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Shopping Centers: Not What They Used to Be (But That’s Not a Bad Thing)

Tale of Survival and Adaptation Unfolding for Retail Tenants and Properties

Your neighborhood shopping center isn’t what it used to be. While some say the Great Recession and the e-commerce phenomenon impacted the bricks-and-mortar landscape in a negative way, in reality, we are seeing an interesting – and encouraging – tale of endurance and progress, illustrated by the ongoing transformation of the tenant mixes of retail real estate companies.

The changes are not singular – or linear. These retail real estate trends involve new types of retail tenants and the evolution of those in our industry adapting to new settings shaped by socio-economic shifts and public policy. The bottom line: fresh opportunities are emerging in an industry where change remains one of the only sure things.

Non-Traditional is the New Normal
Not long ago, the presence of a gym at a shopping center was unusual. However, when the recession hit and many stores went dark, retail real estate companies found fitness tenants eager to step into the vacancies. At first, co-tenants were concerned about their new neighbors monopolizing parking or watering down the property’s range of products for sale. But soon, they recognized that the gym brought increased traffic their way.

Today, fitness tenants are shopping center staples, positioned as first-tier targets for retail leasing professionals. And they come in a range of price points and sizes, from Crunch Fitness and 24-hour Fitness to mid-size Retro Fitness to boutiques like Orangetheory Fitness.

The rise of the gym at retail properties was a precursor to a larger retail real estate trend. Today, many shopping centers are transitioning from places where consumers buy goods and services to places where they enjoy recreational opportunities and engage in their community.

To this end, restaurants – especially fast-casual concepts like Panera Bread and Chipotle – are comprising a larger percentage of tenant mix than in the past. This is by design, as landlords work to reintroduce shopping as a recreational pastime. Entertainment tenants are leasing spaces of all sizes, from big-box anchors like Dave & Busters to small paint-and-sip boutiques. Their success speaks to the viability of “retailtainment.”

That Which Does Not Bend May Break
At the same time, traditional bricks-and-mortar retailers – such as grocery and apparel, to name just two – remain alive and well. However they, too, look a bit different.

Following the recent A&P bankruptcy and liquidation, a growing diversification in grocery tenants has taken place in the Northeast. After several years with only a handful of expanding operators, we are seeing significant growth among chains including ShopRite, Acme, Trader Joe’s, and other specialty and ethnic grocers. Additionally, many non-grocery retailers like dollar stores and pharmacies are expanding their food inventories (although lease clauses may limit their amount of grocery-dedicated space).

In the apparel sector, a number of mid-price retailers, such as Mandee and Fashion Bug, have gone out of business over the years. However, bigger national department store players, like Nordstrom and Saks, are generating healthy sales from off-price concepts like Rack and Backstage. Discount brands such as Kohl’s, T.J.Maxx, SteinMart and Ross also remain favorites among today’s cost-conscious consumers.

Yet there’s no denying that e-commerce has made a significant impact on traditional bricks-and-mortar stores. The conversation has shifted, however, from “survival” to “opportunity,” and physical-store retailers are rethinking their approaches. They are capitalizing on opportunities to meet changing consumer needs and desires by giving customers a good reason to visit their stores.

The trends go beyond the grocery and apparel categories. Retailers across a wide range of specialties are finding new ways to engage shoppers. In Levin Management Corporation’s most recent tenant survey, nearly 40 percent of participants indicated they have adapted their business model in response to e-commerce growth. Among those respondents, many are adding in-store services and incentives, incorporating in-store pickup and return options for purchases made online, and increasing coordination with their online operations. Others are altering store inventory, introducing experience draws and/or changing their store prototypes.

Now Batting: The Healthcare Revolution
In addition to the shopping habits of Millennials and Baby Boomers, one significant driver in shifting tenant mixes ties directly to public policy. Changing healthcare laws are incentivizing people to choose walk-in clinics over trips to the ER. At the same time, hospital systems are decreasing operating costs and improving customer service by establishing outpatient services in non-medical satellite locations. The resulting boost in space demand has come at a time when retail supply has been plentiful, giving rise to a new breed of non-traditional tenants.

Urgent-care, imaging centers, doctor’s offices and dentistry chains in retail settings have something in common with their non-traditional predecessor, the fitness tenant. A shopping center-based trip to the doctor, like a workout at a gym, evolves into a visit to the grocery store or a lunch at a nearby restaurant. In this regard, healthcare tenants are queued up to become the next “normal” retail space users.

The bottom line is that shopping center tenant mixes and tenants themselves, have always evolved to accommodate social trends. The retail industry will continue to re-invent itself to survive – and thrive. And so will retail real estate.