Open-Air Retail’s Dominance Could Last Well Beyond The Pandemic

One of the lasting effects of the coronavirus pandemic on the retail sector may be a bias against indoor shopping experiences among customers and developers, retail real estate experts say.

Very little brick-and-mortar retail has been left untouched by the pandemic's disastrous effects. Among publicly traded REITs, those specializing in regional malls have been hit the hardest, plummeting 53% year-to-date, while shopping center and free-standing retail REITs have been battered by drops of 45% and 20%, respectively, according to Nareit. 

A recovery will likely favor outdoor retail well beyond the worst of the coronavirus, according to Leslie Lundin, managing partner of West Coast shopping center owner LBG Real Estate Cos. She said she and other developers are anticipating a bias for outdoor retail as a lasting societal imprint left by the pandemic.

“It’s going to stick with us, probably for a generation," Lundin said. "And if that’s the case, it’s a real problem for enclosed malls and indoor shopping areas.”

Because of the pandemic itself, limited reopenings and e-commerce's accelerated dominance, indoor and outdoor retail is lagging far behind last year.

Compared to indoor shopping centers, outdoor shopping centers have seen customer visits "far closer" to normal levels so far this year, according to data analytics firm Placer.ai. In the week beginning Aug. 31, visits to outdoor centers were down 24.6%, while at indoor malls they fell 37.2%, Placer.ai's latest report shows. 

For LBG, two of its biggest properties are at what Lundin described as opposite ends of the indoor versus outdoor spectrum.

One, Medford, Oregon's The Village at Medford Center, an open-air entertainment and lifestyle center with a pedestrian plaza running through its middle, has traditionally relied on its Cinemark theater as an anchor. But that changed this summer.

"Really the biggest traffic generator was our restaurants because it had this huge outdoor café seating area, and that kept the property alive," Lundin said. "So that effectively becomes the new anchor and feeds traffic to all the other tenants, which is what Cinemark used to do.”

At the other end of the spectrum is LBG's Hilltop by the Bay property, an enclosed East Bay Area mall LBG was already in the process of repositioning when the pandemic hit. Though indoor malls in Contra Costa County have been allowed to reopen since Aug. 31, Hilltop hasn't because of the challenging economics of indoor malls, Lundin said.

Lagging sales and the increased costs of housekeeping to keep the mall sanitized don't mix well, nor does the cost of capacity constraints. Contra Costa County, like other California counties, currently allows only 25% capacity at indoor malls, which leads to the added staffing expense needed to count people. 

"Practically speaking, it’s too difficult, basically, to open up an interior shopping center," Lundin said. 

Lundin said the longer this situation goes on, the less indoor malls stay enclosed, instead converting to open-air or becoming new types of real estate entirely. The latter was already underway before the pandemic, most commonly for retail-to-industrial conversions but also to other property types to a lesser degree, but it has accelerated this year. As of July, CBRE counted 59 retail-to-industrial conversions in the pipeline across the U.S., up from 24 seen in January 2019.

Conversions to outdoor retail were also already becoming more common, according to Cox, Castle & Nicholson partner Scott Grossfeld, a longtime leader of the law firm's retail group who focuses on shopping center development. He cited an early example going back to the early 2000s of Promenade on the Peninsula, a mall in Rollings Hills Estates in Los Angeles County that went open-air that decade.

“Now, with COVID obviously making it harder for enclosed malls to function as well as open-air [malls], I definitely think that trend will continue," Grossfeld said. "If things like this were to happen again in the future, it definitely would be an advantage for not only retailers but for owners of shopping centers to have open-air shopping centers.”

Even so, there is plenty that could stop such renovations from happening, besides only being practical in warmer climates like California. A drawback to the conversion process, along with construction costs and the cost of improvements like weatherproofing, is that it presents "a whole host of challenges," Grossfeld said.

He said the biggest may be that department stores often own their buildings, and sorting out each of their concerns on design, property governance and common area maintenance cost distribution can take months.

“You really can’t reconfigure an enclosed mall to an open-air shopping center until you get all of those department stores to agree upon recasting that enclosed mall into an open-air shopping center, and then agreeing upon how that shopping center is going to be maintained and operated," he said. 

There are also tenants with leases still in effect, which the owner has to pay to terminate, as well as entitlement work with the city and surrounding road infrastructure.

“It’s a whole host of new agreements that need to be done," Grossfeld said. "But at the end of the day, it’s worth it.”

Maven Commercial partner Pamela Mendelsohn, a restaurant and retail real estate broker, also said it might be worth it in the short and longer term for property owners to think of using outdoor space more effectively, even at smaller downtown spaces. She said she is now regularly getting requests from restaurants or gyms to lease space with outdoor accessibility. 

But even in San Francisco, where Mendelsohn is based, less favorable weather, the effects of daylight saving time, growing comfort with indoor dining and shopping, and relaxed regulations have yet to seriously test customer preferences for the outdoor experience.

With malls, though, she said she thinks outdoor properties will have an advantage, weather permitting.

“It’s all weather-dependent, but at least in California, I think outdoor malls are going to have a much better time than indoor malls," Mendelsohn said. 

As for LBG, which considered opening up its 78-acre Hilltop property as an open-air mall, it has decided on a different path: marketing it as a future life sciences hub.

"Whereas before, when the retail would have been the anchor to a development like this 10 years ago, now the retail development will be much smaller and be an amenity," LBG Managing Partner Doug Beiswenger said upon LBG launching marketing for the Bay Area property.