Adapt Or Die: The Ways Landlords Are Bending Over Backward To Deal With A Shifting Retail World

Retailers and landlords, grappling with a new retail paradigm, are being forced to find creative uses for spaces and experiment more and more with different concepts to fill stores and lure shoppers.

In the first half of 2018, more than 2,500 store locations closed in the United States, according to JLL’s retail outlook report from the second quarter, and nearly 600 more locations will close by the end of the year. Across the country, the closures of retailers like Sears and Toys R Us have dumped empty space on the market. Retail absorption declined nearly 60% in Q2 2018 from a year earlier as vacancy ticked up.

Much has been made of the e-commerce-driven destruction of brick-and-mortar retail. Many large-scale, big-name operators have closed or are shrinking in size. But savvy landlords should see this as a chance to make lemonade from lemons.

“In the past everyone was looking for a silver bullet,” said EY Executive Director Marcie Merriman, a cultural anthropologist and retail strategist who will deliver a keynote address at Bisnow's National Retail: East Coast Series event in New York Oct. 4. “There are tons of tests that are going on that don’t work ... [but] if you are afraid to fail, those are the brands and business that are really in the most trouble.”

In New York, landlords are increasingly willing to slice up large spaces for smaller tenants, many of whom don’t have established track records. Some are turning to boutique fitness concepts or innovative fast-casual restaurants — previously not considered to be highly desirable tenants — to fill space.

Brookfield Property Partners, which this year bought mall owner GGP for $15B, is experimenting with seven storefronts it recently bought on Bleecker Street, where it is running incubators for e-commerce operators to test out a brick-and-mortar space. 

Shoe retailer Margaux has opened a store there and some art and cultural "activations" have launched, according to a Brookfield spokesperson.

“For a landlord that owns a mall in a global gateway market like New York, and they lose a department store, it’s an opportunity to get creative and to find new users. It’s a creative project that’s also got really good upside to it,” JLL Director of Retail Research James Cook said. “For those malls in the secondary and tertiary [markets], it’s a lot more work and it’s a lot more uncertain.”

He said space left open by department store closures is being filled by operators that offer either value or an experience. Former Macy’s stores, for example, are being filled by Whole Foods or Life Time Fitness, according to JLL’s report, while AMC Theatres and H&M have gone into space once occupied by Sears and JC Penney.

It’s all part of the trend toward service-driven, experiential real estate. Consumers are looking for experiences; something that cannot be recreated online, or that can be posted on Instagram. Or both.

Retailers and landlords need to be preparing now for the next wave of consumers, Merriman said: people born after 1997 who are typically referred to as Gen Z.

The oldest members of that generation are now 22 years old, and are distinctly different from their millennial predecessors. They are more skeptical and frugal than previous generations, with more interest in how and where their products are made.

“[Gen Z] have a more transparent understanding of implications of consumption,” she said, adding that Gen Z shoppers are seeking out innovative retailers that use less packaging and waste. "It’s the same generation that has been raised with boxes at their door. Now they are going to question [those] implications.”

TerraCRG Managing Director of Commercial Leasing Peter Schubert, who has represented tenants like Blue Apron and Juice Generation in Brooklyn, believes young people are not consuming less, but differently.

Landlords in Brooklyn are having success filling space with creative or entertainment tenants, he said, where there has always a vibrant nightlife and café culture.

He arranged the lease of Ample Hills Creamery's factory and museum, a 15K SF space at 421 Van Brunt St. in Red Hook that opened this summer. It is the type of offering, Schubert said, where people can see their food being made, that suits today’s consumers.

“This is exactly what people want, they want to be able to see the manufacturing, right on-site [where there] is no shipping, and you get the whole understanding of the origin of the company," he said.

Experiential, entertainment and food service offerings can drive the overall health of a retail area, sources said, because people tend to shop while they are there.

“There is a big value to our tenancy,” iPic Theaters Vice President of Real Estate Patrick Quinn said. "We are not drawing the same amount of attendants as, say, a supermarket, but we do draw about 1,000 people a day."

A high-end movie chain, iPic offers in-theater dining service. Earlier this year it signed on to open a 348-seat theater, restaurant and bar at Heritage Village, a proposed mixed-use development in Hicksville, Long Island.

“I’ve seen a lot of landlords lately trying to attract tenants that are Amazon-proof,” he said. “[But] retail is probably evolving faster now than in the past couple decades ... it’s hard to say, ‘You have to do leases with tenants that are XYZ.’”

Landlords are also trying to adapt and be flexible to change. The Rudin family, with its joint venture partner Eyal Ofer’s Global Holdings, is opening an immersive playground for dogs pop-up in an empty 3K SF retail space at their condominium project, the Greenwich Lane at 155 West 11th St.

“Experiential retail is not the silver bullet solution for the bad retail market … it’s another concept, some places it works and some places it doesn’t," Michael Rudin said. “It’s more about adapting and going with the tides of our business, being flexible and not always doing things the ways they’ve been done in the past.”

Learn more Oct. 4 at Bisnow's National Retail East event at 866 United Nations Plaza.