By Matt Silvers, vice president, Project Management Advisors Inc.
From regional malls to small-town shopping districts, the United States has over 1 billion square feet of excess retail space, according to analysis from CoStar Group, with roughly 23 square feet of retail space for every person in the country. For reference, France, Germany, the United Kingdom and Japan all have less than 5 square feet per capita.
This surplus is not a new problem, though it has been brought into sharp focus by COVID-19. Retailers closed or cut back their offerings throughout the pandemic while people doubled down on e-commerce, relying on digital solutions for everything from grocery delivery to streaming home entertainment.
A recent McKinsey & Co. analysis shows online commerce grew 10 years’ time in just three months, fueled by stay-at-home orders. That study assessed data from the U.S. Census Bureau, which estimated that e-commerce sales accounted for 14 percent of retail sales in 2020, totaling $215 billion versus 11 percent in 2019.
Matt Silvers, Project Management Advisors Inc.
While these rapid changes caught some retailers flat-footed, an opportunity now exists to take advantage of available space — and relatively inexpensive rents — to open new stores and try new concepts. For the first time in years, more retail stores are expected to open than close in 2021. But the product and experience that return will look somewhat different than the retail to which we’ve all grown accustomed.
Already we’re seeing new experiential concepts designed to draw people to shopping venues. In Houston, for example, a former Bed Bath & Beyond has been replaced with an interactive art museum. A former Z Gallerie has been converted into an augmented reality experience called Flight School. Nordstrom has partnered with smart home gym company Tonal to bring its AI-powered personal fitness into 40 stores — including four in Texas. Lastly, specialty shops that provide space for previously online-only, direct-to-consumer retailers to showcase their wares are now popping up throughout the state.
A fresh era of experiential retail is upon us with new measures of success. With a new purpose that pushes well past traditional retail to include fitness, health, entertainment and education, we’re all about to engage with the future of experiential retail.
Expect More Spectacle
It’s no accident that one of the movies that got people back into theaters was a mega-budget action film made for the big screen. Godzilla vs. Kong was released just as theaters were starting to reopen across the country this spring, a match made in Hollywood heaven that drove ticket sales up to the $100 million mark in the movie’s first month.
The success wasn’t just one of timing. While the movie was available in traditional theaters and via limited streaming services, many moviegoers were happy to pay an extra $3 to $5 to see monsters battle it out on premium, large-format screens like IMAX. Cutting-edge projection and sound, coupled with a unique environment, created an experience consumers won’t soon replicate in their homes — and offers an important lesson for retailers.
In the short term, shops may be able to get away with offering more of the same to consumers who are eager to get out of the house, but in the long term, expect to see more novelty in retail locations.
Unlike theaters, where showtimes are fixed and seats assigned, retail locations have to worry about “the touch factor,” with people largely allowed to wander and experience products for themselves. In the post-COVID era, this may be a deterrent for some shoppers, with stores more likely to engage the senses of sight, smell and sound in the short term.
While beauty trials and mattress testing may be paused, other value-add experiences are needed to get people into stores. That might mean more dynamic architecture, Instagram-worthy interiors, touch-free interactive displays, special themed shopping days or appointment shopping to cut crowd size.
The types of stores that continue to lease brick-and-mortar locations will also change, with more specialty retailers in smaller footprints that will target a smaller segment of the population with specific goods and services.
Pop-up concepts should also persist, occupying brick-and-mortar space on short-term leases. Just as movie theaters make their profit on highly engaged viewers — the ones who return for premiere after premiere — retail stores are targeting brand enthusiasts over casual shoppers.
Where Retail, Service Meet
While many store operators ponder how to get people through their doors, the larger retail landscape has embraced new and varied uses for previously empty space.
From healthcare clinics to financial services offices, today’s retail mix has new functions that include helping people manage their lives outside of home and building community beyond a singular brand. Specialty fitness studios, medical clinics, community college facilities and even fulfillment centers for e-commerce deliveries have all popped up in space that was previously devoted exclusively to traditional retail.
People still want convenience along with their experiences, meaning the locations closest to growing population centers have opportunities to introduce more amenities to those areas. Perhaps it’s a family entertainment complex that takes over a big box store, or a commercial kitchen that now acts as a ghost kitchen for a host of different takeout concepts that are all made under one roof. Whatever it is, expect it to be something different.
Healthcare startups like Carbon Health aim to be “the Starbucks of healthcare,” opening new locations across the country that nestle
tech-enabled primary care clinics into retail locations. Many of these locations also offer grocery, pharmacy, banking and grab-and-go food options. The symbiotic relationship between the places people need and want to go will create new retail configurations for the foreseeable future.
Recover or Reposition?
Despite many signs of life in the retail space, there are still some assets whose values won’t recover to pre-pandemic levels. In many cases, this is due to the fact that these assets were already struggling to generate healthy net operating income.
Some of retail’s fiercest competitors, like juggernaut Amazon, have been steadily converting malls to warehouses, routing local tax bases in the process. A mall in your backyard is an asset; a neighborhood road crammed with semi-trailers is not. Further, financing for these types of deals, especially those that involve underperforming assets, can be hard to come by.
Ideas that would have seemed far-fetched a few years ago, like dark stores, office space and multifamily communities built within malls, are now under development.
While these new uses are not guaranteed to succeed, they seem a necessary part of reimagining retail space for a new generation of consumers — one that doesn’t mind waiting a day or two for their purchase if it means not making an extra trip. On the other hand, humans are social creatures. Retail establishments give us the opportunity to see and be seen, to make small talk with strangers and to experience something fresh or different.
The retail mix is undoubtedly changing, but the desire to find the new and novel experience is not. It’s a uniquely human characteristic, and one that belies a world of opportunity for those willing to accept the risks that go along with it.
— Matt Silvers is vice president of Project Management Advisors Inc., a national real estate advisory firm that provides owner representative services, including investor representation, program management, project management and construction management. This article originally appeared in the May 2021 issue of Texas Real Estate Business magazine.