Alexandra Krupka comments on quarantine’s consequences, its impact on the malls’ attendance and profitability, and the industry’s further prospects

Closure of small local stores, the collapse of sales in the entertainment segment, the drop in attendance of malls, and other outcomes of commercial real estate in Ukraine in January–February 2020. 
The coronavirus epidemic and the imposition of severe quarantine restrictions influenced all economic sectors in Ukraine. COVID-19 had a considerable impact on the retail market, including commercial real estate. The editorial staff of RAU interviewed market participants about quarantine’s consequences, its impact on the malls’ attendance and profitability, and the industry’s further prospects.
Shock therapy 
The beginning of 2020 did not foresee a disaster in the market of commercial real estate in Ukraine. Almost all commercial operators recorded natural sales growth, and the developers had an opportunity to progressively raise rental rates. The rapid expansion of the coronavirus epidemic and the imposition of severe quarantine restrictions in Europe has changed everything. Ukraine also experienced troubles in the middle of March, when the quarantine was imposed. Many retail chains lost their opportunity to sell products offline, apart from essential goods. They tried to refocus the business on e-commerce, as a matter of urgency. However, online sales couldn’t fully offset the in-store service. 
According to Alexandra Krupka, the partner in street retails from Retail & Development Advisor, in 2020, there was a stable growth of rental rates, up to 10% from the previous year. However, a positive development has been no longer relevant since spring. “Even those renters, who were allowed to work during quarantine, noted that rates were declining. As a rule, the discount depended on a group of products (home appliances, communication equipment, pharmacies, and food supermarkets). For example, electronic stores had a 40–50 percent reduction on leases. In pharmacies and food supermarkets this percentage was lower. Besides, most malls didn’t charge rent payments from closed stores, limiting them to marketing and operational payments,” Krupka specifies. 
Yevgenia Loktionova, CEO of the consulting company UTG, confirms his statement, “In March-May 2020, retailers massively wrote letters to the malls’ operating companies and authorities. They asked to change rental costs for the period of forced quarantine and provide individual discounts of 10–50 percent, or even total phase-out of rent (except for OPEX), depending on the operator’s group of products. Many lessors agreed and decreased rental rates by 12–15% until May.”
It should be noted that most of the retailers froze their development because of quarantine. Many stores are not going to renew their active expansion owing to current ambiguity in our country. Those developers that hastened to come back to 100% of rent once the full-fledged functioning had been resumed, also have been fed this. At the same time, some developers reduced the discounts for retailers but still saved them. “In such circumstances, retailers analyzed more thoroughly potential locations for opening by calculating P&L on the future store and accepted only the best possible options,” Alexandra Krupka says. 
Victims of the Pandemic
Market participants observed that small retailers hardest hit by the two-month gap and quarantine restrictions. “Coronavirus hit the small retailers who didn’t have enough resilience. Although we were among the first to decide not to collect rent during the quarantine, many of them were unable to return to normal work after the lifting of the tight restrictions,” Natalia Kravets, CEO of Property Management department of the company Dragon Capital said in her interview for RAU.
Iryna Povarchuk, CEO of DCH Infrastructure & Real Estate (Karavan Mall’s operating company), agrees, “Small businesses, retailers without online sales, and the companies that had already experienced problems before pandemic had the weakest safety factor. The entertainment industry, food-court, and restaurants are the fields worst affected.”
The consulting company Colliers International (Ukraine) draws attention to the fact that, as a rule, such tenants are the anchor and form the main flows of visitors to their areas. As a result, the decline in their attendance has also harmed the neighboring tenants’ turnover. The UTG Company notes that the coronavirus epidemic and the forced quarantine have been combined with poor sales for six autumn-winter months due to atypically warm weather in Ukraine. This led to several network traders’ bankruptcy and a consequent increase in the vacancy rate. “With the closing of shops and the opening of many major shopping centers, the average vacancy rate in Kyiv exceeded 14 percent. By early June, the average market attendance had dropped to 526 persons for 1,000 sq. m (by January 2020, there were more than 700 people for 1,000 sq. m of GLA),” Yevgenia Loktionova states. 
