers in the short term,” Unsell said. As a result, consumers took self-care into their own hands. “They ordered products online and learned techniques from online tutorials,” he said.

Today’s Situation

JLL’s Virtue explained that demand for the three categories remains healthy, even as yearly sales gains are shifting the further away we move from the pandemic. Both grocery corporations and QSR companies have announced massive expansions, while health and beauty operators plan to open more than 300 new stores.

“During the fourth quarter of 2024, demand in these sectors reflects a blend of pre-pandemic consumer demand and a shift in consumer preferences and economic concerns,” Rizika noted. Along those lines, demand for affordability combined with busier lifestyles are driving consumers to retailers that can offer value and convenience.

Northmarq Senior Vice President and Co-Founder of the National Restaurant Group Mike Philbin pointed out that the intrinsic value of QSR keeps demand high. “They’re able to survive on smaller lots with adaptable footprints,” he said. “If a tenant does vacate, hundreds of replacement tenants are available because of advantageous locations with drive-through access.”

Furthermore, the casual dining appetite has cooled as chains struggle with labor costs, paper and food. “The cost to build has made it all but impossible to develop new restaurants, rather than growing through acquisitions of vacant restaurants,” Philbin observed.

While grocery chains are performing well (despite inflation and supply chain shortages), they’re also facing a fragmented demographic, with discount options (Aldi) and unique offerings (Trader Joe’s). “In some cases, people want high-quality products that offer healthy alternatives to fast food,” RDC’s Unsell observed. “Single-ingredient whole foods have also gained popularity on social media as more people cook at home.”

Meanwhile, hair salons and spas are operating. Furthermore, beauty products benefit from social media influencers and a general desire for self-care and well-being. “There’s been a resurgence in demand, as consumers return to social activities and seek self-care merchandise,” said Rizika with the Beta Agency.

Unlike grocery stores and QSRs, beauty retailers tend to face higher competition from e-commerce merchants. Datex’s Sigal explained that such supplies need to “thread the needle” between commodities that can be purchased online versus lifestyle delivery. Still, “the outcome of looking one’s best and feeling beautiful is worth that something that only brick and mortar can provide,” he said.

Restaurant Sector Trends

Covid Impacted Restaurant Industry Forever; Innovation Bridges to a “Great Reset”

The “Great Reset" is underway now that the U.S. is shifting away from a period of economic uncertainty that was caused by the health pandemic in 2020. The restaurant industry was as hard hit as any over the past year, yet those who survived have found ways to thrive through innovation. Their strategies and proactive initiatives focused on new ways to navigate the turmoil even as the market appears to be moving toward brighter skies and more clarity. 

The myriad challenges restaurants faced included learning how to adopt and follow the government guidelines that were in a state of flux throughout the year. The rules impacted how they served customers as well as what they could expect from employees. Now, restaurants are dealing with a shortage of labor and rising construction costs that are soaring upwards of 20-40%. The industry is also working to find solutions for leases that were signed before the pandemic hit and now must be worked through in a vastly different environment.

X Team Retail Advisor’s Nelson Wheeler, of member firm Strategic Retail Advisors (SRA) in Newport Beach, Calif., said, “the restaurant industry was horribly impacted by the pandemic. Overall, the retail and theater sectors were hurt the most, but the restaurant sector was a close third.”

A key reason for the pain was the fact that independent restaurant operators typically only have 17 days of available cash on hand. Wheeler notes independent retailers tend to have 35-40 days of cash flow. Yet, both of those segments likely required landlord participation to sustain them through the pandemic, whether that be rent relief or other considerations, he points out. That’s not surprising given the fact that the industry tends to operate on a lower cash reserve basis. 

Advancing Innovation

Among the innovations that advanced over the past year encompassed introducing or enhancing outdoor spaces so customers could spread out and restaurants could serve people, since many dining rooms were closed or operating at limited capacities.

