Shopping centers and regional malls (especially those located in “B” and “C” markets) have the potential to be reimagined and redeveloped via “alternative commercial uses” as the retail industry continues to experience store closures.
In a report from Transwestern, analysts at the commercial real estate agency said that regional malls are far from being “obsolete” — and as the retail market transforms, so too will regional malls. And in a separate report from Fitch Ratings, analysts said the convergence of digital and physical will play out in the retail real estate market as well with retail stores and shopping centers taking on the role of distribution center.
In the Transwestern report, Brian Landes, the author of the study and director of GIS/location intelligence for the company said that the “assumptions that all purchases are moving online, all retailers are going bankrupt, and all Millennials reject the suburban mall and the lifestyle it represents are grossly exaggerated. Furthermore, we’ve seen that when malls are reconsidered and repurposed for other uses, their value may far exceed their use as conventional retail space.”
Landes noted in the report that regional malls have had “positive net absorption since 2010, with the only blip in absorption occurring in 2009, at the height of the recession.” Net absorption is the total amount of new square footage leased minus the total square footage of tenants no longer occupying the space. He said last year, the U.S. market experienced 105 million square feet of net absorption, “representing a growth in occupancy of nearly 1 percent.”
Moreover, he said at by the end of the year, mall occupancy “across the U.S. was above 95 percent, equating to 848 million square feet of space. [And] mall productivity has remained relatively steady and rose 0.7 percent in the last year to $465 per square foot.”
But what about the rash of store closures this year, which analysts say are on track to surpass closures in the wake of the Great Recession? Nick Hernandez, managing director of retail for Transwestern, said while “we’ve seen store closures increase in 2017, for the most part, malls are attracting new tenants through strategic marketing and property enhancements. And in cases where a retail mall no longer makes sense, we have seen many owners successfully adapt to the changes in their trade areas by repurposing the mall for another use.”
These uses include conversion to office space and community centers as well as to serve the medical segment. “Malls are also seeing their parking redeveloped into multifamily, office buildings and hotels, among other uses,” the report stated. “The success of these projects depends greatly on the underlying demographic research and financial analysis that drives conversion.”
Landes added that cases of adaptive reuse for regional malls “has a high chance of success because they typically are located in desirable areas with good traffic patterns, high visibility and ample parking. A creative approach based on a thorough analysis of the market data is allowing the regional mall — which really took off in the Fifties — to evolve into a new type of gathering place that meets the needs of its community.”
In the Fitch report, analysts at the firm said the growth of e-commerce and the “increasing emphasis on delivery speed as well as pick-up services for retail goods will likely precipitate a convergence of industrial distribution and retail real estate.”
Analysts at the ratings agency said that retail’s transformation has “put the future role of shopping centers and lower-quality malls in question. E-commerce continues to take share from bricks-and-mortar retail, resulting in tenant and retail property softness. We believe well-located retail properties and REITs with portfolios centered on consumer demographics will see continued demand as delivery and pickup services and an increased focus on demographics gain momentum.”
The analysts said that e-commerce’s “last mile” of distribution and fulfillment and retail real estate now share the same purpose, which is to deliver goods to the consumer. “One has a delivery focus, but without public access, the other has public access, but without a delivery function,” authors of the report said. “Retail centers that exhibit the best demographics, which include per capita income and population density, will be most easily repositioned and most capable of managing the secular shift in how goods are sold and purchased in the 21st century.”
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