The Evolution of Retail: Part I
Jeff Green and Jason Baker/Shopping Center Business

Of all commercial real estate categories, retail has undergone the most radical changes in post-downturn America. And it is a transformation that’s only destined to continue in the coming years as the industry wrestles with increasing online sales, waning store growth opportunities and changes in consumer shopping habits.

Oh, how the game has changed. The giant construction machine that planted an average of 200 million square feet of power centers, regional malls and other retail products annually across the U.S. landscape in the mid-1990s has come to a virtual screeching halt. In fact, the industry broke ground on less than 11 million square feet of multi-tenant space in 2010 and 2011 combined. Centers that aren’t grocery anchored or weren’t green-lighted before the downturn, simply are not getting built, except for a handful of outlet malls.

With the closures and downsizing of hundreds of big-box stores nationwide and retail vacancies stuck at 20-year highs, there’s far too much existing inventory on the market and few large format stores waiting in the wings to fill those long and deep chasms. Certainly, T.J. Maxx, Marshalls, large dollar concepts and other value retailers are taking some, but even they are reaching a point where cannibalization of their own sales will soon become a concern. So what’s next?

In many ways, the next iteration of retail has already arrived: the soaring E-commerce marketplace, one of the prime reasons Best Buy and so many other retailers are rethinking their space needs. E-commerce retail growth is nothing short of staggering. Amazon.com reported revenues of $17.4 billion in fourth quarter 2011, an increase of 35% over the same quarter in 2010. Worldwide, general E-commerce revenue grew to an estimated $680 billion worldwide in 2011, up nearly 19 percent from 2010.

Best Buy has responded by recalibrating its average big box store size from nearly 50,000 square feet a decade ago to as small as 20,000 square feet, or even less in some cases, by eliminating music, books and other non-core products and otherwise adjusting display space needs to today’s more compact electronic lines. Other retailers have also been slowly exiting areas of their business that have been soft to meet the new budget constraints of upper management and shareholders. Office Depot, Staples, Petco and even some Walmart concepts are drawing down in size, along with others. In our view, merchants who aren’t reconsidering their real estate and merchandising strategies to reflect new realities are asking for trouble—or obsolescence.

To respond to online sales, retailers are starting to adopt a showroom approach in some storefronts, displaying their floor models and best-selling products for the see-and-touch experience that shoppers crave, while offering the balance of their products through fast, sometimes same-day delivery from increasingly efficient regional fulfillment centers. These same stores are also working to integrate that experience into their own online stores and mobile applications.

But what’s to become of the huge volume of vacant shopping space, particularly in older generation “B” and “C” centers? Experts have estimated that as much as 30 percent of our present retail inventory will need to be repurposed. While some of it has already transitioned to schools, museums, churches and entertainment and fitness uses, the most promising and potentially lucrative re-use, we believe, comes from medical tenants. Large healthcare organizations are working their way deeper into communities they serve with satellite clinics, emergency centers and the like to increase their visibility. With their strategic locations, optimal street visibility and ample parking, shopping centers can be perfectly suited to fit that bill in many cases.

Primary care physicians, imaging centers, physical therapy offices, specialty practices, opticians, chiropractors, dental clinics and other medical businesses are also routinely taking up residence in centers that may have once resisted non-retail uses. Medical users are finding that rent rates in these well-located venues are often far cheaper than new construction or the expensive, hard-to-access office towers near hospitals. Some older shopping centers have already been fully revived by medical uses, including the 43-year-old 100 Oaks Mall in Nashville, which converted its 400,000-square-foot second level and adjacent low-rise office building into medical clinics operated by Vanderbilt University Medical Center. The first floor of 100 Oaks remains retail with such anchors as Ross Dress for Less, TJ Maxx, PetSmart and Regal Cinemas.  In Jackson, Mississippi, the mostly vacant Jackson Mall was bought in 1995 and converted to University of Mississippi Medical Center, which, after a more recent $10 million facelift,

is now operated as a clinic and medical education school by the university and two other colleges.

With so many changes afoot, retail remains the most fluid of real estate segments and promises to remain in that transition phase for some time to come. We’re often asked when the next big wave of retail development will happen. That’s a difficult question to answer. What worked in the 1990s isn’t working now and probably won’t work again anytime soon, if ever. Our best guess is that we won’t see any meaningful development happening in the next three years. There will certainly be new outlets and some other new centers built in high-growth areas or on sites where obsolete centers now stand. But moving forward, the strategies of re-tenanting, recalibrating and redevelopment are destined to take reign over new development.

We’ve decided to take a look at the future of retail in several different retail center categories: the Power Center, the Regional Mall and the Neighborhood/Specialty Center. Next up, in the May issue of Shopping Center Business, we look at the footprints, formats and possible evolution of the power center and discuss how usage changes in this one dynamic category will continue to create a ripple effect on the entire retail real estate industry. So, please stay tuned!

Jeff Green is president and CEO of Phoenix-based Jeff Green Partners, a leading consultant in retail real estate feasibility, retail expansion planning, medical retail planning, location analysis and commercial land use. He can be reached by email at jgreen@jeffgreenpartners.com.

Jason S. Baker is an X Team International partner and co-founder and principal of Houston-based Baker Katz, a full-service commercial real estate brokerage firm specializing in first-class retail tenant representation, project development and leasing, and investment sales. He can be reached by email at jbaker@bakerkatz.com.