A paramount strategy was to focus on outdoor patios when permitted. Cities worked with restaurants to find solutions to maximize revenue opportunities because they recognized the importance of seeing them survive. Cities and government agencies became more flexible with restaurants during 2020 to facilitate outdoor patio service. Not only was it the right thing to do to ensure owners sustained their livelihoods, employees had income and to keep sales tax revenue flowing to cities. 

X Team Retail Advisors’ Julie Solomon of the Trilogy Group in Atlanta notes a common refrain heard from restaurant CEOs is the fact that they can’t find labor and that is likely to result in more restaurants going under.

“Creative approaches are required to sustain customers,” Solomon said. “Restaurants added take-out options and beyond the soaring construction costs, they are also facing supply issues for such items as chicken, pickles and even cups.”

The ways restauranteurs changed to try to survive may have been anchored on outdoor patio service in 2020, but they also turned to online ordering as another important component. Customers placed an order then picked up their food at the store or utilized an online food delivery service such as DoorDash or Uber.

Best Practices

The strategies employed over the past year that were met with better results tended to include drive-thru options. The chains that offered long drive-thru queues helped them perform better, too. “It is not surprising that some restaurants experienced a 20-25% sales increase during the pandemic because they adopted improved online ordering and pick-up options,” said SRA’s Wheeler. Chipotle is an example of a restaurant chain that performed well during the pandemic, largely as a result of it rolling out an exclusive drive-thru lane for online ordering and pick-up customers.

But Wheeler also notes one of the most difficult aspects for restaurants to navigate this past year was the inconsistency of regulations. “One city might have a standard for occupancy and the state or county adopted a different standard, which wreaked havoc on restaurant operations,” he said.

Another challenge was understanding and anticipating when a restaurant could be open and at what capacity during the pandemic. For example, some state regulations were set to allow restaurants to open up on a certain date but then a day before the decision would be made to remain closed because it wasn’t safe. That meant restaurant opening plans were delayed, which often presented significant challenges to ordering food as well as retaining employees, who required more job stability than was often found in the restaurant sector in 2020.

Wheeler says, one of the big impediments now for restaurants is getting employees to return to work, rather than relying on unemployment benefits or stimulus money. In some cases, they can make more by staying home than returning to work. That is not just impacting the restaurant industry, other industries are suffering such as delivery services like Uber, he notes.

Moratoriums, Regulations & Relief

The main considerations driving the restaurant sector today pertain to navigating the fallout from decisions made over the past year. That starts with eviction legislation and unraveling how the moratoriums and other government actions will be interpreted. Initial drafts of legislation included provisions to defer rent rather than abatement. 

Retail landlords are facing significant issues with tenants. SRA’s Wheeler notes he heard of one regional mall owner that was forced to renegotiate 6,000 leases. While the requests are coming from the tenant side, savvy landlords closely monitored tenant performance and proactively took action when they saw the impending storm. “Good landlords knew how tenants were doing ahead of time and likely understood how deep a tenants’ resources were to survive,” indicates Wheeler. But he also notes the experiences were “all over the map” in terms of how a landlord or tenant dealt with the impact of the pandemic. Some landlords took hardline approaches, while others worked with tenants to try to find solutions, he notes.

Questions that needed to be answered included determining what happens when the entrances to a mall were closed due to federal regulations? Would rent interruption insurance kick-in or would insurers decline? In most cases Wheeler says those clauses didn’t apply though he notes many sophisticated leases have pandemic language. He notes, “In my experience, landlords for the most part, offered two to three months of abated rent for a market renewal, especially if they liked and wanted to retain the tenant.”

Growth Prospects

The retail industry had been softening and feeling the effects of internet sales even before the pandemic hit, especially in the soft goods category. But that wasn’t the case for the grocery sector. Grocery sales in Southern California were up between 12.5% and 25% or even 30% in some cases. The restaurant sector realized new growth in the takeout and delivery business, which is up roughly 55% compared to pre-pandemic levels.

