Retail’s Reckoning: How to Preserve 1 in 4 American Jobs

Fifty-two million people — one in four Americans — work in retail, making the retail industry the largest private sector employer in the United States¹. While essential retail businesses like grocery stores and pharmacies remain open, the rest of the retail industry from food and beverages to clothing, furniture and home furnishings, electronics and appliances, building materials, garden equipment and supplies, and much more, are temporarily shuttered. This roadblock to retail could cost an estimated $6.2 trillion² to annual GDP.

Source: Fifth Wall Analysis | US Census Bureau³ ⁴ ⁵ CoStar⁶; Cushman & Wakefield Research⁷

The CARES Act makes $2 trillion available to help the US economy survive the pandemic, but little has been earmarked specifically to support the 52 million retail jobs at stake and the $6.2 trillion in retail revenue that’s at risk. To prevent systemic retail industry failure, the US Department of Treasury and the Federal Reserve must rethink the possibility of allocating a minimum of $30 billion in equity and debt — over the next 90 to 180 days — to provide existential liquidity to the large- and mid-sized retailers most impacted by COVID-19 and its associated economic fallout.

Without this $30 billion injection of liquidity to retailers, each of the following are put in serious jeopardy:

1. The entire retail industry ecosystem which includes retailers, landlords, and lenders, and represents $6.2 trillion in revenue and 29% of US GDP (based on $21.43 trillion GDP in 2019);⁸
2. One out of every four US jobs — 52 million Americans;
3. Approximately $1 trillion of secured & unsecured debt collateralized by retail real estate;⁹
4. $400 billion of state & local tax income derived from property taxes on retail real estate;¹⁰
5. A functioning supply chain that depends on stores to deliver critical goods to US consumers; and
6. Many otherwise-viable US retailers and US retail centers.

Source: US Census Bureau¹¹

Retail industry risk is systemic and industry-wide cooperation is required for a solution. Therefore, the success of this program will depend on: (1) professional advisors with a deep understanding of the retail industry to guide the competent deployment of capital into the most-viable retailers; and (2) close cooperation between the federal government and the five largest retail landlords to establish standardized rent forbearance for the industry, in order to maximize the program’s effectiveness.

The Perfect Storm for The Imminent, Systemic Collapse Of US Retail

The US retail industry is currently caught in a “perfect storm,” or convergence of:

1. The COVID-19 health crisis;
2. Retail assets being closed indefinitely;
3. Forced consumer adoption of e-commerce, which has resulted in a 74% increase in transaction volumes in March 2020 compared to the same period last year;¹²
4. A dramatic — and likely sustained — decline in consumer retail spending and consumer wealth;
5. A freeze in equity and debt capital markets for retail; and
6. Pre-existing conditions ranging from over-leveraged and over-stored large- and mid-sized retailers to negative capital markets sentiment towards the reported “death of retail,” which has been gestating since well before the COVID-19 crisis.

Most certainly, there are aspects of the retail industry that are ripe for disruption and some brands that have failed to adopt the omnichannel approach and truly develop relationships with their customers that exist inside and outside the physical store may not make it. But, as Josh Bivens, research director for the Economic Policy Institute says in this article in The Washington Post:¹³

“We should be willing to do something we wouldn’t ordinarily do to keep people on the payroll,” …Bivens added that while he found some of the 2008 bailout objectionable because aid was flowing to the banks that had been “complicit” in causing the crisis, “that is not the case here. None of these companies caused the pandemic.”

Otherwise Viable Large- And Mid-Sized Retailers Are Now Existentially Challenged Without Short-Term Liquidity

The above forces have converged to put many otherwise-viable retailers in a dire position given their short-term liquidity needs. To see how imminent this liquidity crisis is for many of the largest retailers in the US, see Goldman Sachs’ report “Stressing Retailer Liquidity: A Framework” (3/17/20)¹⁴. Current equity values and credit markets reflect the expectation of a surge in large- and mid-sized retailer bankruptcies.

