Pandemics, priorities and the future of commercial real estate destinations
Beset by pandemic pressures and evolving in the face of ongoing demographic and socio-cultural shifts, the commercial real estate industry is on the cusp of profound change. The commercial and mixed real estate landscape of tomorrow will be very different.
While 2021 turned out to be a much stronger financial performance than many pundits had expected, it seems very clear that the COVID era has accelerated the pace of change in an industry that was already beginning to evolve in many ways. fascinating new directions. What these changes look like, what types of retail and mixed-use environments will succeed, and what the industry will look like a decade from now, are questions that owners and operators need to think about if they want to stay relevant. in the years to come.
One of the biggest changes is not just coming, it’s already here: the dramatic reduction in the number of traditional shopping malls. Some forecasts predict the loss of 20% of brick-and-mortar malls in the next five years – and more than half of all brick-and-mortar malls in the next ten years. The pandemic was the deathblow of a staggering segment, accelerating a process already well underway. The loss of so many square feet leads to a natural question: how (and where) will retailers replace this volume? Online sales and new market opportunities will help, but probably won’t be enough to replace what has been and will be lost. A physical presence is now a must for any retail brand, especially those focused on discretionary spending. Industry innovators and developers have always had to evolve and adapt to an ever-changing development landscape and consumer priorities. The challenge awaiting them is not small. At a time when a significant percentage of traditional malls are obsolete, there are real questions about what will emerge to fill these gaps.
Speculation about what will replace traditional malls often starts with big box and mall concepts. Could they be the “new” anchors for lifestyle/specialty environments? While there was are examples of malls emerging as alternatives to traditional malls in some markets, any success speaks more to a lack of attractive alternatives. Brands like Target and Walmart continue to invest in online retail and have a utilitarian nature that makes them ill-suited to the experiential appeal that elevates big anchors. Plus, they’re typically in environments that can’t reach the critical mass of 30-40 specialty retailers.
What about the revival of “art of living” centers 20 years ago? Their disappearance shows the challenges they still face. The fact that smaller projects are relatively inflexible – and therefore more vulnerable to shifts in consumer sentiment – highlights the problem of developing commercial real estate that targets a specific generational demographic. Time is unbeaten. Demographic change: yesterday’s baby boomers are today’s millennials. This is why the best retail environments have multi-generational appeal and require a greater critical mass of specialty retailers.
This critical mass is important because small, durable retail assets are otherwise extremely difficult to maintain. The concept of critical mass exists for a reason, and smaller projects don’t have the same flexibility to evolve their tenant mix over time.
The recent decline of outlet centres, another replacement candidate (and the former darling of the commercial real estate world), can likely be attributed to their often remote locations, lack of sense of place and lack of recreational uses.
The bottom line is that physical retail environments of the future will often be integrated into mixed-use environments, follow traditional urban design principles, be rooted in leisure (dining/entertainment), and be significantly more experiential. Smaller concentrations of retail and leisure uses, likely on the order of 100,000 to 200,000 square feet, will evolve to fill the ecological niche left by large traditional shopping centers. These sites will not always be anchored by larger tenants and will sometimes be incorporated or adjacent to existing urban environments.
Many markets can accommodate what will be larger scale iterations of the lifestyle center model, perhaps 30-40 tenants instead of 12-18. These centers could occupy an ideal location at the intersection of the flexibility, experiential potential and critical mass that fit perfectly into the void left in the market by closed shopping centres.
The next question is how to “anchor” these physical transactional and gathering environments in the absence of traditional department stores. The primary traffic driver will be a regularly updated set of specialty retailers that will create a critical mass of retail businesses. They will be “anchored” by the sense of place of public spaces, a possible civic destination (such as a museum), an experiential collection of dining and entertainment uses, and an integrated non-commercial element with offices, residences and/or or hotels. Components. Going forward, non-commercial components enhanced by the surrounding commercial environment will be a critical part of the return calculation for developers.
Therefore, commercial and mixed-use innovators are likely to invest in modifying some existing assets to accommodate a wider range of commercial concepts and spaces. Projects rooted in discretionary grocery, including brands such as Whole Foods, Thyme Market and Traders Joe’s, complemented by residential, office or other uses, could be a popular formula in the future.
Similarly, existing urban environments with a strong sense of place, sometimes with existing or potential non-commercial real estate uses, and with public support and organization, can become a physical place of transaction and gathering anchoring a critical mass of retail businesses. The 3rd Street Promenade in Santa Monica, California is a good example.
The unifying factor is experience, and experience will only become more important as the industry adapts in the future. Not just the shopping and buying experience, but just being in a space that makes you feel good has tremendous power to drive traffic and boost results. There is hardly any aspect of trading where experience does not play a critical role. Something as simple as opening the package can be an experience (as brands like Apple have shown). There is a reason why the term unpacking has grown in popularity in recent years. Brands, businesses and retail environments must prioritize the consumer experience in everything they do: from design and location, to tenant choices and amenities, to features. interactive and artistic that they use to enliven their spaces.
As for retailers likely to thrive in this new ecosystem, food and beverage destinations will remain popular. Brands like American Girl, Build-A-Bear and others that provide interactive experiences and emotional connections, will continue to grow in importance in brick-and-mortar retail. Pandemic concerns aside, physical spaces remain important to consumers of all ages, even during a steady and significant increase in online commerce. The industry may be changing, but the basic human need to connect – with brands, products, places and people – isn’t going anywhere. Physical retail environments must continue to recognize and respond to this need.
Finally, because specialty retail environments are want tospending environments that represent less than 15% of consumer spending, their need to reach many households still requires these environments to be regionally accessible. Rightly so, this makes many old traditional mall sites desirable. This means that many of these emerging physical transaction and gathering places will both literally and figuratively replace malls in the broader retail landscape.
—Yaromir Steiner is the founder and CEO of Columbus-based Steiner + Associates, a real estate developer and principal planner that provides development, leasing, management and consulting services.