Wheeler points out that some of the gains were given back since restaurants had to make investments to meet protocols such as adding Plexiglas dividers, or stepping up efforts to wash, clean and sanitize areas where customers ate. Yet the pandemic has taught consumers different ways to get the restaurant food they desire. They now know ordering online and picking up food at a store can be a viable alternative to dine-in meals. Just like they found out it is easy to stream movies in the comfort of their home, the pandemic and internet intrusion have combined to change the retail and restaurant industry permanently,” said Wheeler. He points to the shift to more ready-to-eat food at grocery stores as another way consumers are adopting to a new world.

SRA’s Wheeler predicts the market will see more shopping center parking lots dedicated to short-term parking spots or pick up only parking areas. He said, “The Chipotle model will become even more prevalent going forward. Drive-thru restaurants are here to stay and the longer the queue the better.” He expects to see drive-thru’s shift from a typical eight-car stack in the past to now operators seek the highest volume possible. That means expanding drive-thru’s to include 13 or more car stacks or double lane drive-thru’s.

To accommodate that growth, cities will need to adjust zoning and perspectives. Solomon points out that in the Atlanta market, it can be “challenging for restaurants to add drive-thru and pick up areas because the city tends to frown on allowing more drive-thru stacking and considers these now vital restaurant elements eyesore issues.”

The past year has taught restaurants the value of welcoming change or face the prospect of becoming irrelevant or shutting down. As the “Great Reset" continues to unfold, look for more successful restaurant operators to introduce innovative measures in an effort to capture market share and increase sales.

X Team January Article Retail Market Overview/Outlook: Year-End 2020 & Outlook for 2021

Covid Acts as Accelerant in Retail Sector Transformation

The health pandemic that swept across the globe in 2020 produced a host of challenges, yet not all outcomes were negative. There were a number of bright spots and opportunities for growth across the retail sector that emerged amidst the culling of some of the weakest players. The pandemic actually acted as an accelerant to continued transformation of the retail industry, but it also clearly pointed to the need for retailers to execute on multiple channels.

While the damage brought widespread disruption to people’s lives and economies in virtually every corner of the U.S., the impact of government-ordered COVID-19 lockdowns is continuing to reshape a sector that was already undergoing tremendous change.

Beyond the initial shock of the arrival of a pandemic, an underlying fact emerges: the strongest, fittest and most prepared companies adapt to the challenges and learn how to thrive, while weaker ones become less relevant and fade away. “It is painfully clear that one of the lessons 2020 taught us is that Covid truly revealed who was weak in the retail sector and conversely it proved who was resilient,” says Velocity Retail Group's Dave Cheatham, who serves as President of X Team Retail Advisors, a retail real estate organization comprised of more than 350 affiliate specialists in 40 markets across the U.S.

“We experienced significant growth in the essential retail, food and home improvement categories in 2020,” notes Cheatham. “Clearly, consumers shifted where they spent their money in 2020, and that played out across all retail categories. Dollars were funneled to some retailers but not others.”

An example of that is the significant decrease in travel to theme parks and hotel room bookings in an attempt to avoid large crowds. Instead, vacation plans may have included travel in a more siloed approach or one that encompassed the outdoors. That helped drive the success of retailers that sold RV’s, camping gear, golf equipment, quads or bicycles.

Disposable income was also heavily shifted to the home front. Those working or learning remotely drove increases in the home improvement sector as people completed remodel projects at their house, added landscaping, bought new furniture, or discovered new tech gadgets to enhance their work efficiency or to help a child keep pace with their education. Simply by shifting where they spent time each day introduced growth opportunities for some retailers, while reduced others.

The work-from-home shift also brought out an interesting trend in apparel. “Since people stopped going into the office on a daily basis, they realized that they didn’t have to follow an office dress code, and could be more casual,” says, Cheatham, who points out that spending shifted away from buying more formal office clothing to buying more busines casual wear like dressy pants that look like wool but are actually tech wear. He notes, the “other shoe dropping” due to this shift was the fuel added to the athleisure wear category that features clothes that look good for work but are more comfortable and casual.

