By Mark R. Smith, Contributing Writer
What’s the future of retail?
The answer to that question depends on who you’re conversing with, but there are plenty of observers who base their prediction on the number of delivery vehicles that drive through their neighborhoods every day.
To that end, Steve Krupinski feels that what some professionals are calling a seismic shift in the retail market is past tense.
“Retail has gone through a literal revolution during the last five years, with COVID-19 dramatically contributing to a significantly reduced demand for conventional space in many shopping centers,” said the Washington, D.C.-based commercial real estate consultant. “The impact is that most new retail projects include smaller retail footprints.”
And that’s often due to the online shopping boom that reached new heights early in the pandemic. Various industry executives seem to think it rose from about 8-10 percent of all purchases all the way up to 20-30 percent, with even analytics companies posting varying numbers. And given the more recent parameters concerning projects small and large, Krupinski said that developers are finding that “less is more” when it comes to properly scaling their projects.
“No one benefits from a sea of empty stores in retail venues, so that’s critical,” he said. “Many developers have realized that you can still deliver an extremely successful mixed-use project, even with a significantly reduced retail component.”
Scaling Down
Given the pandemic-fueled rise in online shopping, many developers think a mixed-use project with “less than 50 percent of the originally planned retail component” will work, said Krupinski, who can speak of his own “rightsizing” experience with Westphalia Town Center, in Upper Marlboro, Maryland.
But one component that’s helping to boost the retail side is restaurants, often in multiple units. They’ve “suffered tremendously during the last two years, but they’re seeing daylight at the end of the tunnel,” he said. “They have an outstanding future and will continue to be major drivers of successful mixed-use deals, as well as retail centers, from large regional attractions to community or submarket strip centers.
“It’s the art,” said Krupinski, “of determining how much of a particular use provides a good overall balance for a successful venue. Scale is critical.”
Of course, when the scale gets larger than that of neighborhood retail, Amazon’s impact on the reduced need for physical storefronts “has been colossal,” he said. “All of these factors have contributed to the decline in demand for conventional physical storefronts. The most successful retailers will have a balance of digital and physical.”
It was only about two years ago that — despite the intermittent (but fairly frequent) delivery vehicles perusing a given neighborhood and what certainly looked like a growing number of packages stacked upon a smattering of doorsteps — online sales only accounted for roughly 11 percent of all retail sales, according to Statista.
Since, that number has risen for obvious reasons, but perhaps not as much as the shopping public might guessimate. “Online sales are up to about 15 percent of the overall market (also according to Statista),” said Bill Clements, partner with The Retail Companies, of Birmingham, Alabama.
Part of what is thwarting the appearance of new product on the market today is that “the cost of new construction is sometimes prohibitive,” Clements said, “because pro forma rents are high. Still, new construction in the mixed-use arena is solid. So if you have an older center with $28 per foot and the new place is $33, if someone needs a flagship location they may pay the extra rent money.”
As for the once-dominant malls, the sector is perhaps devolving as repurposing at various properties in underway. “If the center has natural frontage, good ingress/egress and ample parking, that can still work in what I call the ‘de-malling’ of the market,” he said. “Many such properties are in the midst of a rebirth of sorts and becoming some other property type, often multifamily housing or senior living communities.”
One example is the former Landmark Mall site in Northern Virginia, which will become home to a new Inova Alexandria Hospital, as well as residential, green space, parking and dining options, with a 10-screen luxury cinema.
What’s Hot
While the retail market isn’t especially on fire, it’s certainly part of the inspiration of what is. After all, online giants like Amazon need wide open places to store all of those products consumers buy via their devices.
“Industrial is hotter than anything,” said Clements, “and there could even be an Amazon or warehouse use in the back of a mall, since such big blocks of space will continue to evolve. Each submarket will dictate what can or cannot be the highest and best use.
That can include big box for outdoor places,” he said. “Flood & Décor, for instance, is taking many former Kmart spaces, as are furniture store and grocers. Those are all possibilities, as long as access is easy.”
Expanding on that thought is Owen Rouse, senior vice president with MacKenzie Commercial Real Estate Services, in Baltimore. “Some industrial occupiers have store replenishment warehouses, others have warehouses dedicated to ecommerce,” he said, “and some do both in the same location. But I think you must look past the numbers, because as retailers expand sales, they may be expanding them off a suppressed base.”
Rouse said in this case, “comparisons to pre COVID-19 sales levels may be relevant. There has been merger and acquisition activity that’s intended to create efficiencies in a particular company’s supply chain, which includes their warehouse/distribution component.”
