Few industries have been hit with as many difficult new challenges over the past year and a half as the real estate investment trust (REIT) sector.
Amid continuing uncertainty in the office and retail real estate markets, REITs have had to grapple with challenges arising from the COVID-19 pandemic and a fast-changing regulatory landscape regarding mask mandates, vaccinations, and sanitation requirements. REITs have also been impacted by the supply chain crunch, labor shortage, extreme weather, and civil unrest.
This article looks at the challenges REITs and tenants are facing from the business continuity and resilience perspective. In my experience from working with retail REITs, there are four common issues that have the potential to pose the biggest threats to REITs as they strive to sustain their businesses and maintain a strong relationship with tenants:
- Determining facility locations and use of space
- Communicating with tenants
- Protecting assets amidst unprecedented threats
- Obtaining quality intelligence to enable effective decision-making
Each challenge is examined in detail below.
The Challenge of Site Location and Use of Space
The COVID pandemic has affected every aspect of the REIT industry. I have noticed a particular impact on retail REIT’s from determining site locations for new facilities, how facilities are being designed or redesigned, facility ventilation, signage, parking lot layouts, and the needed capacity based on a hybrid virtual and in-person corporate business model. While consumer data continues to show a significant number of the general population does not have concerns with in-store shopping, there is a growing consumer base that prefers curbside pickups and contactless shopping and payment options. Additionally, a preference has emerged for retail REIT centers to be in more walkable communities for increased connectivity. Clients have reported these shifts as being a direct response to the COVID pandemic over the past few years. The pandemic has created a shock wave whose ramifications are still unclear. The situation has upended historical trends, creating new challenges for REIT managers.
The challenges are just as dramatic as retail REITs consider the use of space. REITs will need to continue to exert themselves to stay abreast of tenant and consumer needs and preferences regarding how properties are designed and set up. The introduction of public-health issues into the retail and office environments has raised the stakes and multiplied uncertainties. Public health pandemics will continue over time and have the potential to threaten our society in greater ways than COVID. Tenants will be evaluating properties with the health of their employees and customers as the greatest concern. REITs with facilities that do not meet their future needs will suffer.
The Challenge of Communicating with Tenants
A major value-add of REITs can provide to their tenants is “boots on the ground” communication. Events such as public health crises, supply chain product delays, transportation labor shortages, mandatory vaccines and its long-term impact on the job market, insider physical or cyber threats, and natural disasters are only a few concerns which require a joint response if REITs and tenants are both going to remain viable. Over the past few years, I’ve seen tenants looking to REITs to devise and implement response and recovery protocols across multiple regions. Tenants have also expressed the need for transparent communication with REITs with a clear plan for preparedness, response, and recovery capabilities to ensure the safety of the tenant’s employees and customers. Examples of transparent communication include the following:
- Devising a cleaning protocol which meets or exceeds local requirements, sharing information about it with the tenant, and faithfully carrying it out.
- Providing tenants with immediate information on planned protests, sharing what safety and security resources are in place, and discussing contingencies in case situations escalate at key locations.
The relationship with retail REITs and tenants is critical to the success of the business model. Providing clear, consistent communication strengthens the partnership and readiness of both REITs and tenants.
The Challenge of Protecting Assets
The pandemic has coincided with a period of extreme weather, heightened cyberattacks, and increased civil unrest. These and other global and societal trends have made the challenge of protecting REITs’ assets greater than ever. Among the threats facing REITs’ assets in the contemporary landscape are First Amendment protests which escalate the need to board up storefronts to prevent riot-related damage (thus making properties less inviting and effective as showcases); extreme weather such as hurricanes and wildfires; cyberattacks; the danger posed to public health by people who defy vaccination or masking requirements; and the danger of conflicts arising between staff and customers or customers and other customers over attempts to enforce such requirements. Ideally, REITs should have contacts with local law enforcement it can draw on during emergencies.
In this environment, safeguarding people and protecting assets for property managers impacts the bottom line for REITs. The challenge most retail REITs face is the area of responsibility, typically from the windows and front door out. REITs have to be able to mobilize security resources quickly in order to respond to natural and human threats.
The Challenge of Obtaining Quality Intelligence
The last challenge is obtaining accurate, timely, and pertinent intelligence to use in making decisions. Making quality decisions in the real world requires having an accurate picture of it. This can be complicated when information becomes a battleground.
Over the past few years, we’ve noticed keeping track of the many pandemic-related regulations and requirements at the local, state, and national levels is a challenge for some REITs. These have been evolving rapidly, making them a moving target. REITs that are not in compliance face the risk of fines and other issues.
More broadly, REITs today face the challenge of staying informed about the whole range of fast-moving modern events which have power to impact their business. This includes the weather, climate change, wildfires, politics, civil society, global supply chain, cryptocurrencies, technology, cybercrime, online shopping, back-to-work, and many more concerns.
To stay competitive, REITs are encouraged to focus on verifiable information from reputable, objective, scientifically-oriented sources. Pulling data from local, national, and international avenues is key for a successful REIT and tenant relationship.
The main challenges we have observed with REITs and tenants, from a resilience perspective, are determining site locations and use of space, communicating with tenants to meet today’s challenges, protecting people and assets, and obtaining quality intelligence. All of these challenges impose a pressing need to innovate on all REITs that wish to thrive over the coming years.
