The Future of Retail is Mixed-Use

The rapidly growing trend for online buying of “commodity” type products has been accelerated by the COVID-19 crisis. Many consumers that may have been resistant to e-commerce shopping prior to the pandemic have come to appreciate the ease and safety of ordering on their device, convenience of delivery, and competitive product prices. 

Despite this sea change in customer behavior, as of 2018, the United States’ retail footprint was approximately 24 square feet per capita, as compared to four square feet in Western Europe. What does this mean for the future of retail space in an age where brick and mortar sales are generally declining? Most industry participants are convinced that the U.S. retail footprint needs to shrink, and that adaptive reuse of excess space will be part of the solution. 

While the U.S. suffers from an oversupply of retail, the country is simultaneously experiencing a housing shortage, particularly in coastal markets where most of the population growth has been concentrated for decades. Earlier this year, Freddie Mac published a study suggesting that the nation has a shortage of approximately 2.5 million units. Further, if the housing oversupply in rust belt states 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 beginning to search for retail sites that can be repurposed for medium to high density residential uses with a ground floor, necessity-oriented shopping component. However, these densification strategies only make economic sense in urban environments where high multifamily rents justify the cost to “go vertical.” Secondary and tertiary retail locations and markets will require alternative creative solutions to regain productivity and functionality. 

For years now, larger format stores have been shrinking their brick and mortar footprints while attempting to bolster their online distribution channels. By contrast, a number of digital native brands such as Warby Parker, Peloton and Bonobos have been experimenting with physical locations to complement their online sales platforms. This omnichannel strategy results in smaller retail footprints, lower costs through logistical chain efficiency, and added convenience via home delivery and onsite fulfillment. For example, Simon Property Group, the largest mall operator in the country, recently announced that they are exploring the possibility of turning some of their dark anchor stores into Amazon warehouse space. Ironically, Amazon has been a prolific contributor to the demise of the department store, and now it is  establishing last-mile distribution hubs that shorten the time and distance between its products and customers within vacant mall spaces. 

While the near-term outlook for retailers is tenuous at best, the industry will emerge in a post-COVID world with smaller stores, healthier balance sheets, and improved sales driven by pent-up customer demand. Shopping center owners will need to focus on increasing foot traffic through targeted remerchandising and redevelopment strategies incorporating synergistic mixed-use components that meet consumer needs. The demand side of the equation should inform the repositioning effort in markets where it is more functional to incorporate apartments, warehouses, office space or hotels rather than maintaining or expanding the existing retail footprint. 

So what happens next? The era we are living in is marked by an unprecedented level of chaos and uncertainty, but if American history has proven anything, it is that our country is as industrious as it is resilient. 

Jose Carrazana is director of Institutional Property Advisors.