Strip malls should do well; indoor malls need reinvention, Houlihan Lawrence says

Strip malls and well-located street retail properties with access to parking are likely to continue to show resilience as the commercial real estate sector adjusts to changes wrought by the COVID-19 pandemic, according to Houlihan Lawrence’s Commercial Market Report for the second quarter of 2020.

“Southern Westchester is not over-retailed and while malls will have to reinvent themselves, demand for in-line space in well-located strips in Westchester has been surprisingly resilient. Rents are likely to reset lower but at levels that are better than initially expected,” according to the report.

It said that larger retail “boxes” will be more difficult to lease until they are reformatted, while smaller in-line retail spaces in good locations continue to be in demand.

Houlihan Lawrence reported that owners of multifamily residential buildings are trying to manage a confluence of issues including tenants who are having difficulty making rent, higher operating costs, lower cash flow and debt servicing while continuing to keep their buildings running and healthy.

The report saw the demand for industrial properties as being driven by e-commerce applications.

“This is the case in Westchester as well as other parts of the country. New demand sources have emerged for smaller industrial spaces during the pandemic adding to the overall health of this segment of the market,” Houlihan Lawrence said.

The report stated that in Westchester, as in other areas of the country, tenants now prefer low-rise garden apartments over denser high-rise buildings.

“Most of new construction projects in Westchester are the latter format, and pricing may have to become compelling to attract tenants and stabilize these new projects, once delivered,” according to the report.

The Westchester office market was stable during the second quarter of 2020, but the report noted that statistics do not yet reflect changes that may be in the works because of the pandemic. It said that some positive absorption of space may have been due to early relocations from New York City.

“Close to half of the leasing volume observed during the quarter were sublets, which are more prevalent in better quality buildings,” the report said.

It said that the economic shutdown due to the virus has exerted severe financial pressure on some retail tenants, especially restaurants and fitness centers.

“These tenants are currently working with their landlords and financing partners to try to emerge from the pandemic as viable businesses. It is too early for retail occupancy statistics to reflect which businesses may fail and have to abandon their current locations,” the report said.

Houlihan Lawrence said that it expects the industrial end of the market to be stable and vacancies to be filled briskly. It said that the weak investment sales trend that it has observed over the last two quarters is likely to remain in place until financing availability improves, reopening efforts gain traction and effects of the pandemic have stabilized.

It suggested that many purchase and leasing deals that have been put on hold may never take place or, if they do take place, will not look the same as they would have before the pandemic. It said that the cash flows from properties and rent-paying ability of tenants may have changed because of the pandemic. If price cuts result, it expects “a burst of activity in the sales markets” to occur.