From a small northwestern observatory…

Now I read, today, that Tailored Brands (TLRD) is meeting with bankruptcy consultants. If you’re not familiar with them, you may be more familiar with the stores they run: Men’s Wearhouse, Jos. A. Banks, and K&G. They’ve been strong players in the clothing biz for quite a few years, and while bankruptcy doesn’t necessarily mean going out of biz entirely, at the least it will mean some painful restructuring of complex webs of contracts, debt, and banking relationships. My interest is in the real estate side.

Real estate usage changes over time. We think of these changes as slow, but in fact they can come fast and furious. For example, the 1920’s was a decade of explosive growth in the “built environment”, and many of the downtown city street facades date to this period. The depression put a halt to the 20’s growth, only to see suburbs explode after WW-2. The baby boom gave rise to shopping centers, neighborhoods anchored by elementary schools, and commuting on superhighways. Even though the “great recession” of 2009-10 was centered on real estate imploding, we really didn’t see a seminal change in the way people live and work. Home ownership went from about 69% to it’s historic, post-WW-2 level of about 64%. Shopping malls hung on for dear life, and the continued construction of big-boxes was unabated. If anything, real estate experts sat around wondering when, if ever, the Amazon phenomenon would catch up with brick-and-mortar stores. To an extent, the continued prosperity after 2010 put pause to any major changes.

Now, I’ll drop the other shoe. This year marks the fiftieth anniversary of Alvin Toffler’s Future Shock. Yeah. I know. If there is one resounding theme in Toffler’s work, it is that in the future, change will come at an increasingly fast pace. Hence, it should come as no surprise that the first six months of 2020 seem like a decade. So, with that in mind, a few observations…

First, the resurgence of downtowns in prosperous cities (Seattle comes to mind) assumed that people were willing to suffer with small residences (usually apartments or condos) in trade for a vibrant social scene on the streets and in restaurants, bars, entertainment facilities, and such. Last week, the AMC Theater chain announced that they probably could not survive the Corona Virus Pandemic. A significant number of people — not everyone, but a lot — will opt out of the social scene. I’m not suggesting we will become a nation or world of hermits, but three things are coming together to hit the reset button on this utilization model: a long time for people to “catch up” on discretionary spending after this nasty recession, a heightened sense of the risk of lending or providing credit to restaurants and bars, and an overall reluctance to rub elbows, at least by some folks.

Second, it’s not just retail, but it’s all the other stuff that supports brick-and-mortar retail. Every time you buy a pair of socks at Jos. A. Banks (and yes, they have very nice socks), someone had to deliver those from a warehouse. Now, of course, you are at least marginally likely to buy those socks from Amazon, and yes, they have warehouses, too. However, Amazon and their network of small businesses tend to be a bit more efficient than most brick-and-mortar retailers, and as such need less space and fewer people. Further, until the aftermath of this recession is over, it’s a simple fact that people will buy fewer socks, and fewer Ford F-150s, and fewer Weber gas grills. Not withstanding my previous jokes about Captain Morgan sales, reports have it that distilled spirit sales in America have been hit so badly as to endanger many famous liquor brands. Add to this the fact that “necessities” (e.g. — groceries, health care) are skyrocketing in cost, and you can quickly see that merchants focused on discretionary goods may have problems.

Owner occupied housing is nearly at a standstill. Real estate “listing” agents are having to be terrifically clever to sell homes. A lot of sales come from transfers, and there is little of that happening this summer. People are hunkering down, taking down the for-sale signs, and trying to keep their powder dry. By the same token, home builders, who have never fully recovered from the past recession (a story for another day) are now sitting on inventory they can’t sell. It’s not nearly as bad as 2008/9, but it’s not good, either.

A lot of construction happens by governments, both for new buildings and for public infrastructure. You can imagine that the brakes have been hit solidly on that. Transportation projects, which are often dependent on fuel or transportation taxes, are probably hitting the skids right about now.

There are some bright spots. Working from home demands a lot more bandwidth. Connectivity providers are doing what they can. If this trend continues, we’ll also see a marked demand for more cloud storage, which despite the name actually happens in places that look like warehouses full of computers.

Finally, and this is not entirely obvious, but existing rental units with tenants will do just fine, but new rental units will see longer periods to rent-up and get to stabilized levels. Why? Mainly because there will be less moving around and greater tendency for increased tenure in rental units. Existing landlords will increasingly cut deals to keep tenants in place, while new, vacant spots will have trouble competing for those tenants. In the residential rental space, this will be ameliorated a bit by the noted probable decline in home ownership. In the commercial space, even for industries that are doing fine, there will be difficulty competing for new tenants.

So there’s that. Some random thoughts for a Sunday afternoon. Y’all stay safe out there, and I look forward to hearing from you.