All you contrarians unite: Store-based retail is very much alive — even on fire. In fact, according to real estate services firm CBRE, the rate of available retail real estate fell to 4.8 percent in the second quarter, the lowest level in 18 years. And as store-based retailing evolves to become less transactional, more experiential, with higher efficiency, and more environmentally sustainable, other forces are also at play in reshaping the retail landscape.
Across all retail categories, it has become clear that small is the new big. Large multiunit retailers as well as startups are building smaller stores. The JLL report states that smaller spaces (under 5,000 square feet) have seen the highest demand.
Space’s Down, Rent’s Up
Real-estate investment trust Macerich notched its strongest leasing volume since the 2008/09 financial crisis. Leasing so far this year is exceeding last year’s pace. But there’s a catch: Kimco, another major retail lessor increased rents by more than 30 percent last quarter from backfilling spaces vacated by Bed Bath & Beyond. They have been inundated with calls from discount retailers, grocers, home goods stores, bookstores, and apparel companies interested in the bankrupt retailer’s former real estate.
But it is definitely not a one-size-fits-all space race. At the low end, enclosed malls are in crisis as department stores’ contracts expire and other tenants move to open-air locations. According to data provider MSCI Real Assets, two-thirds of the nearly $1 billion of distressed retail property sales so far in 2023 involve mall properties. So, while the upper-end A, A- and B+ malls are raising rents because of high demand, many of the lower-end malls are in a death spiral.
Suburbanization Redux
And there’s another thread to the real estate picture. It has become embedded in recent retail legend that suburban shopping center owners have benefited from the rise of remote work. Consumers visit local grocery stores and other shops more often during the work week when it’s convenient to step out of the house for a quick errand.
Moreover, the 72 million+ millennials have reached the life stage of having families and buying their first homes. As a result, we are witnessing a suburbanization redux, echoing the post-World War II march of their grandparents who put the suburbs on the map. In response, many retailers and even fast-casual restaurants have shifted locations from urban business districts to the suburbs, a movement that has been good for the burbs but has exacerbated vacancy issues in many of our cities’ central business districts.
Shrinking Footprints
Class A malls showed positive absorption of 0.2 million square-feet in the second quarter according to JLL’s “United States Retail Outlook Q2 2023” report, and availability within non-mall, multi-tenant retail centers dropped to 7.5 percent in June. This is a precipitous drop from 2020 when the pandemic caused vacancies to spike to double digits. And it appears that one of the biggest winners today in retail real estate is the open-air center whose demand tripled in the second quarter.
Small for All
Across all retail categories, it has become clear that small is the new big. Large multiunit retailers as well as startups are building smaller stores. The JLL report states that smaller spaces (under 5,000 square feet) have seen the highest demand.
Many direct-to-consumer (DTC) digitally native brands that are opening physical stores are doing so in spaces that are significantly smaller than the chain stores of the past. Similarly, “small-in-the-mall” expansion is occurring among quick-service restaurants.
Macy’s just announced the opening of four more of its small footprint off-mall stores by fall 2023. Ranging between 30,000- and 50,000 square feet in size, they are one-fifth the size of the typical Macy’s mall anchor. And in a curious but telling side note, unlike the Market by Macy’s nameplate given to the initial prototype locations, the new foursome will bear only the Macy’s moniker. My read is that rather than attempting to support the boutique Market by Macy’s sub-brand, they are simply becoming more flexible with their store sizes, as Target has.
Making Retail Work in a Channel-Free World
Over the course of most of the 20th century, retail has been evolutionary (the underlying theme of my book Retail Schmetail). In the 21st century, it has been more disruptive and revolutionary. Blame the internet, Amazon, supply chain pain, the pandemic, mall-fall, or changing consumer behavior. But one thing has not changed: Retail still is all about the goods, and people who want them, full stop.
One of the most daunting pain points between wanting and getting goods has been retail logistics, something that became magnified and exacerbated throughout the pandemic. The super retailers, Walmart, Target, Costco, Amazon, and the like devoted hundreds of millions on top of their already huge investments during this period. This has resulted in a well-oiled infrastructure to send a lot of stuff to zillions of people, fast.
However, for most other retailers further down the food chain, less has changed. From specialty chains to independent retailers, transforming the physical retail ecosystem to meet today’s customer expectations has been a work in progress, at best. But that is changing, and Fillogic is part of that change.
Holistic Approach to Middle- and Last-Mile Logistics
I recently spoke with William Thayer, the CEO and founder of Fillogic. Fillogic collaborates with retailers, brands, real estate owners, and logistics providers to take the mystery out of middle-mile and final-mile logistics. It gets people their stuff by reducing the distance to the end consumer, cutting transport emissions, and cutting the amount of warehouse space, even the very cost of that space.
How? Before you think robots (as I did) came to the rescue, think again. Fillogic is creating an elaborate hub network of satellite facilities (think empty retail spaces) across the country. Combining these facilities with a proprietary algorithm creates complete transparency around where the goods are at every point of their journey. Additionally, by sidestepping the major carriers, they can cut transportation costs, and at the same time reduce transport emissions by 20 percent.
Fillogic’s approach is uniquely holistic. It is not only keeping real-time tabs on the products in motion but creating new efficiencies in the middle mile. Fillogic has partnered with the biggest retail real estate and mall owners including Simon Property Group, Brookfield Properties, Taubman Properties, and Macerich. They optimize the mall owners’ excess space while providing their retail tenants with more fulfillment/delivery options, inbound optimization, supply chain visibility, and reverse logistics options to help them meet customer demands. It’s a clean machine, closer to home.
Empty Spaces
In 21st century retail the one constant is change. What doesn’t change, however, is linking buyers with sellers, people with goods. And you still need physical spaces as marketplaces. Undoubtedly as disruption continues, new players like Fillogic will emerge to bring value to underutilized physical assets while meeting the ever-increasing demands of both the consumer and the marketplace. The main takeaway? It’s going to take creativity and ingenuity to fill the empty spaces in places that have become irrelevant, and it’s going to take financial savvy and finesse to keep up with higher costs and less attractive leases.