Retail closures are not always related to underperforming stores or the downsizing of operations. In many cases, a retailer closes a location because the real estate no longer suits the intended use of physical space now and in the future.
The number of store closings in the retail industry is widely publicized. Many media outlets cite data published by Coresight Research, which tracks store openings and closings in the retail ecosystem. Closings reached a record high of 9,302 in 2019, and 2020 is off to an equally troubling start, as Macy’s announced 125 store closings—amounting to roughly 25% of its existing stores—earlier this week.
Despite the stark headlines, retail landlords have been able to maintain strong occupancy, with vacancy currently at 4.63%. Occupancy, however, is not being driven by growing demand, but is rather due to a lack of supply, as new retail development has lagged dramatically during the past 10 years. The 46.2 million square feet of retail space developed in 2019 is a far cry from the 200 million plus square feet routinely developed in the early 2000s.
However, there is more to the story than just how many stores open or close. Retail closures are not always related to underperforming stores or the downsizing of operations. In many cases, a retailer closes a location because the real estate no longer suits the intended use of physical space now and in the future. Macy’s is the most recent example of a traditional retailer downsizing its footprint to focus on smaller, more profitable spaces—in this case, the Market by Macy’s concept. The new stores will be significantly smaller than Macy’s traditional anchor store mall locations. Macy’s isn’t alone; some 50% of the new leases signed in 2019 were for retail spaces less than 5,000 square feet.
Brick and mortar is far from dead, but it is certainly shaping up to look very different. At the same time, landlords are repositioning assets for mixed use, blending components of office, residential and hospitality. In addition, health care- and fitness-focused tenants are finding new locations at malls and continuing to expand their footprints.
Not your father’s big box store
Brick and mortar is far from dead, but it is certainly shaping up to look very different.
As consumers demand convenience and better customer experience in the digital age, brick-and-mortar locations need to be configured to handle more than just customers perusing the aisles and paying an employee for their purchases. Today’s retail real estate needs to be configured to allow for more transactional complexity: a customer who buys online and picks up their merchandise in the store (BOPIS), or buys in the store but prefers frictionless checkout, or perhaps buys online and returns the item to the store (BORIS). The retail store of the future also has to be built out to include 5G and advanced infrastructure that allows for the use augmented reality and other technologies to create enhanced in-store experiences for shoppers. New prototypes are a far cry from the traditional big box stores with four walls still seen in most U.S. malls.
Smaller footprints, improved technology, flexible layouts and shorter leases all create logistical challenges for retail landlords. Leasing costs and tenant improvements can no longer be absorbed by long-term leases, traditionally seen with big box retailers. As such, retail pop-ups have grown in popularity as a cost-effective way for landlords to attract retailers to their spaces, in particular new brands and primarily online retailers. According to Pop-Up Republic, a broker of pop-up stores, pop-up retail is estimated to be a $50 billion industry and growing. With pop-ups requiring less build out and willing to take risks in new markets, landlords are starting to embrace the once shunned short-term lease model.
As retailers make their way through this digital evolution, many are realizing their investment dollars need to be allocated to technology enhancements rather than more square footage. This change is having a profound impact on large shopping malls, strip mall landlords and the real estate ecosystem as a whole. Landlords are also starting to consider the digital aspect of their footprint. Large mall owner Simon Property Group has continued to invest in its online Shop Premium Outlets site, providing a marketplace for the physical tenants of its outlet malls. As landlords look to evolve alongside their tenants, they should consider partnering with digital platforms, morphing into a one stop omni-channel solution for convenience-oriented retail customers.