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The Pandemic Growth Puzzle: How to Expand When the Risks Seem to Outweigh Everything Else

The Pandemic Growth Puzzle: How to Expand When the Risks Seem to Outweigh Everything Else

Expanding a brick-and-mortar business has always been tricky. If you build it, consumers might not come. But in a pandemic that has required

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Expanding a brick-and-mortar business has always been tricky. If you build it, consumers might not come. But in a pandemic that has required countless consumer-facing companies–restaurants and bars, live entertainment venues, gyms, retailers–to shutter and retool, growth is actually kind of scary. 

“You’re not 100 percent sure [growing] is the right thing,” says Erik Allen Ford of Buck Mason, the Los Angeles-based menswear brand he co-founded with Sasha Koehn in 2013. Nevertheless, the company launched its 11th retail location in Austin, Texas in August. “You have to weigh the odds, and you have to figure out what the risk tolerance is.”

The risks right now are steep. In large part, consumers have taken their spending online, as the pandemic rages across the U.S. and amid new hotspots in several Midwestern states including North Dakota, Missouri, and Wisconsin. 

Businesses continue to reel as a result. As of the end of August, nearly 164,000 American businesses listed on Yelp have closed since the pandemic’s onset, according to the company’s September Economic Impact Report. That’s a 23 percent increase from July. The report further points out that some industries like restaurants and retail remain deeply stressed. “We’re in this terrible place for the foreseeable future,” says Mark Cohen, an independent retail analyst and adjunct business professor at Columbia University. “The harder-hit industries are going to continue to lay people off or will fail to bring people back or will fail and never bring people back.”

The Buck Mason founders aren’t immune to that pain. While the company is reporting that sales overall are up from the $50 million it booked in 2019–thanks in large part to a brisk business in online sales and curbside pickup–having stores in tourism-dependent shopping corridors such as L.A.’s Venice Beach, New York City’s West Village, and San Francisco’s Hayes Valley has given the founders pause.

“One of the big things we’re all trying to figure out, six to 12 months ahead is, of the retail locations we have, how many were dependent on tourism and travel to get to those locations?” asks Koehn. “We’re seeing a decent performance overall, but we’re over-indexing on the stores that are neighborhood driven.”

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That includes its newest location on South Congress Avenue in Austin. In the last month, Koehn adds, “we’re seeing a very healthy local business starting [in Austin] that we can depend on–even when events like South By Southwest get canceled.”

And for founders who can similarly stomach the uncertainty of the moment, there’s never been a better time to nab a prime location.

In the second quarter of 2020, the total amount of newly vacated U.S. retail space exceeded the amount that became newly occupied by 14.6 million square feet, according to an analysis by commercial real estate firm CBRE. That marked the first time the gauge turned negative since the first quarter of 2011. And while the overall retail availability rate nudged up by 3 basis points to 6.4 percent in the second quarter from the first quarter of 2020, the neighborhood, community, and strip-center segment posted the largest availability rate increase at 40 basis points, quarter over quarter. 

Rents have softened, too, as you would expect. While average asking retail rents haven’t budged much, rent growth in the second quarter was down 4 percent year over year, to $17.63 per square foot. 

Landlords are much more willing to deal these days, however. When Amy Errett sought to expand the footprint of hair-color stalwart Madison Reed amid the pandemic, the entrepreneur said she was able to negotiate discounts of 30 percent to 35 percent of what landlords had been asking. “We had a number of leases that had not been signed yet but had had the terms negotiated, and we’ve been able to add some favorable terms to those deals. We would not go back to an existing space and say to them: ‘We’re going to pay you less just because of the market,'” she says. “We are negotiating.” After starting the pandemic with 12 color bars, the company now boasts 22 locations, the newest among them based in greater Atlanta, King of Prussia, Pennsylvania, and the Washington, D.C. area. 

“With the increase in supply, you’ll continue to see pressure weighing on both office and retail rent,” says Adam Henick, co-founder of the New York City-based real estate firm Current Real Estate Advisors. “As a company that largely represents tenants, it’s an exciting time to be on this side.”

To wit: Henick’s company in September opened an outpost in Miami’s Wynwood neighborhood. “We’re excited about the Miami market,” says Henick. “As much as I’m excited about the economic opportunity, as a New Yorker I’m sad to see that places are going out of business. But “it’s an evolving situation,” he says. “You have to constantly innovate and be creative with your strategy.”

That desire to think creatively is, in part, also driving Buck Mason’s expansion plans. “The first month or so [during the pandemic] we were all trying to figure out what was going on,” says Allen Ford. “Once we felt like we had an understanding of what was happening, you start to think about what the opportunities are.” So what’s next? The success of Austin has been eye opening, says Allen Ford, who noted the appeal of other up-and-coming markets including Charlotte, North Carolina, Nashville, Tennessee, Raleigh, North Carolina and Pittsburgh. “It’s given us the confidence to think outside this New York, Los Angeles, and San Francisco vernacular.”

This article is from Inc.com

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