Natalia Kravets from Dragon Capital specifies that the average drop in traffic is in the range of 15-30% in Ukrainian malls. At the same time, developers recorded a gradual resumption of traffic in malls at the beginning of the second half of the year. Thus, Denis Kornuta, CEO of the Arricano Sales Department, says that the attendance of their malls in the summer of 2020 was only 10% lower than in the previous year. Simultaneously, system developers try to catch up in closer cooperation with the tenants.
“The quarantine became a kind of a crash test, which indicated areas for development for both Karavan trade point network and the entire industry. The malls can minimize negative impact in close cooperation with tenants, through the search for mutually beneficial solutions in all industries, from commerce to marketing initiatives. At the end of the quarantine, we strengthened cooperation with operators in the marketing area to attract additional traffic, jointly. We develop new formats that allow working efficiently and generating visitors despite the existing restrictions,” Iryna Povarchuk says.
There is a silver lining
However, despite some drop in attendance, the retail market does not yet exhibit a dramatic fall, as the leading Colliers International (Ukraine) expert Igor Zabolotsky says. According to Colliers, the experience of previous crises has enabled malls’ owners to retain tenants during the strict quarantine period. No massive closures were notable that could affect the market vacancy rate. Moreover, according to Zabolotsky, since the lifting of the severe restrictions, international retailers in the Ukrainian market have recorded better sales performance (as a percentage of the period) than in most European countries, which is encouraging concerning the pace of market recovery.
According to Anna Chubotina, CEO of then Arricano, in July, sales shoes increased by 30%, sports and home clothes increased by 25% and 24% respectively in the company’s shopping centers (for example in the capital Prospect mall) compared to the same period last year. In the Solar Gallery mall in Kryvyi Rig, sports clothing sales increased by 29%, the category of goods for beauty and health – by 17%, and electronics – by 11%. “In August, our malls recovered the pre-quarantine values in almost all categories. Clothing and perfumery shops are at the last-year level, and sports sales have even increased,” adds Denis Kornuta. 
As Natalya Kravets from Dragon Capital explains, the positive trend in turnover with reduced attendance is due to the increase in conversion. “Under quarantine, consumers are less likely to visit shopping malls. They visit them to buy essential goods rather than walk and drink coffee,” top-manager from Dragon Capital PM says, specifying the fashion retailers from the mass-market segment and sports operators’ fast-growing rates. Among other things, the company plans to strengthen the pool of such tenants in its malls.
Cloudy prospects
Concerning future market prospects, much stuff depends on the situation with the coronavirus epidemic. According to Alexander Krupka from RDA, the announcement of the second wave of the strict quarantine will stop trading activities and provoke the “snowball” of closed shops. The first lockdown considerably decreased or ruined the retailers’ safety factor. So, many stores and even entire networks might close,” expert warns.
At the same time, no second wave of quarantine and positive trends in sales will contribute to the graduate market recovery. In this case, Krupka supposes, rental rates might grow by the end of the year. As long as the lessors' requirements are still high towards tenants' expectations, the retailers won’t pay the same rates as before the quarantine. 
Colliers predicts that both sides will be more concerned with reducing transaction costs under such conditions. Malls will be more focused on introducing energy-efficient innovations, and tenants are likely to consider the reduction in renovations and slowing down their networks’ development.
Given quarantine measures, further spread of COVID-19, and the necessity to support consumers online, there is likely to be an increase in the share of online retail and the active use of methods to increase customer loyalty at all stages of interaction. Retail operators, which functioned omnically before the quarantine, will continue to operate effectively online. Probably, after the end of the restrictive measures, more and more shops will change by developing the click & collect niche. This is not only about electronic stores, which have actively developed this format before, but also about the fashion industry, jewelry stores, and food-courts,” Colliers predicts.
See the link to the source here.