Store closures are an all too common occurrence nowadays, with announcements hitting the news cycle on a semi-weekly basis. Mass closings by household names like Victoria’s Secret, Gap, and J.C. Penney have raised concerns amongst developers that traditional retail centers are in danger of extinction as e-commerce gains steam. Fortunately, the outlook isn’t nearly this pessimistic. In fact, these empty boxes unlock potential for new e-commerce concepts and alternate uses and could be leading us towards a whole new era of bricks-and-mortar retail.
Shopping centers with compelling assets relevant to consumers will attract investors this year, according to Nuveen’s 2019 Real Estate Outlook, especially properties like destination malls with experiential offerings. To leverage new opportunities and grow value, developers must understand the consumer expectations driving industry shifts and adjust accordingly to meet the evolving demands.
Shopping center diversification
Now more than ever, profitable retail centers are straying from tradition. Malls are frequently redeveloped and rebranded as “town centers,” “shops,” and villages,” and older occupants are often replaced with non-traditional retail tenants. Suburban retail developers are realizing that converting retail centers to mixed-use destinations will attract the key demographic consisting of older millennials ready to settle down outside of urban areas.
Though the mixed-use trend has gained in popularity, it’s not a new phenomenon. Research by CoStar shows the share of space occupied by non-retail tenants at regional malls climbed to about 13.0 percent in 2016, up from 10.5 percent in 2012. By reducing dependence on traditional shopping center retailers like big-box stores or apparel shops, developers can make room for alternative tenants like entertainment facilities, fitness centers, hotels, food hall concepts, and multifamily offerings. These diverse tenant mixes meet consumers’ desires for speed and convenience by fulfilling multiple needs at one location. Adopting mixed-use enables developers to fill vacated spaces and add value without abandoning the original retail center concept.
Filling mixed-use centers
Before signing new leases, developers and owners must analyze regional consumer trends. Is the retail center in a suburban area? If so, mixing home, food and beverage, and entertainment occupants will add appeal for different age groups. Is the property near downtown employment drivers? Adding a craft brew pub or fitness club is a great way to attract young professionals.
This type of outside-the-box thinking is critical when it comes to creating a successful tenant mix. We live in an age of instant gratification, when consumers expect and appreciate a one-stop-shop experience, so developers need to identify and implement strategies to meet this demand. For example, RD Management recently added MedFirst Primary & Urgent Care to our tenant mix at Waterview Marketplace in Parsippany, N.J. MedFirst will join DSW, Whole Foods Market, Ulta Beauty, Orangetheory Fitness, Homesense, Shake Shack, B.GOOD, and The Paper Store at the center once it’s completed. This gives regional shoppers easy access to premier retailers and health and wellness offerings, with community-based medical care right next door.
From medicine to co-working spaces, there are very few rules when it comes to leasing up a retail center these days. One thing that hasn’t changed is the necessity of a strong anchor, preferably grocery, with complementary yet diverse in-line tenants. This combination will put any retail center on a path to long-term success. It also creates another opportunity for developers to think strategically. What will best fit the area and drive traffic to other tenants? What’s missing from the local community that can be added to create value for residents?
Since department stores are losing momentum as profitable anchors, developers should analyze local needs before finalizing tenants.
Trends to watch
A well-honed knowledge of industry trends is critical for the viability of any business. For retail center developers, there is no exception. It’s important to stay on top of shifting consumer preferences to remain successful. Unsurprisingly, many of today’s trends are influenced by technology and largely driven by millennials.
Millennials, in particular, are responsible for the rise in experiential retail, which for developers means creating a unique and photo-ready shopping environment to keep young shoppers engaged. It also explains the surge of pop-up shops in areas targeting younger foot traffic. While pop-ups lack permanence, their ability to attract customers makes them effective marketing tools.
Pop-up shops are increasingly utilized by online retailers looking to improve their omni-channel presence; it allows them to test physical retail without the burden of a long-term lease. This interest in bricks-and-mortar retail will continue to rise this year as digitally native retailers recognize the need for customers to touch and feel their products in order to spur business growth.
Despite the headlines of store closures, there is strong value in real estate for retailers. To attract the latest concepts and customers, developers must be willing to diversify. A mixed-use retail center conceived through both analytical and creative thinking will find success in the months and years to come.
Richard Birdoff serves as principal and president of RD Management, a privately-held real estate development and management organization with over 150 commercial properties in its national portfolio.