The country will reopen sooner or later, and it will look far different when we become the “new normal.” More and more small businesses won’t be able to make a profit. Dominos will fall as the effects tumble into commercial real estate, residential real estate, schools, child care, and government.
Restaurants
As restaurants reopen in Georgia, the governor says they will have to meet 39 guidelines. For some, those guidelines will mean they lose money every hour they are open. Look for those requirements to be modeled for restaurants around the country. Some of the most profit-threatening Georgia requirements include allowing only 10 patrons per 500 square feet, limiting parties to no more than six people per table, encouraging reservation only, and not allowing people to congregate in waiting areas.
Restaurants need a minimum patron per square foot to make a profit. Cut the number of tables in half, and they simply can’t make enough money to stay in business. The larger chains may be “safe,” but smaller restaurants operate on a knife’s edge of profitability even in the best of times. Cut their maximum patronage in half, and it slices their ability to stay open in half.
And there’s more. It can cost upwards of $10,000 to restock the refrigerators and bulk bins before they serve their first meal. If the restaurant has already had to cut its possible patronage in half, it could mean just locking their doors forever.
Commercial landlords
As restaurants close, vacant storefronts will result. Those storefronts will be difficult to rent because they just add to other small businesses that bit the dust during the pandemic. Look for lower rents and rent concessions, but also look for foreclosures. Shopping centers, which were hurting before all of this came about, will lose more tenants and the mall anchors will suffer because the shoppers who come to the smaller shops often end up at Macy’s, Dillard’s, Nordstrom, and others. And with former giants Penney’s and Sears teetering, the vision of the vacant shopping mall looms large.
24-Hour Fitness is threatening to file Chapter 11 bankruptcy and Gold’s Gym has already filed Chapter 11 even though CEO Adam Zeisiff says they are “not going out of business.” These could be the biggest fitness center companies to fall, but there are lots more sitting on the same knife edge as the restaurants. Fitness centers depend on lots of people signing up on a year’s contract and never being seen again. Planet Fitness, for example, reports that half of its members never do more than drive by their gyms, possibly feeling guilty and thinking “when I have time. . .,” but never stopping in. It’s a good thing, too, because their average gym holds about 300 people but they may sign up 6,000 on year-long contracts.
Because of the coronavirus people hesitate to go out in crowds, so fitness centers will have trouble signing anyone up. Watch them begin to shut their doors. According to activewellness.com “6,000 square feet. . . is the bare minimum for a quality fitness center.” But larger chains have considerably larger footprints. Gold’s Gym can take up 35,000 square feet, 24-Hour fitness up to 42,000 square feet, Planet Fitness 20,000 square feet. The average small business in a mall or storefront is between 800 and 2800 square feet, only 13 percent to 46 percent of the square footage of the minimum fitness center size. But for the 42,000uare feet a 24-Hour Fitness takes up, a small business is only 2 percent to 7 percent as big. A fitness center closing can be a profit-killing hit to a commercial landlord.
Commercial landlords will also suffer in office rentals. Why that is in a minute.
Residential landlords
Look for unemployment and fewer hours to be a problem even after the economy begins to come back. The PPP grants from the government require businesses to use at least 75 percent of the money for hiring back employees, but they don’t have to be the same employees they laid off. Some business owners will use that as an excuse to hire new help, not only to get rid of the employees they would have liked to have dumped when unemployment was 3.5 percent but also to pay lower wages.
That means rents will be lower many places and vacancies higher. It will also mean that some existing tenants won’t be able to pay their rent, and what with some cities prohibiting evictions, there may be no rent being paid at all for some units. In addition, look for laws prohibiting rent increases.
This will require a rethink of rental requirements and entirely new and creative marketing to attract qualified applicants. But there’s more. Expect more draconian laws emanating from some cities adding to requirements for “sanitizing” rental properties.
Office Jobs
Restaurant and retail jobs require physical presence at the business. But those people who worked from home present a different scenario. A YouGov study paid for by USA Today and LinkedIn reports that productivity increased when people worked from home. Saving commuting time was a huge factor, 71 percent, along with fewer distractions, 61 percent, and fewer meetings, 39 percent. Those figures may be suspect since YouGov uses a fixed list of paid respondents but probably representative.
Even so, business owners will take notice. If people can work from home and be more productive than sitting in an office, why does the business need some much office space? Look for businesses to shrink their square footage, thus making it additionally difficult for commercial landlords.
Schools
Several different options have been presented for reopening schools. Many will result in child care problems and teacher shortages. One idea to enable social distancing has cutting the classes in half and students coming every other day. That means child care will be required for kids every other day, assuming that parents go back to work at a physical workplace increasing child-care costs enormously.
Another proposal breaks the classes in half and opens up cafeterias and gyms for classes. That will require more teachers and create a problem. After hurricane Katrina for example, the New Orleans schools closed for four months. When schools reopened in the fall of 2007, only half the teachers returned. There’s no telling if that will be the case with the schools reopening after the coronavirus, but some older, veteran teachers may decide to stay away until there’s a vaccine or the virus is completely eradicated. According to the National Center for Education Statistics, 23 percent of teachers are between 50 and 59 years old and 7 percent older than 60.
Government
Tax revenues have fallen because of a slower economy. The Pew Charitable Trust estimates that personal taxes, 38 percent, and sales taxes, 31 percent, account for the bulk of state funding. If tax revenues continue falling, governments could well be in the position of having to lay off employees including even police and firefighters.
Then there’s public transportation. According to a USA Today article May 4, “transit ridership demand has dropped 75% compared to normal,” In San Francisco, ridership has dropped 85 percent, in Detroit about 67percent and in Philadelphia 60 percent. The New York subway system is closing every night beginning at 1 AM for train cleaning.
That, of course, means more people who have trouble getting to work, are out of work and out of rent money.
The country will look far different when it reopens with more people out of work or earning less money, vacant storefronts, and businesses just trying to make a go of it before they give up and lock their doors.
By Robert L. Cain
