Retail's New Normal

Phase I of the HSA Commercial project opened in spring 2014 and targeted off-price concepts such as Nordstrom Rack, Saks Fifth Avenue OFF 5TH and T.J. Maxx. As the off-price sector continued to grow, newly launched brands such as J. Crew Mercantile and Off/Aisle by Kohl's selected the location for some of their first stores in the country.

As the Mayfair Collection's first phase filled up, Phase II broke ground in late 2014, and, like the initial phase, it involved converting vacant industrial space-this time a former Kohl's distribution center-into retail. Phase II's anchor, a 47,563-square-foot Whole Foods Market, opened in February 2016-adding a “daily needs” traffic driver to the center.

The project's third phase, the Mayfair Collection Promenade included an additional 50,000 square feet of retail, reflecting the broader tenant mix as well as 250 luxury residential units, adding a built-in customer base to the project. The apartments, which are being developed by Fiduciary Real Estate Development, will be the first of more than 1,000 residences slated for construction over the next five years, pending market demand.

A New World

Welcome to the evolving world of retail — a world that is geared at changing the way people engage in retail and is fast becoming the new normal. It is a world where the environment has become easier to navigate even from 12 months ago. “The main difference we are seeing from this time a year ago is a more positive environment,” Scott Holmes, senior vice president and national director of the national retail group at Marcus & Millichap, explains. He points to headlines from the late 2017 to early 2018 that used negative language when describing the retail environment, such as “the retail apocalypse” and “the end of the retail.”

Today, retail destinations featuring a blend of entertainment, experiences and services is now well underway, he says. “Omnichannel retail, which was once little more than a buzzword, has come to fruition,” he explains, with online retailers adding physical store locations just as traditional retailers refine their online presence.

Demand for space remains robust, Holmes says, and rents have reclaimed their pre-recession levels. “Limited new construction, together with the extended growth cycle that has seen the addition of more than 20 million jobs and exceptionally tight unemployment, has given rise to the reinvigorated retail sector, inspiring investors to show increased interest in the opportunities that these assets offer for both current yield and appreciation.”

A Package of Many Uses

Not that there aren't still challenges in retail's new normal.

For instance, Tim Blum, executive vice president and managing director at HAS Commercial, notes that, initially, residential developers at the Mayfair Collection did not believe that the site of a former industrial complex was well-suited for new housing. But once a Whole Foods was announced and the project started attracting an eclectic lineup of local restaurants, competition became fierce among those same residential developers. “They saw value in these walk-to amenities.” Almost always, in short, all of the pieces of these projects must be in place — even if just on paper — for it to succeed.

In response, mixed-use developers have become more creative in looking for alternative anchors and merchandising concepts to spur interest in their projects. As one example, Chuck Taylor, director of operations for Lemont, IL-based Englewood Construction, who specializes in retail, restaurant and shopping center projects throughout the U.S., says that the common theme he sees in filling vacant anchor tenant retail space is that “nothing is off the table.”

Taylor is working with owners and developers who are considering an array of options to convert empty department stores at shopping centers. Those options range from movie theaters and family entertainment concepts to entirely new uses, including multi-family, senior housing and even facilities for municipal bodies such as park districts. “While our clients are ideally looking for something that supplements the experience at a retail center, at the end of the day they're willing to weigh nearly any opportunity that will make good use of a large swath of vacated space,” Taylor says. “In this climate, their construction partner is becoming an extremely valuable resource to help them investigate feasibility and costing for converting spaces for an entirely new purpose.”

Blum agrees, noting that developers are increasingly looking to theaters, gaming halls, health clubs, co-working facilities, concert venues, brewpubs and others to take the place of conventional retail anchors and drive traffic through a complementary mix of uses — many of which cannot be replicated online.

The way people engage with retail is continuing to change with the growth of e-commerce, Blum explains. “That means that traditional retailing environments must change as well,” he says. “Owners of shopping centers and lifestyle properties that would have historically been populated by national fashion brands are increasingly finding that customers are looking for different experiences when visiting their properties, including a curated mix of local restaurants, entertainment and gaming venues, boutique fitness concepts, gathering and performance spaces and retail concepts that emphasize a more compelling in-store experience. This is achieved through VIP events, knowledgeable customer service, product sampling, and better overall customer engagement.”

With that strategy in mind, Blum says, Serendipity Labs will open a co-working facility in the third phase of The Mayfair Collection. “While a junior department store would have likely occupied this space in the past, the co-working lab offers a contemporary alternative that provides more consistent daytime traffic and an attractive amenity to residents of the nearby luxury apartments.”

