Industries Facing Headwinds in 2021

These industries share similar challenges but face different outlooks

2020 has been a truly unique year, with nations inflicting massive economic pain on themselves to mitigate a global pandemic. The list of industries that suffered in 2020 is long and depressing, but the promise of a vaccine in the short term is going a long way to reviving many sectors of the economy. In some cases, however, the headwinds will likely linger well into 2021. We'll look at some of the industries facing longer-term, structural problems over the coming year.

Key Takeaways

  • Commercial real estate, hospitality, and traditional brick-and-mortar retail have all been badly damaged by the pandemic.
  • These three industries have high fixed costs and a dependence on throughput, which the pandemic choked off.
  • Hospitality is most likely poised for a post-pandemic rebound, but commercial real estate and traditional retail will need innovation to succeed in 2021 and beyond.

Commercial Real Estate

Commercial real estate has had a rough 2020, with the sector seeing rent collections going down and tenants renegotiating everything from the space needed to the rental rates. The office space sub-sector is the portion of commercial real estate that is facing the most long-term risk, as companies of every size and type have now experienced some level of remote work.

Technology companies in particular are looking at a range of options that will reduce office space needs such as permanent work-from-home arrangements or flex schedule arrangements with a smaller office footprint. At the very least, commercial landlords are going to have to invest in their office inventory to attract new tenants in a weaker market, making their workspaces match the flexibility that employers will likely adopt going forward.

Retail space landlords have arguably seen an even more severe shakeout with the damage the pandemic is doing to traditional retail. Traditional storefronts are being abandoned as retailers struggle to reduce their footprint. If COVID-19 can be tamed in 2021, there could be a wave of nostalgia for the mall shopping experience, but the long-term trend for brick-and-mortar retail still looks grim.

There are many existing and yet-to-be-discovered solutions for turning outdated malls into revenue generators again. Converting malls into multi-purpose destinations with less emphasis on retail has promise, as does fusing office and living space into retail space. That being said, the pandemic has likely extended the timeline on these transformations while simultaneously accelerating the pain in this sub-sector. Part of this is just the challenge of pushing projects forward during trying times, but a more important issue is the fact that density, once a main goal of urban planning, may be less attractive in the future given our recent experience.

Hospitality Sector

The hospitality sector was obviously among the hardest hit sectors in a global pandemic that basically shut down leisure travel worldwide. Tourism destinations, hotels, recreation spots, restaurants, and airlines have been hanging on largely thanks to stimulus measures. The positive news for the companies in this space that can make it through is that the pent-up demand is real and growing. When it is safe, a lot of people accustomed to traveling and spending will do so with a vengeance.

The headwind facing the hospitality sector is the fact that "when it is safe" is a highly personal decision. Dining in a restaurant is a relatively small outlay of capital for a pleasurable activity in a local environment. A week-long trip to Disneyland is more expensive and may be perceived as riskier even after the pandemic is tamped down.

While the companies and some investors in the sector are betting on a robust rebound in 2021, it heavily depends on widespread vaccination and lower COVID-19 numbers globally. The hope that this will happen quickly is up against the reality of logistical challenges for several of the vaccine candidates. More importantly, just because COVID-19 abates, it is not a guarantee that there will be the same base of customers with the means and confidence to travel right away. Companies are obviously not the only ones that have been economically affected by the pandemic.

Traditional Retail

There may always be a place for stores that offer the ability to browse and touch products while getting timely customer service from staff. It is, however, looking increasingly like a niche sub-sector, while retail as a whole is going increasingly online. The pandemic and the lockdowns have accelerated the speed at which consumers are getting comfortable ordering a larger portion of their goods online. Younger generations were already opting for more online shopping offset by experiential local outings, but older consumers have now been forced at least partially online for their shopping needs.

A potentially large portion of these late converts will end up mixing in more online shopping even when it is safe to go back to browsing in-store. Even though this may not translate into a significant reduction in terms of foot traffic, every basket item being sourced online is significant for retailers going forward. Traditional retailers were already grappling with smartphone-wielding consumers using their stores as showrooms before price shopping online. Now they have an issue where even declining foot traffic may be hard to come by following the pandemic.

Three Different Outlooks

The three industries covered in this article have some things in common. The traditional retail, commercial real estate, and hospitality industries are all made of businesses with high fixed costs and a dependence on throughput (or occupancy) on the existing assets. Commercial real estate and the hospitality sector are, for the most part, facing headwinds created by the pandemic.

The hospitality industry is the most vulnerable to an extension in the pandemic in the short term, as many companies are seeing negative cash flow without customers. That said, the industry has a fairly healthy long-term outlook because we still love to travel and experience new things – we just can't right now. Companies in this space need to find a way to hang on rather than fundamentally change their business model.

Commercial real estate is doing better than hospitality now due to the nature of long-term leases and stronger sub-sectors, but it faces longer-term challenges in what to do with malls and excess office space. Innovation will be needed, and some of that work was already underway before the pandemic derailed it. The business model of creating and leasing space still has a place after COVID-19, but the type of spaces need to better match new working arrangements and tenant lifestyles.

Traditional retail is hurting in the short, medium, and long term, as the pandemic accelerated existing negative trends for the industry. The strongest players are becoming online retailers, so brick-and-mortar retailers need innovation badly. The malls around them may evolve to multi-purpose destinations, but that won't improve a shop's bottom line unless it can convert that foot traffic into real sales. If traditional retailers can't re-imagine their business models and innovate, the headwinds of 2021 will continue to blow away companies in this space.

Bottom Line

While the outlook for 2021 is not great for any of these three industries, it is not universally negative either. Investors looking for a bargain right now will find plenty in these three sectors. Trying times are also when solid companies emerge and reinvent parts of the industry they are in.

There will no doubt be some companies in these three industries that defy all the headwinds and long odds, making their investors very happy along the way. The challenge for bargain-shopping investors is spotting those gems before it is obvious to the broader market – something much easier said than done.

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