Without short-term liquidity from a federal government stimulus package, many large- and mid-sized retailers may not make it to the other side of the COVID-19 / Capital Markets / Consumer Spending crisis. These retailers need assistance.

Otherwise Viable Retail Landlords Will Begin To Default On Mortgages And Pay Less In Property Tax

April is expected to be the single-biggest, “non-payment” month of retail rents in US history¹⁵. Most early estimates suggest that greater than 75% of US retail rent was not paid in April. The US retail industry generates as much as $25 billion in rent monthly; non-payment will further freeze capital markets and strain the balance sheets of retail landlords. Currently, 47,000 chain stores remain closed¹⁶ and many have publicly stated they will not pay rent until their stores are allowed to reopen.

Although the largest retail center owners are cutting their dividends, furloughing their workforces, and asking for mortgage forbearance, they currently have no visibility on: (1) when (or if) they will get paid rent; (2) when their centers will reopen; (3) when retailers will reopen; and (4) which retailers may reject their leases in bankruptcy. If a small number of large- and mid-sized retailers file for bankruptcy and reject leases, it may ignite a chain reaction of co-tenancy provisions that could lead to a sudden and dramatic mass number of vacancies at retail centers.

The downstream consequences of retail rent non-payment and mass retail vacancies are profound. $1 trillion of secured and unsecured debt collateralized by retail real estate is now at risk of default. In addition, the $400 billion of critical state and local tax income derived from property taxes on retail real estate may shrink considerably.

The Immediacy Of Liquidity for Large- and Mid-Sized Retailers Requires A Government Solution

Rent forbearance alone will be insufficient. If short-term liquidity capital is not provided in the next 180 days, many otherwise-viable retailers will die unnatural deaths, in turn (1) accelerating a freeze of retail capital markets, (2) retail landlord defaults, and (3) mass vacancies at retail centers.

Injecting $30 billion in the next 180 days is the functional equivalent of “flattening the curve,” to borrow from that which has been proposed for public health measures related to COVID-19. Such liquidity capital is required in 180 days to get retailers to the other side of the crisis, or until debt and equity capital markets normalize. Restructurings, recapitalizations, and rent re-negotiations can occur outside a crisis environment to protect the long-term viability of retailers and retail real estate assets.

Such liquidity capital can prevent a surge in near-term potential bankruptcies that could trigger an unrecoverable, systemic chain reaction: from large- and mid-sized retailer bankruptcies to smaller retailer bankruptcies to retail landlords mortgage defaults to foreclosures to reduced state and local tax revenue.

Strong Employment Imperatives Exist To ‘Save’ The Retail Ecosystem

The US government should have a strong societal, economic, and moral imperative to protect the retail industry from systemic failure, as it accounts directly and indirectly for more than 25% of American jobs. With more than 26 million unemployment claims filed¹⁷ over the past six weeks we’re on track to fulfill the Federal Reserve’s prediction of a 32% unemployment rate and 47 million jobs lost¹⁸— all contributing to a potential systemic retail ecosystem collapse.

Source: VOX | US Private Sector Job Quality Index¹⁹

Allocating capital to retailers in the short-term will actually “save” / recoup money that would have otherwise been spent in the $2 trillion CARES Act stimulus package as part of unemployment insurance and other social safety net programs.

Without Government Involvement, Private Investors May Exacerbate the Crisis

The private equity and distressed debt investors that may emerge as candidates to “rescue” struggling retailers will not have landlords’ — nor society’s, nor employees’ — best interests at heart, and more retailers will likely file for Chapter 7 (versus Chapter 11) bankruptcies. More Chapter 7 bankruptcies would further exacerbate the systemic failure as retail payrolls are slashed, leases are rejected, and retail center vacancies are accelerated.