Taking it Down a Notch

But other projects, which might not be typically viewed as cutting-edge, are also getting creative and are making redevelopment work. In March of this year, for example, Alpha Partners, a commercial real estate company that develops, invests and operates multi-family and select retail opportunities, revealed that it was redeveloping a lot on the first major entry point into the southside of Columbus, OH.

Part of the main retail corridor for Grove City, OH, is a high-visibility location with easy access to I-71. The site is ready for a small strip center and will potentially include a drive-through quick-serve restaurant. Additionally, the Days Inn located in the rear of the parcel will be rehabilitated from the inside out.

“Perhaps not the kind of property typically viewed as hip or cutting-edge, we see this area on Stringtown Road as a 'Welcome Mat' into Columbus with a ton of potential — it's a great creative real estate deal story,” says Avi Abroms, managing partner of Alpha Partners. “The site offers investment opportunity that will not only serve the community's daily needs, but also mark the spot that appropriately introduces tourists, businesspeople and newcomers into the historic — yet growing and evolving — Midwestern urban area.”

The immediate area surrounding the Stringtown Road project is expecting ongoing population growth over the next five years as job creation continues to expand.

Alpha Partners has completed other similar upgrades throughout the Midwest and is also currently renovating and leasing the 128-year old, historic Zettler Hardware Building in downtown Columbus' Red Brick District.

Traditional malls in suburban markets with access to transit are also well positioned for redevelopment, explains David Kitchen, a principal in the Mixed-Use Studio of Cooper Carry. “Main Street-style mixed-use environments that are pedestrian-oriented, thoughtfully designed and have a significant F&B [food and beverage] presence offer one solution for mall owners and investors in search of long-term value,” he says. “The street-level retail and F&B offerings are crucial to creating value and offering a lifestyle that will sustain the living and working components above the public realm.” When executed correctly, under the right market conditions, he says, “This new breed of sustainable communities will remain relevant long after the current real estate cycle.”

With that said, Kitchen explains, “it is important to be careful to not oversaturate our already over-retailed country with retail-driven mixed-use developments and food halls. Not all class C and class B malls and their department store anchors will support these projects. Alternative solutions such as schools, medical offices or residential may better serve the community.”

Adding Technology to the Mix

At a recent International Council of Shopping Centers (ICSC) event, Melina Cordero, global head of retail research at CBRE Group, noted that convenience, technology and an omnichannel platform is integral to a successful retail experience, also adding that lines will be completely eliminated — possibly in as little as five years. That means no waiting in line to check out or for help. “Technology and consumer experience is going to get rid of the line. I don't think it will exist in the future,” she said on the panel. The other panelists at the event agreed, adding that technology will only aid in creating convenience for consumers, from integrating voice activation and AI technology to creating transparency in consumer inventory.

Technology helps to create convenience, but it does so much more, particularly for a retailer's backend, according to Nathalie Walton, global head of local shopping at Google, which has retail technology available that can manage inventory, making it more easily accessible to consumers. “I think retailers will update their backend technology so that they can create a true omnichannel experience and the inventory is more accessible to the consumer.”

Walton explained that Google is leveraging technology to bring consumers to the goods that they need and want. For example, if you are driving home and need to pick up an essential, Google Assistant can help you find a nearby store and check the store's inventory to make sure they have the item in stock. “Google is connecting users to the products that they need,” added Walton. “I am trying to make sure that retailers are on Google so that we can connect the dots when a user does need something.”

Building Communities

According to David Weinert, partner and SVP of leasing at North American Properties, building meaningful communities is also important for the future of retail. For example, the firm's Cascades project in Tallahassee is a good example of the kind of transformative urban development the market can expect to see more of in the coming years. Project components include market rate mid-rise residential, retail, office, restaurant and hotel space built to maximize views of the park and the Capitol building, along with pedestrian-friendly paths connecting the development to downtown, a range of family-friendly amenities, event space to support performances at the Capital City Amphitheater, and expanded public parking. “These experiences directly result in increased foot traffic, dwell time and human energy, which creates tremendous value for all uses-office, hotel, residential and retail,” Weinert says.

While the grand opening of the first phase of that particular project is slated for late 2020, Weinert explains that retailers can no longer just sell products and developers can no longer just lease space. “Instead, it is about figuring out how to monetize the art of creating exceptional experiences for guests.”

Fortunately, for him and the rest of the industry, we are well on the way to doing just that.

*****

Natalie Dolce is the National Executive Editor of GlobeSt.com. This article also appeared in Real Estate Forum, an ALM sibling publication to this newsletter.