The combined effect of last spring's mandatory lockdown (three months with shutters down for most establishments, except those considered essential services), the almost total disappearance of the tourist flow that fueled business in Barcelona's most central areas, and an uncertainty that seems to have no end and announces imminent new restrictive measures for mobility have created a perfect storm for a good part of Barcelona's businesses. A meteorite fall could have caused less havoc in the city's commercial fabric.
The center of Barcelona offers a dystopian image, with many streets displaying graffiti on their shutters instead of products in their shop windows, and the increasing pressure of accumulated debts (owners do not always fully understand the dimensions of the problem when they demand to continue collecting their rents punctually) paint a picture that, without a doubt, will profoundly transform the city's commercial ecosystem. ERTEs and public financing through soft loans have provided a lifeline for many small businesses, but it will be insufficient to prevent the closure of many of them and will lead to a deep reconversion of the sector.
If the GDP drops announced in almost all Eurozone countries exceed 10% in almost all cases, the fall in income for a large part of retail trade will be much higher, estimated between 40% and 60% on average, excluding specific sectors such as food stores or pharmacies. In areas very sensitive to tourist flow, the drop in income has been even higher.
Overcoming this crisis will require a combined effort from the Administration and the private sector, which must adopt drastic measures to survive in the current context and adapt to a new reality whose profiles are still uncertain.
The problem of rents
Any sustainable commercial business plan establishes that the rent of a commercial premise should not absorb more than 15% of the turnover. A premise that has not been met for years in many of the city's hot commercial areas, where very often rental costs exceed 50% of total turnover. A burden that has resulted in the practical disappearance of local or traditional commerce, and that has allowed only large international franchises or establishments of low quality and debatable added value to survive in these locations, such as the myriad of cloned souvenir shops that live exclusively from tourism or the hundreds of tapas restaurants of dubious quality and excessive prices for the local population, which thrived thanks to high margins on products of very low quality, the lack of need to retain regular clientele and, in not a few cases, the labor exploitation of staff hired under precarious or directly irregular conditions.
In the case of the restaurant sector, most Barcelonians can only express bewilderment when it is suggested that they recolonize temporarily lost spaces like La Rambla, whose gastronomic and commercial offer (with honorable exceptions) will hardly convince any sane native, regardless of the price at which it is offered.
The phenomenon is not unique to Barcelona, although in the case of our city, the urban structure of Ciutat Vella, where small premises with very restricted potential uses due to regulations abound, coupled with the explosion of tourist influx, has put great strain on the rental market, causing very high prices on the front line, a great abundance of disused premises on the second line and a commercial mix that does not serve the needs of the resident population (which, incidentally, has been in clear recession for two decades) and that also does not offer a quality image that fits with the ambitions of the Barcelona brand.
One only has to look at real estate portals to see discounts of up to 50% on commercial rental prices in the centerThe combination of these factors does not seem to offer many options: the die is cast
El presidente de la República, Gabriel Boric, se refirió este lunes a la conmemoración de los 50 años del golpe de Estado, que se cumplirá el próximo 11 de septiembre, y a la polémica que se ha generado en torno a la fecha.
En ese contexto, el Mandatario hizo un llamado a “no empatar las responsabilidades” y a “no falsear la historia”.
“No es aceptable que se falsee la historia, que se relativicen o se justifiquen violaciones a los derechos humanos, o que se empaten las responsabilidades entre quienes fueron víctimas y victimarios”, dijo Boric en un acto en el Palacio de La Moneda.
El jefe de Estado también se refirió a la propuesta de algunos sectores de la oposición de firmar una declaración conjunta con el oficialismo, en la que se condene el golpe de Estado y se valore la democracia.
Al respecto, Boric señaló que “no es el momento de buscar acuerdos mínimos, sino de avanzar en la construcción de una memoria compartida que nos permita mirar el futuro con esperanza”.
“No se trata de imponer una verdad oficial, sino de reconocer los hechos tal como ocurrieron, de condenar las violaciones a los derechos humanos y de valorar la democracia como el único camino para resolver nuestras diferencias”, agregó.
El Presidente Boric también hizo un llamado a la unidad y a la reflexión, y a “no caer en la tentación de la polarización y la división”.
“Chile es un país que ha sabido levantarse de sus tragedias, y estoy seguro de que esta vez no será la excepción”, concluyó.
The drastic and irreversible drop in commercial rental prices is on the table.The recovery of the commercial fabric of city centers will depend as much on the evolution of the health situation as on the ability of local owners to adapt to the new reality and on the inventiveness of the commercial sector to find sustainable formulas less sensitive to specific crises like the one we are experiencing. Prices will adjust, it only remains to be seen in how much time and by what percentages.Currently, one only has to take a look at real estate portals to see discounts reaching 50% in commercial rental prices in the center. Prices in the market for transfers of restaurant licenses, whose value was very high due to almost absolute restrictions on obtaining new licenses in several areas of the city, have fallen by more than 70% and hardly any operations are registered. These drops, for the moment, have not been enough to spark a market reactivation, which is logical given the uncertainty of the moment.