Business Approaches

Another key learning in 2020 was the fact that the retail industry must adapt to a new way of conducting business, both from a physical aspect as well as technological one. Specifically, as a result indoor dining room closures, restaurants needed more areas outside to serve customers. That means adding drive-thru’s or curbside pick-up areas. Fast food restaurants like McDonald’s and even many Walgreens sought to add double or triple drive-thru’s.

The onward march of the tech convergence and COVID-19 health and safety measures will mean restaurants and stores will introduce more touchscreens, and apps from which customers can order. Cheatham says, “Covid threw gas on technology and it was already a trend set in motion by the fact Millennials shop differently using apps and digital tools. These are changes we expect will continue advancing in the future.”

Future Strategies

The long-term impact of all the changes is the fact that many of the short-term solutions and strategies retailers deployed during challenging times are becoming permanent fixtures because consumers liked them, found value in the new approaches and it helped retailers create a more efficient sales process. Some of those emergency solutions included use of QR codes and menu photos instead of menus that need to be printed each day at restaurants.

Physical aspects of a store or restaurant are also be explored to find new ways to serve customers. Some of those could involve updating design and zoning codes in cities to accommodate more drive-thru’s to meet demand for outdoor service. In some cases that will mean planning for much longer stacking lanes to accommodate increased drive-thru business, observes Cheatham.

While Covid acted as driver to continued adjustments in the retail sector, retailers must re-think their overall strategies, as well. A case in point, notes Cheatham, is Starbucks, which shifted to pick-up stores before Covid hit. The Seattle-based coffee giant announced it was slowing the addition of traditional third-space stores and instead favored a new, smaller pick-up store concept.

Integrated Customer Experiences

The Covid pandemic can’t be credited for ushering in all new approaches to retail. In fact, for some time retailers have been under pressure to meet consumers demands in a host of ways in what is commonly called Omnichannel retail. This integrated customer experience aims to deliver goods and services at every conceivable moment, in any fashion or at whatever place someone wants. Retailers now must deliver in four ways – a great in-store shopping experience, home delivery for online shopping, buy online pick up in store (BOPIS), and drive-thru’s where practical.

“Amazon taught us the art online shopping for home delivery, and Covid taught us convenience of pick-up at stores in the buy online pick up in store (BOPIS) or pick up in store parking lot model,” says Cheatham. “Grocery stores now must open their arms to young moms who want to pull up and have their groceries loaded in car, or seniors to shop at a special time and have items loaded into their car.”

One of the prime examples today of a fast-food retailer who understands the requirements is Chick-fil-A. It reinvented the customer experience via drive-thru’s, incorporating practices that were well received by consumers such as replacing windows with sliding doors and eventually the adoption of outdoor ordering. “They are now a master of the process because they understood it wasn’t about taking orders faster. They recognized it was about creating more touch points to serve customers since they were restricted from having dining rooms open,” says Cheatham.

Navigating Choppy Waters: Is Retail Dying?

The strategies retail tenants can deploy to navigate choppy waters depends largely upon the health of the business heading into the pandemic. For instance, those who had serious terminal illnesses related to their core business model, didn’t survive, as evidenced by such examples as Pier One or Sears. And for those that are sick or weaker and lack the financial wherewithal to see them through a long-term disruption, they are likely headed for a painful demise.

In 2020 some sectors of the retail industry performed well such as grocery-anchored, or discount retailers like Costco. The retailers expected to be in demand down the road include those that best meet customers’ needs when and where it is demanded.

“The real answer to the challenge retailers face today is helping them develop selling channels and different processes during this time period,” says Cheatham. Those with the expertise to understand what, how and where to meet customer demand, whether that be adding drive-thru’s, pick up spots or delivery options, as well as the knowledge of the best practices to retain from COVID-19 times, will be those who succeed in the future.

The ability to operate successfully in multiple channels will dictate the future winners. Amazon already succeeded online and in delivery, so now they are working to expand their brick-and-mortar channel. Walmart is acutely focused on building an online delivery service because they already operate a store near customers.

“The false narrative is that brick and mortar is going away,” notes Cheatham. “Yes, we will see some retailers disappear. But ultimately, the greatest need is the ability to operate in multiple sales channels today. That’s where we expect to see the best examples of growth and expansion in the retail sector in the future.”

