Market Insight June 2018 - Retail

RETAIL Market Insight JUNE 2018

How Retail Real Estate Continues To Change The changes in consumer shopping behavior continue to create upheaval in the business of retail real estate. As certain kinds of space become less valuable or obsolete, the arrangements that landlords and tenants make has had to adapt. I recently sat down with four partners from Goulston & Storrs, a law firm with one of the largest retail real estate practices in the United States, and asked them what they’re seeing in the mar- ket right now. All of the partners I spoke with (Nancy Davids, Matt Epstein, Karen O’Malley and David Rab- inowitz) have decades of experience in retail real estate deals all over the U.S. Mixed Use now, smaller urban groceries are on the rise; they are often as small as 25 thousand square feet, much small- er than supermarkets historically. That could make the inclusion of grocery in shopping malls only a temporary change. Landlords are also exploring uses of retail space that have historically been prohibited but are now in demand by consumers, like medical care, massage studios and marijuana dispensaries. Many leases restrict what used to be called “head shops” and the sale of “drug para- phernalia,” but the increasing legalization of marijuana and popularity of vaping have called those restrictions into question. Factories were also historically prohibited but with the growth of microbreweries and their ability to draw consumers who may shop in other stores on the same visit, landlords are finding ways to allow certain kinds of production facilities.

They report an increase in mixed-use projects. That’s where a large property is used for different purposes that are integrated in one parcel of land. An increasing number of existing retail-only developments are be- ing converted to include offices and residences (both private homes and apartments). New development projects are less about retail-only and more about retail as a part of a live-work-play neighborhood and not a mall. Karen O’Malley told me, “Forward-thinking devel- opers...[are] curating their tenant mix to attract a broad range of consumers.” They are also adding different kinds of retailers that were previously not thought of as belonging in malls like grocery stores, movie theaters and gyms. Those used to be perceived as discrete destinations, where consumers would go and leave without visiting any of the other retailers nearby. Now landlords are finding those tenants are contributors that help bring more people to their property. There’s now an Equinox in the rebuilt Brookfield Place in Manhattan — that could never have happened in the past. The Whole Foods store at Related’s Time Warner Center is one of the chain’s top stores. These changes are landlords’ way of broadening shopping experiences and giving consumers more reasons to come in. Grocery is one of the least-penetrated retail sectors for online shopping but that will likely change as technolo- gy develops and systems are better able to pick fresh produce for consumers. That will accelerate consumers’ transition to online shopping which means less retail space will be needed in the future for grocery. Even

Office spaces are not immune to change either. In the past, research and development was in a separate area because of space requirements for equipment. With companies wanting coders and scientists to work in proximity to other staff so that the development of products and services are integrated with strategy, those separate spaces now need to be combined. The combi- nation also creates a unified, campus-like feel, often with retail and other amenities nearby, creating a new kind of work environment. Parking There are going to be fewer parking space per square foot of retail space in the future than there have been in the past. Different uses in mixed spaces need differ- ent amounts of parking spaces and they each peak at different hours of the day and even on different days of the week. Also, the growth of ride-share services such as Uber and Lyft has allowed more consumers to arrive at stores without their own car. These services also create a need for more pickup and dropoff space than current designs usually have. The rebuilt Westfield mall at Cen- tury City already has dedicated drop-off/pick-up areas for ride-sharing services and The Grove in Los Angeles goes even further by offering subsidized rides during the holidays.

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