Nobody could have imagined that COVID-19 would be the greatest disruptive event for virtually all sectors in our modern economy. An unforeseen effect of this is we are redesigning, improving and changing the way we implement all economic and social connections. Tragically we are losing people, companies are going under and the largest recession in a generation if not longer is predicted. But with great sacrifice and change comes inevitable progress and development, humans naturally adapt.
Change is not necessarily a bad thing
It seems like a daily theme that forecasts are declining. Projects being postponed and clients who inform us that they will not or cannot pay us. Different rules apply in our English office, which mainly means that we temporarily have fewer people working. If there are any opportunities there, we have fewer people…. These seem like setbacks, but are they?
The Ship in the harbour is still afloat!
In times like these, everything revolves around the navigation of the art of management. We are at the beginning of a voyage, with rough seas ahead, and outcomes that we cannot predict. But it is time to innovate and communicate. "An exciting ride," said Bart Schmitz, CEO of the PFM Intelligence Group. "Especially now that I will be hitting the European roads as a truck driver myself this summer with our PLANET PFM Roadshow. With this I will be demonstrating all our innovations on location!"
The PFM Intelligence Group operates in various sectors with solutions for communication equipment and techniques to map passer-by and visitor flows. The latter in particular is an area that is under increasing scrutiny as a result of CV19. Bart notes that the view we have on the relationship and a flexible lease between the landlord and the tenant within Retail should be considered.
Footfall Index Netherlands
In 2010, at the end of the banking crisis, PFM together with IVBN (Institutional Association of Investors in the Netherlands) and later StiVAD (Real Estate Data Foundation) laid the foundation for FIN (Footfall Index Netherlands). A strong, widely supported method for indices based on visitor and passer-by data from Dutch shopping centres. A macro-economic barometer with which stakeholders in the Retail real estate sector gained insight into the performance of their assets in relation to the market. The correlation of this INDEX versus retail turnover appears to be 0.86. Undeniably, with the great advantage of immediate availability! Following the FIN, PFM has been setting up a passive rental price model for the past 5 years. A financial model in which three unknown and two stakeholders acquire a position on a common denominator: decreasing Passer-by and visitor flows.
The Retail and retail sector has been saying for years that consumers are changing. E-Commerce winning in some areas from a shopping street is not rocket science, is it? Just be aware that our behavioral changes are driven by necessity and technology, as has been the case for hundreds of years.
Visitor flows as a binder
The common denominator for every stakeholder in the Retail landscape is the passer-by / visitor. The consumer acts as a binding agent between the landlord and the tenant. But they can also become a wedge driven between. This is no different now with COVID-19. The discussions between landlord and tenant about suspending rents are increasing rapidly. Rightly so, or not?
In recent years, we have increasingly witnessed a form of turnover rent, especially in new or renovated locations. The tenant pays more or less rent depending on the turnover realized. In almost all cases, this model has a lower limit. The tenant is nevertheless obliged to pay a fixed rent per m2. This threshold value is a logical consequence of a piece of valuation. This applies to both the real estate and the underlying contracts. The landlord expects the property, location and facilities to be in top condition. On the other hand, the tenant is expected to exploit the location optimally and take on the role in the mix of the landscape. After all, it is in everyone's interest that the whole flourishes and is attractive to the consumer. So much for the theory.
Never underestimate how wrong you can be
A turnover rent threshold in a lease is no different from a lease with a surcharge for economic success. It seems so. As with almost everything, the solution is locked in data. Big data, Algorithms or we just call it numbers. The missing factor in a turnover lease is the relationship with the passer-by. Then the visitor and the conversion with the last addition (only!) The turnover!
The almost daily reporting in which tenants suspend or adjust rent "unilaterally" is increasing rapidly. Be it retailers with several billion profit in 2019 or a local clothing store that has been in the family for 4 generations. The landlords are on the other side of the table. These are often depicted as megalomaniac cash burners in oversized and beautiful office buildings. Be it investors or pension funds. One thing is certain, these parties (and yes, there are exceptions!) Invest grotesque amounts in retail landscapes and locations. Numbers that will make you dizzy! Why should they take the blows immediately without further guarantees or compensation?
The problem is clear, but the solution drifts further away.
Our econometrics and data science department have already made models in which the rent of the store location is linked to location, the number of passers-by, the number of visitors and turnover. It is obvious that you have to capture, hold and process vast amounts of data or this. Fortunately, this is PFM’s specialty. Our model was created from data and vision. The burden of proof arises from current events and a pandemic. The essential challenge is not in what you know, but in what you do not yet measure.
A passer-by rental model is the future.
Especially for settling discussions as they now take place every day. It is a fact that many players in the sector have to think about it. Until recently, our consultants in our business model could hardly determine what the lower limit of valuation could/should be in times of crisis.
We now have all the answers, but are we asking ourselves the right question?