Opportunities and Challenges

Leaders such as Costco or Amazon will continue to find ways to remain ahead of the competition, whether that means coming up with a new way to sell something or offering something new to sell. Amazon now sells health insurance and pharmacy orders can be delivered directly to your door. Malls now are focused on adding more entertainment options, restaurants, essential retailers, and even medical and office users.

The biggest challenges Cheatham sees ahead in 2021 for retailers, retail property owners or retail investors include right-sizing stores to the proper footprint, adopting a less homogenized format, working to be the two or three dominant players in each category and perfecting an omnichannel strategy. The key, he believes, is “trimming the fat” and figuring out where your operation is the weakest, so you don’t “get weeded out.” In today’s omnichannel environment, that may mean improving a retailers’ in-store experience or addressing an online shopping bottleneck or adding a drive-thru.

“The fundamental precept of retail is to deliver a customer what they want, when they want it and at a good price. Retailers who are able to accomplish that the most efficiently across the four channels will survive,” notes Cheatham. “Change creates opportunities, but only for the fittest who seek to fill the void and don’t get caught up in the chaos around them.”

The Crisis-Proof Shopping Center

While an anxious national media reports on the retail apocalypse, spiking vacancy rates and big-name bankruptcies, perhaps it’s time for cooler heads to shift their focus squarely to the winners in the present disruption. Doom and gloom sells newspapers, but the list of prospering brands is long, and growing, as consumers adapt their shopping habits both to e-commerce revolution, and the current COVID crisis. Big wins by clever and opportunistic brands is the most under-reported story in retail today.

Indeed, the current state of affairs in the economy has created a new set of darlings in retail, as select retail and dining brands have demonstrated themselves to be both essential and internet-resistant. Expect that savvy commercial owners will be re-positioning their tenant mixes going forward to maximize the stability and success of their assets around these winning brands.

Grocery stores have clearly re-established themselves as the most essential and implacable of anchor tenants, posting soaring sales and record profits as consumers pare back travel and dine at home. Look for a broader and deeper array of grocery store offerings, in smaller sizes and unconventional locations to play out in retail in the 2020’s.

The classic grocery store co-anchor, the pharmacy, has demonstrated itself to be equally internet resistant, while the elevated safety and security that their frequent drive thrus offer have made pharmacies an easy winner in the COVID era. Prescription and over the counter medicines, as well as paper products and cleaning products all represent regular visits to the local pharmacy.

Hardware stores, home improvement big boxes and large format general merchandisers have all qualified as essential, while also benefitting from consumers staying at home, working from home, and consequently working on an array of home improvements, home office set ups, etc.

Drive-thru restaurants, coffee shops and QSRs have proven themselves able to generate as much, or in some cases even more revenues, than they were achieving in the pre-COVID paradigm. As traditional dine-in establishments have closed or reduced capacity with outdoor dining only, drive thrus have filled the void with hungry consumers and kept their cash registers ringing.

Likewise, brands that have adopted mobile ordering and smartphone apps, or marshalled proximate parking space for the mobile customers and delivery drivers have been able to differentiate themselves and align with the needs of consumers in the changing market environment. Dunkin’, Sweetgreen, Chipotle and Chick-fil-A are among the long and growing list of brands that have nimbly met changing consumer habits.

Other winners in retail? Garden centers and outdoor furniture retailers have benefitted as consumers spend money on their homes, instead of flying to Hawaii or Europe this summer. With less flying comes more driving, and gas stations and their C-stores and car washes have kept on humming. Add to these other crisis-resistant concepts including banks and credit unions, urgent care clinics and collision repair, and a picture starts to form on how tomorrow’s landlords will curate the internet-resistant, crisis-resistant tenant mix.

Dramatic and fast changing market conditions are quickly serving to sort out the new winners in retail. Look for savvy REITs, investors and owners to re-position their assets around these new winners to collect a bigger slice of tomorrow’s commercial rent stream.