The Way forward for Retail is Combined-Use

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The Future of Retail is Mixed-Use

The rapidly growing trend towards online purchases of “commodity” products was accelerated by the COVID-19 crisis. Many consumers who may have been resistant to e-commerce purchases prior to the pandemic appreciate the ease and security of ordering on their device, the convenience of delivery, and the competitive product prices.

Despite this fundamental change in customer behavior, the U.S. sales area was around 24 square feet per capita in 2018, compared to four square feet in Western Europe. What does this mean for the future of retail space at a time when stationary sales are generally declining? Most industry participants believe that the US retail footprint needs to shrink, and that adaptive reuse of excess space will be part of the solution.

While the US is suffering from an oversupply of retail stores, it also has a housing shortage, especially in coastal markets where most of the population's growth has been concentrated for decades. Earlier this year, Freddie Mac published a study indicating the nation is short of approximately 2.5 million units. If the housing oversupply in rust belt conditions is removed from the analysis, the housing shortage becomes even more acute with a deficit of approximately 3.3 million units. As a result, some apartment developers are starting to look for retail locations that can be used for medium to high density residential use with an on-demand shopping component on the ground floor. However, these densification strategies only make economic sense in urban environments, where high multi-family rents justify the costs of a “vertical alignment”. Secondary and tertiary retail locations and markets require alternative creative solutions to regain productivity and functionality.

For years, large-format stores have been reducing their presence in stationary retail and at the same time trying to strengthen their online sales channels. In contrast, a number of digital native brands like Warby Parker, Peloton, and Bonobos have experimented with physical locations to complement their online sales platforms. This omnichannel strategy results in less retail presence, lower costs through logistical chain efficiency, and added convenience through home delivery and on-site fulfillment. For example, Simon Property Group, the country's largest mall operator, recently announced that they are looking into the possibility of converting some of their dark anchor stores into Amazon storage space. Ironically, Amazon was instrumental in the decline of the department store and is now building last mile distribution centers that reduce the time and distance between its products and customers in empty malls.

While the near-term outlook for retailers is bleak at best, the industry will thrive in a post-COVID world with smaller stores, healthier balance sheets, and improved sales due to pent-up customer demand. Shopping center owners must focus on increasing pedestrian traffic through targeted restructuring and redevelopment strategies that incorporate synergistic, mixed-use components that meet consumer needs. The demand side of the equation should influence repositioning efforts in markets where it is more functional to include apartments, warehouses, office space or hotels than to maintain or expand the existing retail presence.

What happens next? The era we live in has been marked by unprecedented levels of chaos and uncertainty, but if American history has proven anything, our country is as hardworking as it is resilient.

Jose Carrazana is Director of Institutional Property Advisors.

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