Why the commercial real estate sector is struggling to survive COVID-19

As the COVID-19 pandemic continues to hurt most sectors, real estate markets have been especially impacted as more people migrate out of urban areas. Kimco Realty CEO Conor Flynn joins The Final Round to break down the commercial real estate sector and the impact the pandemic’s having on it.

Video Transcript

SEANA SMITH: Welcome back to The Final Round here on Yahoo Finance. Well, a study out by the National Retail Federation and PJ SOLOMON today find that in July the number of retailers paying rent almost doubled from June to 65%. So here for more on this, the impact that COVID is having on commercial real estate, we want to bring in Conor Flynn. He's the CEO of Kimco Realty.

And Conor, Kimco's portfolio, I was looking at it before the show, it includes over 400 properties. You have big names like Costco. You also have these small mom and pop shops. And I know a lot of the headlines that have been catching the media's attention has been these retailers struggling or not being able to pay their rent. So what are you seeing from your tenants and their ability to pay rent right now?

CONOR FLYNN: Yeah, pleasure. And thanks for having me. Kimco is predominately a grocery-anchored portfolio. So we obviously benefit from having the lion's share of essential retailers that are benefiting in a lot of ways from the pandemic. We saw our grocery anchors do all-time high volumes, mainly from the surge in demand there. And then we have-- we're the largest landlord for Costco, Walmart target, and they've seen, you know, obviously benefiting from this as well, being essential.

The issue that we see and where we've been working overtime to try and help is the small shops, the mom and pop tenants. Those are the ones that typically don't have a rainy day fund or a big balance sheet or cash on hand to manage through this process. There's a lot of uses that have deemed not essential that were forced to close. Restaurants have capacity constraints on them. So what we've tried to do as a landlord is activate green space, activate sidewalk cafes, and then we've installed curbside pickup across the entire portfolio to help those folks really navigate and try and activate the home delivery model.

SEANA SMITH: Conor, it's interesting when you talk about navigating the home delivery model, because when we talk about the direct impact that COVID has had on so many of these retailers, I mean, even the grocery stores, the anchored centers there for your business, you can't overstate just the impact that COVID has had on so many of these different names. So I know that your strategy has proven at least to be the right strategy, certainly during a time like this. But when you take a look at the future of retail, what it's going to look like five or 10 years from now, how do you see that playing out?

CONOR FLYNN: So the lines are definitely blurring. When you look at the old retail model, it's really sort of starting to merge into an omnichannel retail model, where most of the best in class retailers today are not just single channel. They're utilizing their stores as distribution and fulfillment points. And where we benefit from that is our assets are located in that last mile. All the retailers are trying to solve to get as close to their customers as possible and to deliver their goods any way they choose. So whether it's delivery to the home, whether it's buy online, pick up in-store, whether it's curbside pickup, or whether it's shopping in the actual store. And so what you're seeing is the players that have been able to invest in omnichannel have started to utilize their stores as a differentiator. Because they're the closest to the customer, they're actually able to service that customer faster in those ways.

RICK NEWMAN: Hey, Conor, Rick Newman here. With regard to those small retailers that are struggling to pay their rent, is it getting worse, or is it getting better? Do you feel like you can see a pathway to the other side of this thing, or is it more like, winter is coming and it's going to get ugly?

CONOR FLYNN: So all of our shopping centers stayed open through even the worst of the pandemic. We have up to, now, 96% of our tenants are open and operating. We're collecting over 85% of our rents, and the small shops, definitely, are the ones where we're trying to bridge them to the other side.

I think, to your point, winter is coming, right? So there's a lot of opportunities for, in the warmer climate areas, to activate outdoor space. There is a concern, obviously, with capacity constraints inside when they don't have the ability to have a sidewalk cafe or a picnic area to service customers. So that's where we continue to think and brainstorm, what can we do as a landlord to help them activate their curbside pickup program, to do more with ghost kitchens.

One of the interesting tidbits I found from a small operator is they're predominantly a brunch player. So they do a big business during the beginning of the day, and then they actually close in the evening. Well, what they've done is they've come up with a strategy to utilize their kitchen as a ghost kitchen and to activate a taco concept in the evening. So even though their fixed costs are the same, they're actually able to utilize that kitchen to be able to drive more sales in the afternoon for just purely curbside and delivery model.

- Conor, what do you see is the role of the government in helping with that bridge? We've heard so many stories about small restaurants, for example, not being able to pay their rents, landlords not necessarily giving them relief, because they've also got to pay. And what you've really got right now is just a moratorium that's in place, kind of kicking the can down the road.

CONOR FLYNN: Well, you're exactly spot on. I think originally, when they launched the PPP funding round, we thought long and hard, how do we go about helping our small shops navigate that process? And we launched a tenant assistance program which gave them the ability to use an outside attorney, free of charge, on Kimco's dime, to have them navigate that process, to get their documents in place so they could really, hopefully, get those fundings from the government. Over 600 tenants signed up for our tenant assistance program. They generated over $20 million of PPP funding, which was great. You saw the government actually working there.

Now with the program exhausted, or shut down, we're starting to see how does Kimco become a bigger partner there? What else can we do to help these folks bridge the other side? Do they need additional working capital to get their store, their business up and running? Because my biggest concern is these small businesses, they're like the fabric of the community. Many times they're generationally owned. Many times they're run by people that live and breathe the community. So we want to make sure, if they were a strong business coming into this, Kimco is well positioned to utilize our balance sheet to help them bridge the other side.

You know, we have over $2 billion of dry powder. We have almost double the amounts of liquidity of anybody in our peer group. So we're fortunate. We're an unsecured lender. We just did a 1.9% bond. When others are secured and trying to put mortgages on retail properties that are difficult today, we're in a unique position to hopefully not only weather the storm, but be able to thrive on the other side.

SEANA SMITH: Conor, I want to ask you more of a-- from an outside view, looking at retail right now. Because we've been talking about a record number of store closures over the past couple of years. We're expecting that again this year. And it seems like there is a supply and demand problem when we take a look at retail in the landscape right now. To what extent do you think the US is still over-retailed?

CONOR FLYNN: So you're exactly right. There is an oversupply issue in the United States. If you look at us versus any other developed country, we're like four or five times more GLA developed versus other countries. So we recognized that about five-plus years ago at Kimco and did a massive transformation of the portfolio to get to markets that have higher barrier to entry. And what I mean by that is there's a supply and demand balance there. So it's harder to develop in certain trade areas than others. So we sold over $6 billion worth of real estate over the past five years to get to where we believe there's a balance. And what I mean by that is higher density.

So typically, a shopping center is 80% parking lot. And so if you think bigger picture, if only 20% of it is developed by a single story, and you're in these high dense areas, you're sitting on gold that you can unlock through redevelopment. By entitling-- whether it's multifamily, whether it's office, whether it's hotel-- another use that can complement the retail. And we look at the retail as an amenity. And if you look at the combination of those, the amenities really drive premiums on apartments.

And so we have, actually, 5,000 apartment units entitled on our portfolio today. We're striving for 10,000 over the next five years. And feel like with the amenity that we bring to the table, we have, actually, a pretty unique set of opportunities set in the future.

SEANA SMITH: Conor Flynn, great to have you on the show. We really appreciate you taking the time here. CEO of Kimco Realty. We hope to have you back soon.

CONOR FLYNN: My pleasure.