Another dependable cog in today’s market, Clements said, is 15,000-square-foot (or so) strip centers with up to seven tenants. “That will continue,” he said.
On the larger scale, he also noted that knee-jerkers who offer dour observations the moment they hear a major retailer is shutting down a number of stores need to comprehend the bigger picture.
“All big companies, such as Best Buy and Bed Bath & Beyond, have naturally closed in markets that have shifted, so it’s not so much that a chain is doing poorly as simply rightsizing, chasing growth elsewhere and reinvesting,” he said, adding, “They could also be opening other locations with smaller stores.”
All told, “The death of brick and mortar retail has been greatly exaggerated,” Clements said. “The service sector will always be relevant, and know that from traditional stores to food options to community retail, it will always be around. And vacancy rates across the country are probably less than one might think.”
Smaller Footprints
While Aaron Farmer, president of The Retail Coach, in Austin, Texas, is among the observers who wonders how long it will be before online sales reach 20 percent, he stressed that the main point to note is that consumer habits have changed. And like Clements and other peers, he stressed that observation in no way means that a retail apocalypse is a thing.
“That’s just not happening,” he said. “We’re seeing anticipated changes, but retailers also understand that they also need brick-and-mortar space for the ‘experiential’ retail,” noting concepts like the Market by Macy’s offering in Texas that is only about 20 percent of the department store chain’s typical square footprint.
So happily, leases are still happening, albeit often for smaller deals. “Kohl’s, Old Navy, Target and even Ikea are reducing square footage in a given location by up to 50 percent and subleasing the rest of the stores. “We’re seeing such spaces fill up here in Texas and in other markets,” he said. “Backfilling hasn’t been much of an issue.”
As for the online component, Farmer pointed to the hybrid models of some established chains. “We’re seeing the pick-up-in-store option gain popularity for Lowes, Target and Home Depot,” said Farmer. He also pointed to Kohl’s deal with Amazon that enables Amazon customers to make returns at a brick-and-mortar Kohl’s—then Kohl’s offers the customers a discount coupon.
As for anyone who insists that online shopping will be the end of cruising to the neighborhood center simply needs to acknowledge a newer player in the brick-and-mortar game: Amazon, which operates a variety of physical locations, trading as Amazon Books, Amazon Fresh, etc., scattered nationwide.
Farmer thinks one reason the commercial real estate community is taking big box vacancies in stride is because they don’t always need to re-lease the entire space to one tenant. “For a 100,000-square-foot space, today we’re looking for backfill by three or even four of what we’re calling ‘junior boxes.’”
He also thinks the market will see more mixed-use going forward. “That component will stay popular for the foreseeable future with rising construction costs and what retailers and restaurants are willing to pay, rent wise,” he said. “Builders need various uses, including regular retail, restaurants, entertainment and hospitality, to get the rates to make the projects work.”
Lease Breaks
And that comes down to the fact that humans need, to some degree, interaction.
“Retail is alive and well,” said Mark Millman, CEO of Millman Search Group in Owings Mills, Maryland. “While online is always going to be a popular option, know that people are always going to want to go out, as well as touch and feel what they buy. That part of why places like Dave & Buster’s and Medieval Times do so well.”
But Millman also understands that the market is shifting and that vacant space needs to be spoken for. “Generally speaking, empty spaces fill up, temporarily or permanently. There is a great deal of money in the market for new concepts,” he said, “and know that a landlord can get more rent from the former Lord & Taylor location in Westfield Annapolis (which has been subdivided), for instance,” he said, “than it received from Lord & Taylor.”
When a sizable number of anchors leave a mall like Westfield Annapolis—which has also lost its Sears and its Nordstorm, so three of its five anchors have exited—“the mall’s remaining smaller retailers can exit their spaces or have their rent dramatically reduced,” said Millman. “So Westfield is taking a major hit. It’s laying off and reorganizing, and its entire portfolio could be up for sale.”
He was also stressed the importance of restaurants and other eateries to today’s retail landscape. “People are eating out more and if not they’re not, they’re using delivery services like DoorDash, so many of the hospitality concerns that struggled mightily early in the pandemic are doing well now.”
The main issue today with areas of the retail world (among many other industries) is staffing. “The stores are busy,” said Millman, “but struggle to find the right workers for the right place. Many people have gotten out of retail to explore other options, including starting their own business or just staying home with the family, which they may be able to do due to federal funding.”