In this crisis, the Administration has left the solution to the problem to negotiation between the parties (tenants and landlords), getting rid of a very uncomfortable hot potato. In recent months, the already overloaded courts are being flooded with lawsuits between landlords and tenants of commercial premises who have not reached any agreement on the payment of rents due to the absence of any regulatory framework that would facilitate such agreements.
In many cases, struggling commercial tenants have resorted to the legal figure rebus sic stantibus as a strategy, which allows for the breach of a contract if the basic conditions on which it was founded have changed essentially. A mandatory closure decreed by the government fits this assumption like a glove, and at least would be applicable to the months of forced closure last spring, since it deprives a real estate asset of its use value, whose rent is paid to be open to the public.
It remains to be seen what resolutions the courts adopt and what jurisprudence emanates from them, but judicialization will also pose an extra conflict to the already convoluted situation. The few new commercial contracts currently being signed are already beginning to include clauses that provide for rent reductions or waivers in case of new forced confinements, and scaled rent payments that provide for significant bonuses during the first years of rental.
Possible solutions
A commercial rental modality that is already quite widespread in international markets but is still exotic here is the so-called revenue-sharing lease, or revenue-referenced lease. That is, the amount of rent received by owners is directly related to the operator's income. It is a formula habitually applied by companies like WeWork (which operates six coworking spaces in Barcelona) or discount chains that open establishments in prime areas of central London or New York. It is also a widespread formula in rental spaces in large shopping centers.
This modality allows the owner to participate in the profits of the company to whom they rent the property and achieve higher income than a conventional lease, and normally allows them to terminate the contract if previously agreed minimums are not met. In turn, it allows the operator not to be financially suffocated by a binding contract if market conditions change to the point of making the rent an unsustainable burden. A formula that, for the moment, is difficult to apply to small operators, given the difficulties (well known to tax authorities) in auditing real income in small retail businesses, and which is met with reluctance by owners accustomed to constant rent increases in recent decades.
The elephant in the room
On the other hand, the reactivation of the commercial fabric faces another elephant in the room: the unstoppable rise of e-commerce, which grows at the expense of traditional commerce, and which has found fertile ground in the confinement caused by the pandemic. In February, e-commerce in Spain was expected to grow by 12.5% throughout 2020. The latest available figures speak of an increase that has already reached a stratospheric 67%. In just a few months. And it is known with certainty that a good part of the users who have discovered this purchasing modality will no longer return to their previous routines.
The Barcelona city council has already timidly expressed some ideas to face these challenges, such as promoting the transfer of certain activities from office buildings to street-level premises, to at least partially compensate for the irreversible emptying of traditional commercial premises. How to effectively incentivize this process is still unknown, but what seems certain is that these measures will be slow to apply, and must include substantial changes in land use plans, particularly that of Ciutat Vella, launched in 2018 and whose complexity of application had already greatly slowed down the renovation of the district's commercial fabric.
Apart from large brands, which will concentrate their activity in prime locations and will close stores in secondary locations, in addition to incorporating support services for their digital activity (click&collect services, where the purchase is made online and the product is picked up in a physical store), independent businesses face great challenges. For many independent bookstores in the United States, for example, the survival and boom they have experienced in recent years against the hegemony of Amazon has come hand in hand with income diversification, with the creation of complementary cultural activities and the installation of cafes within their establishments, a formula practically impossible to apply in Barcelona due to the rigidity of current regulations, which makes it very difficult to obtain licenses for mixed uses, especially if they include any activity analogous to catering.
The future of the city's commercial fabric is at a crossroads. A city plagued by lowered shutters only inspires unease and an ominous feeling, which is not positive for residents or potential future visitors.Another possibility to recover the vitality of the streets is to make the concessions of habitability certificates more flexiblefor those commercial premises that will not find users in the commercial sector. This is a complex process, as it is not applicable to many commercial premises that do not meet the minimum habitability requirements even if they are renovated, and which also requires a determined political commitment to modify the regulations in force. However, it would be a path that, by rebound,would allow to alleviate pressure on residential rental prices, by increasing the supply of available housing.
The future of the city's commercial fabric is at a crossroads. Beyond the direct effects for those who live from the sector (15% of Barcelona's GDP and 21.9% of employment), the quality of public space and city life is at stake. A city plagued by lowered shutters only inspires unease and an ominous feeling, which is not positive for residents or potential future visitors. Rebuilding a quality, sustainable, and future-adapted commercial offering is one of the great challenges posed by the new reality.
