Real Estate Weekly
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Landlords embrace ‘retailtainment’ as malls diversify tenant mix

By Matthew K. Harding, President, Levin Management Corporation

Your neighborhood shopping center isn’t what it used to be.

While some say the Great Recession and the e-commerce phenomenon impacted the bricks-and-mortar landscape in a purely negative way, in reality we are seeing an interesting – and encouraging – tale of endurance and progress, illustrated by the ongoing transformation of retail property tenant mixes.

The changes are not singular – or linear. They involve new types of retail space users and the evolution of those working to adapt to a new setting influenced by socio-economic shifts and public policy. Ultimately, fresh opportunities are emerging in an industry for which change remains one of the only constants.

Not long ago, the presence of a gym at a shopping center was unusual. However, when the recession hit and many retailers began shuttering their doors, retail property owners found fitness tenants eager to step in and fill the vacancies.

Photo by Rene Schwietske/ Flickr
Photo by Rene Schwietske/ Flickr

At first, co-tenants were concerned about their new neighbors monopolizing parking or watering down the property’s range of products for sale. Yet they soon began to recognize the advantages of increased daily traffic from gym members.

Today, fitness tenants are shopping center staples, positioned as first-tier targets for retail leasing professionals. And they come in a range of price points and sizes, from Crunch Fitness and 24-hour Fitness on the larger end, to mid-size Retro Fitness and the boutique Orangetheory Fitness.

In a sense, the rise of gym tenants at retail properties was a precursor to a larger trend.  Today, many shopping centers are transitioning from places where consumers go simply to buy goods and services. Now they visit to enjoy recreational opportunities and engage in community.

To this end, restaurants – especially fast-casual concepts like Panera Bread and Chipotle – are comprising a larger percentage of tenant mix than in the past. This is by design, as landlords work to re-introduce shopping as a recreational pastime.

Entertainment tenants are leasing spaces of all sizes, from big-box anchors like Dave & Busters to small paint-and-sip boutiques. Their success speaks to the viability of “retailtainment.”

At the same time, traditional bricks-and-mortar retailers — such as grocery and apparel, to name just two sectors — remain alive and well. However they, too, look a bit different than in the past.

Following the recent A&P bankruptcy and liquidation, a growing diversification in grocery tenants has taken place in the Northeast.

After several years with only a handful of expanding operators, we are seeing significant growth among chains including ShopRite, Acme, Trader Joe’s, and other specialty and ethnic grocers. Additionally, many non-grocery retailers like dollar stores and pharmacies are expanding their food components (although lease clauses may limit their amount of grocery-dedicated space).

In the apparel sector, a number of mid-price retailers, such as Mandee and Fashion Bug, have gone out of business over the years. However, bigger national department store players, like Nordstrom and Saks, are producing healthy sales numbers from growing their off-price concepts. Discount brands such as Kohl’s, T.J.Maxx, SteinMart and Ross also remain favorites among today’s cost-conscious consumers.

Yet e-commerce has made an undeniable and significant impact on traditional bricks-and-mortar stores.

The conversation has shifted, however, from “survival” to “opportunity,” and physical-store retailers are rethinking their approaches. They are capitalizing on opportunities to meet changing consumer needs and desires by giving customers a good reason to visit their stores.

The trends go beyond the grocery and apparel categories. Retailers across a wide range of specialties are looking for new ways to serve and engage customers.

In Levin Management Corporation’s most recent tenant poll, nearly 40 percent of participants indicated they have adapted their business model in response to e-commerce growth.

Among those respondents, many are adding in-store services and incentives, incorporating in-store pickup and return options for purchases made online, and increasing co-ordination with their online operations. Others are altering store inventory, introducing experience draws and/or changing their store prototypes.

In addition to the shopping habits of Millennials and Baby Boomers, one significant driver in shifting tenant mixes ties directly to public policy.

Changing healthcare laws are incentivizing people to choose walk-in clinics over trips to the ER. At the same time, hospital systems are decreasing operating costs and improving customer service by establishing outpatient services in non-medical satellite locations. The resulting boost in space demand has come at a time when retail supply has been plentiful. This is giving rise to a new breed of non-traditional tenants.

Urgent-care, imaging centers, doctor’s offices and dentistry chains in retail settings have something in common with their non-traditional predecessor, the fitness tenant.

A shopping center-based trip to the doctor, like a workout at a gym, translates into a visit to the grocery store or a lunch date at a neighboring restaurant. In this regard, healthcare tenants are queued up to become the next “normal” retail space users.

The bottom line is that shopping center tenant mixes and tenants, themselves, have always evolved to accommodate culture. Time and again, long before the latest recession, rise of e-commerce and healthcare industry disruption, the retail industry has continued to re-invent itself to survive – and thrive.

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