“That’s why,” he said, “many places have had cut hours or close one or two days a week.”
Crunching Numbers
With space available around the industry, Todd Walls, chief innovation officer for Buxton Co., of Fort Worth, Texas, a customer analytics firm, discussed how much information and preparation go into how a chain expands.
“Most of the time, our clients operate at least 30 stores,” said Walls, “but reaching that level is getting more complex. It’s amazing how many people just trust their gut when it comes to opening stores, but when they get to 30, they can’t afford any more mistakes, though they have also had considerable success using the same process.”
Buxton works with clients great and small, for every retailer from the largest sporting goods retailer in the country to tiny coffee houses, “that often struggle to comprehend who their customer is,” he said. “We help them understand the existing store network and the performance of each, which is a huge consideration.”
Noting that before 2008 closing a store meant “the company got fried” by the media, Wall Street, customers, etc., Walls said that changed after the 2008 recession. “At that point, closing stores became more acceptable and that usually meant shuttering the lower performers. That was often a mistake, because we assist with those very situations. We know which stores to keep and which stores to close. You don’t address that issue by firing the store manager.”
Today, if a new store opens it may seem like a recent idea, but “that decision was made 24 months ago. The second quarter of 2021 is when people started looking ahead. It takes time to identify and open new locations, from about 18 months and even up to three years,” he said.
The other trend is for larger companies, such as Walgreens, to have its own real estate department or hire a firm like Buxton.
“That left a gap for smaller retailers that didn’t have deep pockets,” Walls said. The answer? “We still offer our usual ‘white glove’ service for location planning, but now also offer SCOUT, Match and Mobilytics for self-service analytics concerning what markets these chains should consider and how to compete, as well as tracking thousands of retailers.”
Launching Pads
Clint Jameson is managing partner with Centerpointe Research Institute, in Scottsdale, Arizona, a Starbucks developer that focuses on single-tenant retail development. The COVID-19 market has taken a different turn that he imagined it would, but he said that’s been a good thing.
“We thought we would lose deals at the start of the pandemic and the opposite happened,” said Jameson. “There has been high-demand for existing fast food restaurants and getting them opened right away, but that wasn’t so much the case a few years ago. But now, even if the location isn’t that great, you can figure out a user for it.”
Now, established eateries are getting in step with what today’s COVID-19-era customers want, notably food delivery. “Even Chipotle and Golden Corral, for instance, are considering drive-up windows,” he said. “That concept is very hot.”
“I’m also surprised at the level of activity for gas stations and car washes,” Jameson said, noting that the single-site approach, whatever the use, “is way more valuable than building a strip center and hoping to keep it leased.”
Another company that focuses on pad and smaller sites is Chicago-based XSite Real Estate. “We also keep them easy access,” said Brett Paul, a principal. But unlike Centerpointe, XSite also owns some multi-tenant buildings “and did lose some tenants earlier in the pandemic but it seemed like the businesses that were troubled anyway closed and the others have bounced back.”
Still, an XSite multi-tenant building that once would have housed five or six companies now often has two or three tenants to help avoid vacancies. “So when we build on spec, we want 70 percent of the space committed,” Paul said, noting, like Jameson, a trend toward convenience-type users in the food sector that incorporate apps, delivery, drive-thrus, etc., into their marketing approach.
While also pointing out more medical users, such as hospitals and dialysis companies, are absorbing some repurposed space in existing centers, the main trend remains merging with the digital world.
“The larger malls [and centers] are becoming almost showrooms,” said Paul, “and some are still doing well and able to fill their open spaces, often with restaurants or some kind of entertainment option. Generally speaking, about 10-20 percent are on solid ground and the rest are struggling with various issues.”
It all adds up to the today’s industry landscape. “Once the pandemic subsides, people will come out more often, but retailers have adapted to the new market,” said Paul, “and I think the hybrid approach will remain popular.”
Bio: Odenton, Maryland-based Mark R. Smith joined Expansion Solutions after having written about site selection among the vast number of topics he has covered in the business universe. That part of his career began in 1993 when he joined The Daily Record, a Baltimore business and legal publication, where he delved into the worlds of economic development and commercial real estate, among numerous other industries; in 2003, he was named editor-in-chief of The Business Monthly, another Maryland publication that covers the scene in the Baltimore-Washington Corridor counties.
Concurrently, he’s written at length about the film and video industry for a variety of publications, and about his other loves, including music, sports and leisure.
