20 Apr COVID-19 and the Atlanta Retail Market: A grim short-term outlook from KB Advisory Group
Our Analysis Highlights – The result of the Great Lockdown could represent:
- $32 billion in lost retail sales in the Atlanta region in 2020: a 30% reduction
- $10 billion in lost Atlanta area wages for retail employees over the year
- 126.5 million SF of retail space demand depleted in the Atlanta region, representing an increase in the potential retail vacancy rate to over 40%
- $1.8 billion combined lost sales taxes in Georgia in 2020
- $1 billion in lost state sales taxes, roughly 17% of the annual total for the State of Georgia
- $538 million in local sales tax revenue in Georgia’s cities and counties
- $270 million in lost ESPLOST funds Georgia’s public schools
In April of 2020, KB Advisory Group analyzed the potential impacts of the widespread economic shutdown on the retail real estate market in the Atlanta metro area. The resulting expected quantifiable economic impacts are, not surprisingly, very significant. One could also use another descriptor: grim.
The analysis calculated the potential impacts of the current economic shutdown on the 10 major retail categories for its initial month, at 60 days, and at 90 days. While the end of the shutdown is arguably entirely due to the unknown outcome of the area’s public health conditions and reaction, the analysis assumed after June 1 the Atlanta region will begin a slow process of getting back to a new normal for the rest of the year. However, the modeling exercise assumes that sales return to no more than 80% of their pre-lockdown levels.
During the initial three months of the Great Lockdown, which started in March, that retail sales are cut approximately in half, worse in some sectors (restaurants, bars) actually up in others (beverage stores and pharmacies). Overall retail sales during the 90 days are 49% of the projected monthly sales pre-Covid-19 for metro Atlanta. For the remaining seven months of 2020 beginning in June, as it seems the strict shelter in place rules become increasingly relaxed and businesses begin to reopen, sales increase to 60% of normal in June, rising gradually to 80% in the last two months of the year—as holiday spending and pent up demand take hold.
The result of the Great Lockdown, according to this KB Advisory Group analysis, indicates that total retail sales in the Atlanta metro area will come in at $75 billion for the year instead of $107 billion. This would represent a loss of $32 billion in retail sales in the Atlanta region: a whopping 30% reduction in 2020 retail sales. Obviously, this is a disaster for many of the region’s retail businesses and their employees. If a third of the lost income translates into lost wages, that means a loss of $10 billion in wages for retail employees over the year.
In terms of sales tax, the impacts are equally dramatic. Assuming 85% of lost sales are taxable (which reflects non-taxable grocery sales primarily) we estimate the state will lose $1 billion in sales taxes, which is roughly 17% of the total they collect. Georgia’s public schools will lose $270 million in ESPLOST funds and counties somewhere around $538 million in local sales tax revenue—a combined loss in sales taxes due to the COVID-19 Great Lockdown of $1.8 billion in 2020.
In terms of the demand for retail space, COVID’s impact could be catastrophic. Of the existing 357 million square feet (SF) of retail space in the Atlanta metro area, roughly 5%, or 18 million SF, was vacant prior to the arrival of Covid-19. We estimate that the $32 billion in lost retail sales COULD translate into a loss of demand for 126.5 million SF of retail space in the region through 2020. If this were to occur, it would represent an increase in the potential retail vacancy rate to 40%-45%, accounting for currently vacant space and new vacancies. This would be an unprecedented challenge for retail real estate owners and one that would have a long and lasting impact on the commercial real estate industry.
The level of impact on Atlanta’s retail real estate sector is likely to be offset by mitigation measures being developed by operators. Some percentage of businesses will be able to continue operations at reduced sales levels while others will not. More than anything, the big, and probably obvious, take-away; landlords will need to absorb rent reductions to keep tenants in place and avoid unrecoverable vacancy levels. The current health pandemic and its economic impact will certainly re-shape the retailing landscape, at least in the short-to-medium timeframe. The most likely impact will be an acceleration of the online retailing trend. Nationally internet sales accounted for 16% of all retail sales in 2019, excluding motor vehicles, gasoline, and food and beverage. Amazon accounts for almost 40% of all internet sales. Anecdotal information indicates that this ratio may have increased by an additional 25%-50%, which will further negatively impact the demand for physical retail space in the market.