Richard Kestenbaum
Contributor | Forbes

Depending on who you ask, estimates of the number of retail stores that will close in 2017 range from 7,000 to 10,000. Given the retail climate, the number of new store openings is likely to be much lower. If you walk in almost any shopping area now, you see vacancies. They’re an eyesore, they make people less likely to shop, they ruin the adjacencies that spur shoppers to buy and they limit the incomes of store employees, retailers and landlords.

Retail real estate doesn’t vanish if you don’t use it, so what will happen to all those empty stores? No one knows for sure but there are some things we’re seeing now that are important indicators of where all that retail space will go.

One of the inevitabilities of retail real estate now is that it will be less valuable in the future than it was in the past. You don’t need a crystal ball to see that there’s more supply than demand of retail square feet. Basic economics says when that happens the price goes down. Landlords are not acting quickly to recognize that, they are not acknowledging that their asset is less valuable, they are not lowering the price of their space fast enough to generate new leases and soak up what’s coming on the market. They are letting the space sit on the market while their thinking adjusts. Craig Macnab, the CEO of National Retail Properties, told me that at the present time the market is “underdemolished.” Landlords are going to have to be more flexible, not just about the price, but about how space is used. And they may have to make investments in their real estate to reconfigure it and make it more useful for what consumers want now.

The Quick Fixes

I recently met two very interesting companies that are facilitating short-term solutions for retail real estate. One company, The Lionesque Group, creates pop-up stores, stores that are open for only a short time, usually a few months. Pop-ups are a great way to create excitement for a brand, take advantage of a busy season like Christmastime, or test a store concept. The problem is, if you’re a brand owner and you don’t already have stores, opening stores is hard. It requires very different skills than what you do every day. The Lionesque Group helps a company conceive how a store should look, find a location, design the layout, build the fixtures, hire store employees and even run the store and measure its performance. That’s a turnkey set of skills that allows a brand owner to avoid a lot of risk of failure and distraction. It’s also a productive way of utilizing some of the retail space that’s on the market. Having a constantly rotating array of retailers in one store location is entertaining for consumers, a useful laboratory for brands and a revenue source for landlords.

The other company I recently met is called Space In The Raw. They are a marketplace for short-term users of real estate. Companies like The Lionesque Group use Space In The Raw to find empty store spaces suitable for retail pop-ups. But Space In The Raw is not just for finding pop-ups, Space In The Raw allows a user to find almost any kind of short-term real estate, particularly for corporate events and parties. With the growth in short-term uses for real estate becoming essential for landlords, accomodating the particulars of each user is very important but as challenging as ever. Space In The Raw allows seamless transformation of space and less strain on property resources, making fast turns of space much more doable.

Both companies allow landlords to adapt without having to commit to lower prices for the long term. Both of them are a good way of allowing the market to adjust to drastic changes that are happening. They are both likely to be useful solutions in the long-term for landlords and renters who have short-term needs.

The Long Fixes

In order to understand how landlords can make the long-term adjustments to the massive changes shaping retail now, I visited with a friend, Eric Hertz of The Center For Retail Real Estate. Hertz believes that retail real estate is at the beginning of a huge transformation. He explains that there are different degrees of change that retail landlords will make and they are just beginning to make the changes now. All the changes he describes are attitudinal but they reflect themselves as physical changes in what stores will look like. In particular, because B malls and C malls are seeing such substantial declines in traffic, those mall operators need to figure out what they’re going to do when the shakeout is all done and there are fewer stores needed than we have now.

The smallest changes being made are malls that take their inward-facing stores and make them face outward. Where the outside of a shopping mall has looked like a faceless, windowless building, mall operators are putting store entrances on the outside of the building so that it’s more inviting and interesting as you drive by. Each store then has two entrances, one from the outside of the mall that a customer can drive right up to, and one from the inside of the mall. The strategy can do a lot of good for a mall that is well-located to attract passersby.

That kind of solution won’t work for the malls that are the bigger problem, power centers and regional malls that are away from towns and cities where land was cheap when they were built. Power centers are malls with leasable space of 500,000 feet or more and built on land that was inexpensive at the time because it wasn’t near homes and businesses. What made power centers work was that they had several anchor tenants, department stores and other big-box retailers that drew consumers to the mall, and smaller stores fed off the big stores’ traffic. With the declining interest in large stores, that strategy doesn’t work well anymore and space needs to be rethought. Hertz says there are a number of radical changes being experimented with that are working.

The first is to change the purpose and scale of the mall. We are starting to see shopping areas that are based on a specific purpose, food for example. Where previously a mall was for shopping and food was to support customers’ ability to stay in the mall longer, by turning that idea on its head, food can be the driver and non-food retail is incidental. There are numerous examples of this approach including Eataly, Pike Place Market in Seattle, Union Market in Washington DC, Union Station in Denver and Grand Central Station in New York where the non-food retail is anchored by the food. Notably, all these facilities are smaller than the typical suburban shopping mall or power center.

Because these food experience malls have worked well, we are likely to see other smaller, thematic shopping areas develop. For example, there have been some experiments with shopping areas devoted to wellness. In the Saks Fifth Avenue flagship store in New York, the second floor has been converted to what they are calling The Wellery. The idea is to offer a dozen shops-in-shops that are focused on wellness and feeling good. There’s a range of unique products and services focused on wellness, there’s even a studio called ConBody where ex-cons will help you get in shape. (There’s also a Glow Recipe shop, a super interesting company I wrote about in this blog.) Although I question the location of a facility like The Wellery on the 2nd floor of a store in midtown Manhattan, I think Saks is both daring and smart to build it in the first place. It will stimulate new ideas that create formats which are more likely to be what consumers want and will pay up for.

Eric Hertz points to the most radical change of all, tearing down a mall and replacing it with something more relevant. That’s exactly what happened at a power center called Belmar in Lakewood, CO. Located just outside Denver, it was completely replaced by a city-like environment that includes streets, stores and apartments. There are now 2,000 apartment residents in what’s called the Belmar neighborhood and there are an additional 4,000 people who live within walking distance. Of course, there is retail and restaurants but there’s no enclosed mall anymore, it’s a city-like environment with a downtown feel. It’s succeeding, almost all the apartments are occupied and now there’s a Hyatt House Hotel on the site as well.

Here’s a YouTube about Belmar made by a real estate broker marketing condos. It’s shocking to watch this and imagine that this was a conventional mall in a previous time.

Lakewood, CO, isn’t the only place. Parole Plaza in Annapolis, MD, was torn down and it’s now Annapolis Towne Center. Like Belmont in Colorado, Annapolis Towne Center has shops, restaurants, residences, even some offices. One thing it doesn’t have: an enclosed mall. There will no doubt be more transformations like Annapolis, MD, and Lakewood, CO.

What Now?

A number of new formats are being tested and it’s not clear which new ideas will be the winners. One of the things that is certain is that being a landlord has changed. It’s not enough anymore to build out a space, hand it to a tenant and expect to collect rent. Landlords are going to have to innovate, create spaces that are more varied and engaging. And they are going to have to offer services that make things easier, like picking up packages, parking, making it easier to get things home and bring people in. Just as retailers like Saks are experimenting with new formats, the upheaval facing retail real estate will require landlords to experiment and be creative. The changes we’re seeing now and in the next few years will have a long impact on what retail will look like in the future.
Original article here

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