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.

Retail Real Estate Trend: Non-Traditional Tenants Go A-List

Web-Proof Services Are Attracting Landlord Interest as Some Retailers Falter

Last month I served on a panel at ICSC’s PA/NJ/DE Conference and Dealmaking event in Atlantic City. My group’s discussion focused on non-traditional tenants and their growing popularity in commercial retail leasing. On the four-person panel, I was the sole spokesman for the landlord side, with the rest of the members representing non-traditional tenants who lease space (or want to lease) in shopping centers. As might be expected, they were all attracted by the visibility, convenience and traffic a popular shopping center offers. They want to be where the customers are. No surprise there.

At Levin, we have many non-traditional tenants under lease – fitness centers, health services, day care providers, gaming centers, and, of course, restaurants. Not long ago, like most managers in the business of commercial retail leasing, we were reluctant to go with tenants other than more traditional retailers. That’s changed big time. I’d like to tell you why non-traditionals are now on our A-list.

Behind the Trend #1: Non-Traditional Tenants Are Amazon-Proof
While many retailers are struggling against branded online stores and behemoths like Amazon, service businesses face no web-based competition at all. WebMD can’t stitch up a cut. YouTube videos are no substitute for a Nautilus circuit or Spin class. You can’t leave your toddler with babytv.com while you work. You get the point. Services and experiences can’t be provided by the Internet (at least not yet). We in commercial retail leasing like that. We’re looking for tenants that are fiscally solid and likely to stay that way.

Behind the Trend #2: Service Businesses Drive Traffic
In our era of the time-starved lifestyle, people look to consolidate as many of their errands and activities as possible. A shopping center that offers the opportunity to combine a fitness session with grocery shopping and a prescription refill will draw traffic, benefitting multiple tenants and attracting new ones. Our grocery tenants, for example, report a substantial flow of customers from their fitness center neighbors. That’s a win-win-win for the tenants, landlord and shoppers.

Behind the Trend #3: Long Leases and Solid Financials
Non-traditional tenants typically seek longer leases, often because of the higher construction costs due to the more extensive build-outs they initially require. They also tend to be stronger financially and have better credit than many of today’s retailers. Both these qualities make them a highly desirable addition to the tenant mix.

Non-Traditionals Do Pose Some Challenges in Retail Leasing
Since nothing’s perfect, we have to consider the challenges that these businesses – appealing as they are – present. The most common is parking. A fitness center user, for example, may tie up two hours of parking space per visit. We’re always very careful to assure that there’s adequate parking before any new lease is signed. Another roadblock may be image. Some specialized medical centers, for example, can seem out of place among the existing mix of restaurants, boutiques and entertainment providers. We’re sensitive about overall image and have declined some prospective tenants that weren’t a good “fit.”

At Levin-Managed Properties Non-Traditionals Are Here to Stay
Our portfolio has many fitness centers, which are now considered mainstream uses in today’s shopping centers. Levin-managed properties are home to most of the major national brands, including Blink, Crunch, LA Fitness, Leisure, Snap and Planet Fitness.

More health services are coming on board with us. We just signed a lease for 2,500 square feet at our Mayfair Shopping Center (Commack, NY) with GoHealth, a walk-in clinic. This medical services model is growing rapidly, with a third of the new establishments situated in shopping centers. We expect to see more of them as Levin tenants in the near future. Physical therapy services are interested in shopping center space, too. A Kessler rehab is located in our Aldrich Plaza (Howell, NJ).

Daycare (Apple Hill Academy and C2 Education Center), postal services and even a vet, along with restaurants and the popular gaming chain Dave & Buster’s evidence Levin’s interest in cultivating this new segment in commercial retail leasing. Non-traditional tenants meet the needs of today’s consumers – and even boost business for our traditional retailers. A combination that works quite well