Landlords, users and brokers throughout the Houston retail market are re-tooling their properties and operating practices to stay afloat amid the COVID-19 pandemic, introducing ways of doing business that may persist long after the public health crisis has subsided.
A panel comprising retail leasing, development and investment sales professionals in Houston convened on Tuesday, Oct. 6 to discuss specific ideas and methodologies that have been put into practice as COVID-19 rocks the world of brick-and-mortar retail. Shopping Center Business and Texas Real Estate Business, two magazines published by Atlanta-based France Media Inc., hosted the event.
Prior to the pandemic, social events that activated open public spaces helped landlords to promote their tenants’ businesses and to bring traffic to their centers. With public health protocols precluding many of these events from happening, owners and tenants alike have had to think outside the box.
New Practices Sustain Business
No retail category has seen this trend displayed more visibly than the restaurant sector. Emily Durham, partner and director of hospitality services at Waterman Steele Real Estate Advisors and a longtime tenant rep specialist for restaurant owners, identified several new practices that have helped restaurants stay above water.
“The sit-down and fine dining restaurants have had the biggest challenges, but executive orders that have allowed selling alcohol to-go and using parking lots for patio seating have been critical for some restaurants,” she said. “Most operators are focused on figuring out how to package their product to-go and make it accessible that way.”
Texas law currently allows restaurants to operate at 75 percent of their listed capacities. Restaurants with bars are subject to this condition, provided that they derive at least 51 percent of their total sales from food. Bars without commercial kitchens can still operate by selling food that is prepared offsite or by partnering with food trucks.
Panelist Lacee Jacobs, vice president of strategic leasing and advisory services for developer Midway, noted that some restaurant users in her firm’s mixed-use projects don’t have their own parking lots. This has forced these users to work with their landlord to be able to provide the kind of services diners prefer amid a public health crisis.
“At this point, Yard House [at our CityCentre development] has patio seating on four different blocks of the project,” said Jacobs. “We have to get real creative on all fronts to find curbside pickup spots for these restaurants so they can do grab-and-go business and offer outdoor seating. But because we aren’t doing marketing and activation events on a regular basis, we are able to find patio seating in areas we hadn’t utilized before.”
David Luther, executive vice president of investment sales at development and brokerage firm NewQuest Properties, spoke to some of the features of centers that landlords are looking at to accommodate these new modes of operation.
“We have a variety of different pad uses at our centers, and that’s where the creativity comes into play in terms of changing our design around and utilizing our drive-thrus, green space and parking lots,” he said.
Luther referenced NewQuest’s new grocery-anchored project at Interstate 10 and Peterson Road, which has numerous available pad sites, as an example of such a center where these spaces will be creatively utilized.
Older Spaces See More Demand
One trend that has emerged from the various paradigm shifts in restaurant operation is elevated demand for second-generation spaces. While some retailers and restaurants that are expanding and looking for new sites seek to capitalize on rising vacancy by demanding lower rates, others are prioritizing the search for turnkey spaces that offer flexibility for pop-up or ancillary purposes.
“If you’re in the business of launching a restaurant or a fitness concept, and you’ve got to make lemonade out of lemons, the way to do it isn’t to beat landlords on rates, but to go find great deals for second-generation spaces,” said moderator Jake Donaldson, managing partner at Method Architecture.
“Given the demand for second-generation space, we’ve really begun to focus on short-term temporary leasing,” added panelist Mark Vondrak, vice president of leasing at the Houston office of Illinois-based shopping center REIT InvenTrust Properties. “A lot of tenants are reluctant to sign five-year leases, and because landlords aren’t putting in big tenant improvement dollars, this gives them the opportunity to take a ‘test drive.’ If it works out, we sign them to a longer-term lease afterwards; if not, we let them go.”
For those types of deals, rents are calculated on a case-by-case basis depending on the user’s sales and other factors, Vondrak added.
Durham pointed out that some food and beverage tenants have taken to using “ghost kitchens” or commissary-like kitchens. These are spaces that are not retail-facing businesses but which are fully licensed commercial kitchens. Such spaces are typically used just for cooking and delivering, perhaps by caterers or bakers working offsite.
Jacobs noted that ghost kitchens are ideal for restaurants whose kitchens are not currently set up to accommodate takeout and curbside pickup, but which have pivoted to those services and want to continue offering them. Rents for these spaces are typically affordable due to their locations that lack frontage or visibility, making them ideal for restaurants looking to do more third-party delivery services and/or catering.
Hard Truth
Despite providing detailed examples of how restaurants are pivoting, adapting and working to emerge as survivors of the fittest, the panel made no bones about the fact that in times of real economic hardship, there are always winners and losers.
National retailers in the grocery, home improvement and discount soft goods sectors currently look like the main class of winners, noted panelist Jonathan Hicks, managing principal at SRS Real Estate Partners. These users may be taking advantage of soft rental rates and rising vacancy to improve their real estate, he said.
“The Walmarts, Targets, Krogers and Lowe’s of the world are printing money right now,” said Hicks. “There are some really good rent deals out there, and some retailers are going to take advantage by upgrading their real estate. They may seek more visibility; they may go from inline to an endcap. It depends on what makes them tick. But if you’re a retailer whose landlord isn’t going to play ball with you, now’s the time to find one who will.”
To watch the full complimentary webinar and hear more analysis on current and future trends to monitor in the Houston retail market, click here.
— Taylor Williams