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FIVE TRENDS TO EMERGE FROM THE CRISIS
What are the possible recipes to restore the health of a sound and integrated commercial landscape in post-pandemic cities? These are some of the trends that will inevitably prevail in the coming years:
- Linking rents to the actual turnover of businesses (revenue-sharing lease). When well applied, this formula can be a win-win for landlords and tenants.
- Appearance of activities associated with distribution logistics. Many commercial premises can be converted into pick-up points for online purchases, which will alleviate mobility challenges caused by the growth of home deliveries.
- Conversion, where possible, of street-level commercial premises to residential or office uses.
- Appearance of mixed commercial activities, allowing for increased cash flow by catering to new social uses.
- Robotization of establishments. Wage costs continue to represent a high fixed expense in the management of retail spaces. The reduction of these costs is not a new objective. In fact, since the early 20th century, the appearance of self-service in food establishments, or fast-food restaurants where table service was eliminated, follow this trend. But digitalization and robotization can take this process to an unknown dimension. Amazon, for example, already has supermarkets in the United States that operate without in-store staff.
A CRISIS AFFECTING MAJOR COMMERCIAL CAPITALS
The New York Times recently cited cases such as that of Bryant Park Grill & Cafe in the heart of Manhattan. A restaurant belonging to a successful chain with more than 20 branches throughout the United States. The fall in tourism, empty office towers, and an 85% drop in turnover forced the management to permanently close the establishment, and to declare that they had no intention of reopening even if the health situation normalized. The rest of their restaurants in other cities across the country, although with reduced income, continued to operate with relative normality. The underlying reason: the same business can be done in other cities with much lower expenses. The reputational pressure to be in the most cosmopolitan city in the world no longer compensated for the associated costs.
Many years will pass before viable commerce can return to downtown New York as it was before Covid-19It is not an isolated case. At the same time, chains like J.C. Penney, Kate Spade, Subway or Le Pain Quotidien, Victoria's Secret or The Gap made similar decisions.Victoria's Secretpaid a monthly rent of 937,000 dollars for its star store in New York, and in the letter of resignation from its contract, the company addressed the landlord in these terms: "Many years will pass before viable commerce can return to downtown New York as it was before Covid-19." Zara, J.C. Penney, and Neiman Marcus stores in midtown Manhattan have declared bankruptcy and will not reopen their doors.
On the Champs-Elysées, one of the most luxurious shopping streets in the world, almost 30% of stores have not reopened after the first wave of the pandemic. The Galeries Lafayette department stores located on the famous avenue have been forced to request a 1 billion euro loan to ensure their survival, and have even negotiated an additional loan with the French state to avoid bankruptcy. The future does not look promising even in the world centers of luxury commerce.
In Barcelona, the title of the street with the highest rents is disputed between Portal de l'Àngel and Passeig de Gràcia. Several restaurant operators have closed their doors on this latter boulevard in recent months, unable to cope with rents of up to 70,000 euros per month without the usual flow of customers. Most of the major luxury brands resist, in many cases after negotiating temporary or definitive rent reductions and thanks to the fact that, for many of them, their presence on this commercial artery is measured not only in terms of economic profit but also brand visibility. In many cases, keeping a store open on the most expensive streets results in losses. Even before the arrival of the coronavirus, this was the case, although it was compensated by assigning these expenses to the company's marketing budget.
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TEN TECHNOLOGICAL CHANGES THAT WILL COME TO RETAIL
The international consulting firm Coresight Research, specialized in retail trends, highlights these 10 trends in 2020:
- Autonomous last-mile delivery robots are gaining viability and are already being used in some cities. Although still far from being massively implemented, they will help mitigate urban traffic and mobility problems that the profusion of messaging services brought about by the almost exponential growth of home deliveries is beginning to cause.
- Data protection laws require a more conscious and collaborative adaptation on the part of retailers, who must find a balance between the protection of personal data and the personalization of products and services.
- The growth of e-commerce is already triggering the use of robots that practically automate the operation of distribution warehouses. The loss of low-skilled jobs in logistics warehouses could be offset by the emergence of needs for more qualified personnel to supervise and direct these processes.
- Retail will bet on exploiting the commodification of health services, especially those related to aging. Sectors such as cosmetics, aesthetic services, palliative care, and wellness (massages, spas, nutritional counseling services) can emerge strengthened from the pandemic.
- Concern for the environment will offer the opportunity to offer new green products with high added value.
- Augmented reality technologies will continue to blur the line between digital experiences and physical shopping.
- The arrival of 5G networks will begin to have commercial applications that will reach the retail sector.
- Voice control technologies will begin to be applied to brands' marketing strategies.
- Banking services and digital payments will be rapidly integrated and will grow in the weight of traditional commercial activity.
- Technological advances such as 3-D printing will allow a true explosion in the offers of personalized products.