Friday October 16, 2020 |Notes

Many charts look entirely broken this year. Economic data, retail trends, travel habits, and spending categories have all seen massive shifts, and a new baseline has yet to be set. There are wild fluctuations and it's unlikely that everything will fall into a consistent pattern until the pandemic is over.

The ripple effects of the pandemic are still taking shape. There are some misplaced conceptions that normal patterns of life will return and this is all a buildup to 'getting back' to pre-pandemic normality. The changes over the last 7 months are setting the landscape for the next stages, where cities are de-prioritized, partial work-from-home becomes widespread, and office spcae is quickly reduced. Companies recognize the enormous savings of downsizing office space, and employees generally seem to prefer a split schedule of office/remote work.

Ecommerce will continue to surge, and physical retail will be hurt. The past norms of ecommerce slowly increasing share of total retail sales have shifted. Digital commerce, in all its forms, will grow quickly and simply become commerce as the distinction becomes meaningless. In Ark Invest's recent 'Bad Ideas Report', they project "US e-commerce will grow from $820 billion in 2019 to $2.7 trillion in 2025, pushing non-e-commerce retail down from $4.6 trillion to $3.9 trillion, a level last seen in the late 90s".

The report goes on to put some numbers to the overabundance of retail space, which I've posted about previously

The US has more retail square footage per capita than any other developed nation, 5X that of the UK and 10X that of Germany.12 Moreover, even though retail sales per square foot in the US has been declining since the 1970s, retail square footage per capita has been increasing. If square feet were to stabilize at current levels, brick and mortar retail sales would continue to fall as e-commerce takes share. To push retail sales per square foot back to its peak, roughly $1 trillion worth of real estate would have to be repurposed by 2025.

We believe the brick and mortar retail apocalypse will continue to impact both equity and fixed income holders. ARK estimates that roughly $2 trillion in enterprise value is at risk in the public equity markets across the retail categories with heavy real estate footprints, as shown below.

This year has introduced changes to digital commerce at a fast pace, and these developments are paving the way for even faster growth ahead. We are not in the midst of getting back to normal. New baselines are being established and the trajectories are steeper ahead for digital commerce.