Who Wins in a Recession?

At this point, every business leader in retail is asking themselves: what should I do?


The coronavirus effect is in full swing. The Dow Jones had its biggest single day point drop ever yesterday, breaking this record for the fourth time in less than a week. Retailers like Apple and Nike are temporarily closing their doors. Every major sports league is on hold. And to top it all off, no one has toilet paper. At this point, every business leader in retail is asking themselves: what should I do? The good news is that even in a recession, there are still some winners – those who identify the unique opportunities in the market and capitalize on them. To find some clues on the hidden opportunities in today’s market, I revisited the last recession. Here are the winners that stood out to me:
  1. Retailers that took advantage of lower rents
Most retailers were not thinking about growth in 2009. The exception? Value-focused segments, primarily the emergence of quick-service restaurants (QSR) and budget/discount. While most retailers lagged, Dollar Tree, Smashburger, Chipotle, and others thrived by helping consumers stretch their dollar. Importantly, their growth was made easier by hurting landlords offering lower rents. Smashburger’s CEO specifically credits the economic climate as helping fuel their growth by giving them access to better real estate and better rents. The results? From 2007 to 2012…
  1. Real estate investors who bought low
It’s a strategy as old as time: buy low. As the recession took hold, retail cap rates ballooned from an average of 6.5% in 2008 to 8% in 2010 due to lowered property valuations. However, investors are never looking at an opportunity in isolation – with the volatility of the market and US Treasury Bonds still returning 3-4%, money didn’t flow into retail real estate immediately. By 2012, those bond yields dropped to 1.5%, the lowest they had ever been (in the 50 years for which I could find data), which meant a spread of nearly 6% between bonds and retail cap rates. Private investors jumped on this, reflected in an increase of nearly 50% into commercial net-lease investments that same year.
  1. Real estate developers with cash for new projects
Real estate developers in 2010 that weren’t swimming in fallout from the recession found themselves in a great position for new development opportunities. Construction firms had fewer projects going on, meaning developers had the best contractors competing against each other, driving prices down. On top of that, materials prices were bottoming out. All of this made new projects more economical than they had been in years. Of course, each of these lessons is only somewhat relevant today. Some major differences between the last recession and today are already obvious:
  • Retailers completely closing their doors, due to government mandate, is unprecedented. The risk of new investments / projects failing due to tenants is likely higher.
  • Consumers have never had more tools to avoid going outside – from Amazon and Instacart to DoorDash and Netflix – food, groceries, home goods and entertainment are available on-demand. The world is being forced to learn how to cope without brick-and-mortar retail.
  • Some employees may permanently adopt a work-from-home setup, meaning less consumers out and about on a daily basis.
  • UST bond yields are already under 1%, an all-time low
How will retail adapt? Will experiential retail eventually pick up where it left off, fueled by a wave of consumers with coronavirus cabin fever? Or will this be their tipping point? Whatever the case, the strongest companies will be those who revisit the lessons learned in the past, stay attuned to their customers, and find the rare opportunities that are emerging from the major shift in economy. Stay safe everyone.


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