Much has been written about the change that is happening in retail, specifically how internet sales are slowly making traditional brick and mortar stores a thing of the past. How mighty brands have fallen by the wayside and iconic brands like Sears and JCPenney are struggling. We’ve also heard about the experiential uses that are moving into many of the abandoned retail spaces: movie taverns and fitness facilities, for example.
We now recognize that in the good years, a go-go economy led to an unprecedented number of malls and power centers being constructed. Layer that with the popularity of e-commerce, then add in the fact that many national retailers are choosing a smaller format as an adjustment and you get this: The United States is over-retailed. There’s just too much square footage and not enough retail to fill it.
An industry prediction is that within five to ten years, 25% to 33% of retail space will be vacant. This increase in available square footage will present challenges to brokers, developers and owners. But it will also present opportunities to other retailers. As stores leave Class A locations, brokers will be recruiting from retailers that are in Class B locations. And as those tenants move up, tenants in Class C locations will be able to move into the Class B space.
Over time these upgrades to better space will leave the less desirable locations empty. In the major metropolitan areas of the east and west coast this process will be more gradual. Barriers to entry in these large metropolitan areas—such as limited availability of land, higher construction costs and more stringent regulations—will slow this process and allow for greater options to transition the vacant retail space to alternate uses (medical, residential, educational, etc.).
But in smaller markets, less desirable space will be vacant. This process has already begun and many of the REITs are spinning off the lesser, Class C, portions of their portfolios.
The eventual fallout will be more demolition of older, less valued properties and a complete re-thinking of the land use. But all is not doom and gloom. Land always has value and a blank slate usually doesn’t stay blank for long. It might be a bumpy ride getting to the next new thing but rest assured—there are already many people thinking about how best to reuse these well located retail centers.