Retail Landlord Cooperation With A US Government Stimulus Package Is Critical

Cooperation is needed from the largest institutional retail landlords to work with the federal government to form a liquidity package to support large- and mid-sized retailers that:

1. Establishes standardized rent forbearance programs for retailers, which the rest of the industry can emulate;
2. Combines rent forbearance programs with short-term cash infusions from a federal government stimulus package to maximize solvency for viable retailers;
3. Actively works with the government and retailers in search of concessions (e.g., payroll and sales tax reductions); and
4. Actively coordinates with mortgage lenders and retailer lenders to maximize leniency.

A Systemic Solution for A Systemic Problem

The US Department of Treasury and the Federal Reserve should inject $30 billion of debt and equity into the retail industry at the “top of the funnel,” to support the large- and mid-sized retailers that are most existentially challenged but otherwise viable. This would enable capital to circulate down through the retail ecosystem (to payroll, rents, debt payments, mortgage payments, property taxes, etc.) to maximize the long-term, holistic viability of the existing retail ecosystem.

There are two main requirements for such a program to be effective:

1. The establishment of professional administration, advisors, and oversight, to ensure selective deployment of capital to existentially challenged but otherwise viable retailers.
2. Cooperation between the five largest retail landlords to provide standardized rent forbearance to pair with equity/debt infusions. Having such a “package” (of standardized rent forbearance + government concessions + cash infusions for short-term liquidity) will increase the likelihood that many over-levered, over-stored retailers will be able to obtain concessions and leniency from their lenders, allowing more time for debt and equity capital markets to normalize.

Such a proposal will require considerable government oversight coupled with independent advisors skilled in mediating the competing agendas of landlords and retailers (both among themselves, and among each other). Hypothetically, an effective effort might generate a profit for the government, although that need not be the case. What’s at stake is an estimated $6.2 trillion sector; 29% of US GDP and one in four US jobs — preserving the majority of any of these statistics is worth at least $30 billion.

¹https://nrf.com/media-center/press-releases/retailers-welcome-financial-bridge-other-side-pandemic-ask-more-aid

² https://fred.stlouisfed.org/series/RSAFS

³ https://fred.stlouisfed.org/series/RSAFS

⁴ https://fred.stlouisfed.org/series/MRTSSM44W72USN

⁵ https://fred.stlouisfed.org/series/ECOMSA

⁶ https://www.prnewswire.com/news-releases/retails-most-profitable-square-footage-636947493.html

⁷https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-shopping-center-marketbeat-report

⁸https://www.bea.gov/news/2020/gross-domestic-product-fourth-quarter-and-year-2019-advance-estimate

⁹ https://www.naic.org/capital_markets_archive/120918.htm

¹⁰Fifth Wall analysis from equity research

¹¹ https://fred.stlouisfed.org/series/RSAFS

¹²https://www.aciworldwide.com/news-and-events/press-releases/2020/april/covid-19-crisis-drives-changes-in-ecommerce-sales-aci-worldwide-research-reveals

¹³https://www.washingtonpost.com/business/2020/04/07/bailout-retail-cares-act/

¹⁴Goldman Sachs Credit Research, Stressing Retailer Liquidity: A Framework, March 12, 2020

¹⁵https://www.bloomberg.com/news/articles/2020-03-24/u-s-retailers-plan-to-stop-paying-rent-to-offset-virus-closures

¹⁶https://www.bloomberg.com/graphics/2020-coronavirus-retail-store-closings/?sref=QhZsvyLm

¹⁷https://www.politico.com/news/2020/04/23/coronavirus-unemployment-claims-numbers-203455

¹⁸https://www.cnbc.com/2020/03/30/coronavirus-job-losses-could-total-47-million-unemployment-rate-of-32percent-fed-says.html

¹⁹https://www.vox.com/policy-and-politics/2020/3/24/21191075/coronavirus-recession-worker-layoffs-unemployment-economy-restaurants-stimulus-bill

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