How new tenants in department store spaces are transforming retail
As traditional retailers move out of department stores, new types of tenants — from coworking companies to entrepreneurial pop-ups — are taking their place
For retailers that long occupied the largest spaces in shopping malls across America, the rise of e-commerce has meant shrinking, or in some cases, going out of business altogether. Either way, their hefty footprints have left a big dent in the real estate market.
Saddled with these large spaces to rent, landlords are increasingly welcoming non-retail tenants like coworking spaces, healthcare facilities and experience-based pop-ups.
“It’s a fundamental paradigm shift — it’s not the end of retail, but a substantial repositioning of it,” said Mark Dufton, CEO of Real Estate at Gordon Brothers, a global advisory, restructuring and investment firm. “We’re seeing an explosion of non-retail and quasi-retail uses backfilling open space — including healthcare, education services, fitness and entertainment — much more than we were seeing before.”
General Growth Properties, Inc., the second largest shopping mall owner and operator in the U.S., owns 127 retail centers across the country. At least part of 46 of these centers were replaced by new tenants — and only a quarter of them were other department store retailers, JLL data shows. The rest were filled with a mix of food and beverage, sporting goods and entertainment uses.
Smaller retailers are taking advantage of the available space, leading to a rise in entrepreneurial retail concepts. Dufton points to the Seaport neighborhood of Boston, where short-term pop-up She-Village flourished earlier this year.
“Ten different women-owned businesses had a little space inside, which allowed them the retail presence to build up their brand, but didn’t require the huge capital investment of taking a whole new store and a 10-year lease,” Dufton said.
Westfield is currently renovating a former department store at its Broward Mall near Miami and carving it up with several dining and entertainment tenants.
“In general, I think there’s a huge opportunity for local folks in this current climate,” Dufton adds. “They’ve always been priced out of Class-A malls and have never been able to get the foot traffic that they can get now, when there are opportunities to affordably move into high-quality space.”
“It’s a fundamental paradigm shift — it’s not the end of retail, but a substantial repositioning of it.”
Coworking as an option
When landlords can’t find retailers to backfill vacancies, “owners and retailers need to be a little more creative,” said Taylor Coyne, Retail Researcher at JLL.
One creative solution is to bring in coworking spaces, which are in higher demand as more and more freelancers become part of the gig economy, with both remote and traveling employees looking for quick, convenient touch-down work spaces. Approximately 43% of people employed in the U.S. work remotely at least some of the time, according to JLL research.
The members of coworking spaces in malls also create more daytime foot traffic that can attract new retail tenants, Coyne said. Given current expansion plans, JLL predicts that coworking space in retail properties will grow at a rate of 25% annually through 2023 and reach approximately 3.4 million square feet.
“Coworking is an expanding market that is continuing to branch out into new niche offerings,” Coyne said. “The rise of these concepts is a great thing for retail landlords.”
Creating whimsical experiences
Another low-risk idea landlords are pursuing is almost entirely about one experience — a great photo opportunity.
The Museum of Ice Cream, a pop-up which came to Los Angeles and New York, lets visitors play on cookie carousels and immerse themselves in tubs of sprinkles for $38, with ice cream included. These Instagram-friendly pop-ups, which are becoming more popular, can run for a few days, a few months, or longer. The Museum of Ice Cream, for example, now has a permanent home in San Francisco.
“As more and more retail becomes available online, consumers are looking for places to experience something, and are more willing to pay for that experience,” Coyne said.
Tom Mullaney, Managing Director of Restructuring for JLL, said the shift we are seeing in retail is just an uncomfortable part of a historic tradition academics call “the Wheel of Retailing,” where new ideas and opportunities are created as old concepts die.
“Itinerant peddlers were taken over by the general store; the general store was taken over by Sears and Kmart and other mass merchandisers, who in turn were eviscerated by major national chains at the local level and by the growth of e-commerce,” Mullaney said.
“Today, prominent chains that have overbuilt and are no longer consumer-relevant are, in turn, moving to a natural death,” he said. “But they always get replaced by new concepts, and that will be true this time as well.”
This article originally appeared in Ambitions Magazine. If you’re interested in reading the full issue, please visit this page.