Tenant Representation

The Shifting Landscape of Retail Real Estate
The Shifting Landscape of Retail Real Estate 1440 428 ASG

It’s an exciting time to be part of the retail industry. For years, there have been hand-wringing warnings that brick-and-mortar was dying. 

There are still factors that keep the retail real estate market on edge – concerns about inflation, recession, the supply chain, rising material costs, and geo-political instability mean assessing risk must be part of the decision-making process. However, even with those concerns, the economy has remained stronger than expected, with retail sales growing moderately.

As it turns out, people still really love to shop in person – so much so that brick-and-mortar is seeing a revival. This revival is driven by a change in consumer behavior as well as a change in retail strategy, consumer demand, and the state of retail real estate.

Changes in Consumer Behavior Require Retailers to Adapt

Shoppers are becoming more sophisticated and selective, turning away from traditional department stores. Their expectations also are changing. While this was, in large part, accelerated by the pandemic, shoppers were already beginning to demand more from the shops they frequent. The focus for consumers is on the shopping experience.

When it’s so easy to get what you need delivered at the click of a button, physically going into a store needs to be about more than just acquiring stuff. Perhaps that is partly why shoppers are not patronizing traditional department stores, which have been steadily declining, while at the same time surging to the new, exciting experiences being offered by DTC brands that are opening physical stores. 

Rethinking The Store Experience

The U.S. leads the world in retail real estate market growth, so how do retailers take advantage of that growth and position themselves for ongoing success? How can they ensure they are choosing the right locations and putting themselves in the best position amid fierce competition? How are current trends in commercial retail shaping the retail landscape? 

Many retailers are rethinking their store experiences. They are experimenting with store design and location; they’re meeting consumers where they want to shop. This has resulted in innovations in retail, from pop-ups and temporary shops to adjusting where stores are placed, what product mix they carry, and the size of the store. It’s an exciting time for retail leaders who are open to discovering new ways to connect with consumers and reinvent themselves.

Let’s take a look at a few of the factors impacting the shifting landscape of retail real estate.

Fierce competition in top-tier centers and street locations has altered location strategy for many retailers, driving them elsewhere. This has been amplified by a mass exodus to the suburbs by consumers who can now work remotely and prefer to shop in their own neighborhoods. As consumers seek more community and connection, retailers are responding. In an interview on the Shopify blog, Vinny Martinelli, owner of Helios Sunglasses, a sunglasses and apparel store in Rehoboth Beach, Delaware, summed it up: “COVID changed everything, especially [the] shopping experience. More people [are] working from home and staying local.” 

A high number of retail vacancies is encouraging retailers, particularly DTCs, which embrace the entrepreneurial spirit of retail, to try new locations and store types. With some legacy brands exiting and a variety of DTCs moving in, the real estate market is red hot right now. Digital-first brands are gobbling up the hottest locations and bringing new retail experiences with them.

Branching out beyond physical retail, some retailers are experimenting with frictionless technology (BOPIS, tighter integration between online and in-store, and sophisticated apps), retail healthcare, and improving the user experience in order to deliver better experiences to consumers. 

Radical reductions to lease lengths have made initial lease negotiations much more critical. However, these changes also allow retailers to experiment without the six- to 10-year renewals that used to be required to secure the space. 

Lease complexities require expert tenant representation to ensure there are appropriate protections in place. Provisions that were introduced during the pandemic are now being baked into leases as a matter of course to ensure retailers have recourse for situations beyond their control.

Embrace Change To Find Success

In his book, Secrets of Retail Real Estate: How Successful Retailers Win, ASG founder Steve Morris explains: 

“Successful retailers are reinventing their customer-facing practices and technologies to create a unified customer experience. Real estate decisions and approvals can no longer be processed on a center by center, deal by deal basis, but must reflect broader market, portfolio, and customer engagement strategies. This is the new real estate world.”

Finding the Right Location in this Environment

To find the right location in this shifting landscape requires access and understanding. “It’s critical to understand how markets develop and how they’re changing,” explains Doug Tilson, who leads ASG’s Tenant Representation. “That can only happen when you have access to up-to-date, comprehensive data.” Using accurate data to drive decision-making and working with a trusted tenant rep partner can help you determine what’s possible in a retail real estate landscape that is constantly evolving. 

The Landlord-Tenant Partnership to Save Retail
The Landlord-Tenant Partnership to Save Retail 1440 428 ASG

The loss of specialty retailers, such as Jos. A. Bank, J.Crew, Lord & Taylor, and Pier 1, didn’t just impact the companies themselves. The ripple effect ran through the malls in which they were tenants and indirectly impacted the other mall tenants that relied on their presence as a draw. Many tenants had anchor store requirements that allowed them to renegotiate or even cancel their leases. Unfortunately, landlords are often caught in a tough spot, between tenants who are also trying to survive and must use every leverage point they can, and mortgagers, who require a minimum level of revenue to avoid foreclosure.


Landlords and Tenants Can Work Together to Save Retail

The worst situation for all parties involved would be foreclosure. Landlords and tenants are going to need to find ways to work together. The retail real estate industry must assume a collaborative stand with tenants through these unprecedented times. That doesn’t mean just agreeing to what the tenant wants. Understanding how a tenant makes money and what they can afford to pay is incredibly important. So owners, view your tenants’ requests for assistance as opportunities to strengthen the non-financial aspects of a lease. Reduce co-tenancy requirements, shorten terms, and remove exclusives or other cumbersome items that limit a landlord’s flexibility.


Anchor Stores Need to Change

The downfall and demise of the traditional department store means that anchor stores must change. Given the focus on consumer experience, it makes sense that the anchor stores should be experiential. From hotels and restaurants to gyms and theaters, reimagining retail space is a way forward that can benefit both the landlord and the tenants.

As e-commerce continues to grow, retail investors and tenants are being forced to reconsider what consumers gain from the brick-and-mortar shopping experience. Traditionally, landlord and tenant relationships were ultimately transactional. Today, the sides are teaming up, realizing that together, they can achieve a shopping experience worthy of drawing consumers away from their smart phones and devices. – CBRE


The Future of Mall Space Can Be Exciting and Functional

Elizabeth A. Whitman takes a deep dive into what can be done with retail space in malls that is no longer being taken up by department stores. Temporary options include becoming a vaccination site or converting to warehouse space for last-mile delivery. But long-term solutions are even more exciting in the potential they offer. One mall is transforming its now-empty Sears location into a fitness center with a pool. Another has converted boutique shops into micro-apartments for single tenants. The one common element of all of the reimagined uses of the space is that it recenters the mall as the place where people congregate to live, shop, and have fun – and that’s the key.

We use phrases like ‘omnichannel’ to describe scenarios as though every consumer wants to move seamlessly across everything a retailer, for example, has to offer. However, we have to turn that idea inside out and remember that for consumers it’s all about experience, and always has been. A consumer will choose the experience they want, based on the service or goods they are buying, and then the channel. The businesses that will be rewarded with brand loyalty are those delivering great experiences in stores and online.


Where Do We Go from Here?

Two truths on which we need to remain hyper-focused have come out of this year: One, tenant representation is essential – tenants who had someone capable of navigating, renegotiating, and changing lease terms were more capable of being flexible in meeting their customers’ needs; and two, the adversarial nature of the tenant-landlord relationship needs to transform into a partnership that keeps them all in business. If these things are not achieved, then banks are going to end up owning a lot of empty malls.

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