Desperate Retail Eyes Changing Uses In Saturated Market

In the months since the coronavirus pandemic arrived, the retail industry has been one of the most severely impacted sectors in commercial real estate. Millions of retail workers have been furloughed or laid off. Thousands of retailers have closed, and of those that have remained open, only half are able to pay rent.

As many states halt reopening plans and the economy remains grounded, retail's outlook is bleaker than ever. What will happen to millions of square feet of empty retail space across the nation in the near future? The answer to that may involve some creativity. While some brick-and-mortar stores and retail outlets will survive, expect plenty of those underperforming retail sites to change uses, commercial real estate experts said.  

Larger CRE players are already anticipating that trend. Real estate investment, development and management firm Lowe said last month that it would begin to identify underperforming regional retail centers and transform them into other uses, such as office, mixed-use, hotel or housing. Lowe tapped former Rockwood retail exec Joel Mayer to lead the company's new retail property redevelopment platform, dubbed Retail reVision.

"There's going to be pretty big changes," said Mayer, an executive vice president at Lowe. "Clearly, there is distress in the retail sector from some long changes that have been occurring in the last 30 years." 

Mayer said now is the time to re-envision and redevelop underutilized, well-situated retail sites.

"One thing we're not going to do is solve retail's problems with more retail," he said.

Before the coronavirus, the retail industry was already grappling with change. Brick-and-mortar retailers were struggling to stave off the rise of e-commerce and Amazon, as well as adapting to consumers' changing shopping behaviors. With Sears and other major department stores going bankrupt, several mall owners had already begun repositioning some of their assets.

In Brea, a suburb of Orange County, Simon Property Group said it would convert a former Sears department store into a mixed-use development that includes housing, restaurants and a fitness center. Macerich and Hudson Pacific Property are converting the former Westside Pavilion Mall in West Los Angeles into a 584K SF creative office.

When the pandemic hit and states began shutting down, the retail sector hit rock bottom. Mayer said repositioning retail assets will be "accelerated because of COVID-19." A recent RCLO report found that survey respondents expect the retail sector to remain in those tenuous conditions into 2021. While rent collections in this sector have improved since May, this sector lags behind other CRE sectors, with rent collections under 60% in the month of June, according to RCLO. 

"Retail is in a serious downturn and still headed lower," RCLCO’s Mid-Year 2020 Sentiment Survey said.

One of retail's biggest problems? There's too much of it, said David Sheldon, a practice leader with Perkins and Will. The U.S. has almost 25 SF of retail per person, Sheldon said, while China and Europe have 2.8 SF and 3.8 SF of retail per person on average, respectively.

"This is troubling for many reasons, including the fact that so much of our population can’t afford the retail designed to serve them," Sheldon said, adding that retail models in China and Europe are a great example of how varied uses can help. "The sociocultural and density contexts are totally different, but it does reveal the cracks in our excessive retail model." 

Archere Investment Management principal Lynn King-Tolliver said acquiring underperforming retail assets is a smart move and an excellent opportunity. 

"As long as there is a strategy redirecting some portion of [retail] in both utility and function," King-Tolliver said. "We were over retailed before this disruption. Infill locations are still attractive. ... Don't wait for retail demand to return. That is a dangerous strategy."

The fallout in the sector will likely have ripple effects. Cities are heavily reliant on sales tax from retail businesses to replenish their general funds, which in turn help pay for road repairs, police, firefighters and other essential services. If retail property is going to change uses, repositioning retail assets could have a negative impact on a city's budget. 

Sheldon said cities should work with developers and property owners to transform underperforming retail assets into health facilities, schools, community centers, housing or other mixed-use projects. He said cities should consider whether they want blighted, vacant storefronts or lively, active spaces.

"Cities that are willing to step out and evolve and focus on activation and change how they look at their budget will have greater economic resiliency," Sheldon said. "Those that continue to work on the old model will fall into deeper economic recession, despair and a blighted pedestrian realm." 

Mayer said Lowe is actively pursuing deals and is in discussions as it looks to identify retail assets in markets where it already has a presence or experience, including Southern California, the Bay Area, Portland, Seattle, Denver, Phoenix, Washington, D.C., and the Carolinas.

Generally speaking, he said brick-and-mortar retail isn't going to to go away, but there will be some consolidation as store space gets smaller for fewer retailers. But local planners would be smart to work with developers and retailers to keep existing space occupied, even if it means changing designations, he said.

"The last thing a city wants is a long-term vacancy," Mayer said.

Mayer would not give an amount that Lowe has committed to redeveloping retail assets but said it would probably provide 5% to 10% of the equity required for a given project and work with partners. Project costs will range anywhere from $50M to $250M, he said.  

Thus far, retail investment sales have stalled as investors have looked to see what consumers may do next. Some property owners have pulled their property off the market while others are waiting to see how economic conditions unfold. Mayer said right now, it is hard to find out a property's exact value without knowing which stores are going to survive and pay rent.

"We're reaching out to all parties involved to let them know that we are here with this concept," Mayer said. "We're not trying to take advantage of somebody or be the 'traditional distressed buyer.' What we want to do is help people solve their problems. ... It's about making a positive impact."