Monday Morning Scoop - STOREFRONT SHAKEUP

STOREFRONT SHAKEUP – Retailers across the country are turning to trendy urban neighborhoods and suburban lifestyle centers for their storefronts. Where does that leave downtown retail districts?

The challenges facing America’s downtowns are frequently linked to the staggering amount of empty office space sitting in towers. But another important segment of the downtown revitalization conversation is how to fill a growing amount of vacant retail space in cities across the country.

Once the core shopping hubs of cities and metro areas, downtowns for many retailers have lost favor to more suburban locations, even predating the Covid-19 pandemic, thanks to population and demographic patterns. Even the suburban retail story has faced challenges, though, with U.S. malls posting an average vacancy rate of 8.7% in 2023 — the highest of any retail property type tracked by Jones Lang LaSalle Inc.

The post-pandemic landscape for retail real estate is still evolving. But retailers and restaurateurs increasingly are choosing to be in high-end, open-air lifestyle centers in the suburbs or in trendy urban neighborhoods that are near to, but not necessarily in, central business districts.

“Suburban markets are definitely having a moment,” said Mark Masinter, vice chairman of retail at Newmark Group Inc. (Nasdaq: NMRK). “And I don’t think it’s a moment that’s going away.”

Atlanta’s prime retail district has historically been Buckhead, a tony suburb about six miles from downtown. While major shopping centers like Lenox Square and Phipps Plaza still exist in Buckhead today, some of the retail energy previously felt in the district has moved farther out in the Atlanta metro — to Alpharetta, for example, Masinter said.

The same trend is happening in other hot Sun Belt cities like Dallas, where retailers have flocked to centers in nearby Plano, buoyed by new development and proximity to housing and office buildings. In Nashville, Tennessee, suburban Franklin — long an upscale shopping-and-dining district — continues to draw new development and businesses.

Areas immediately adjacent to CBDs in many cities also are succeeding. Charlotte, North Carolina, has South End, a once-industrial neighborhood immediately south of that city’s CBD that now has high-rise office towers, more than 3,500 apartments under construction and household retail names. Dallas’ Uptown and Nashville’s The Gulch are other examples of hot retail neighborhoods that are distinct from, albeit close to, those cities’ technical downtowns.

These places have emerged as the sub-urban retail districts in their respective metro areas, encompassing trendy neighborhoods adjacent to a city’s CBD as well as town village-style, open-air shopping centers in the suburbs.

“I believe interesting [food-and-beverage] and other creative concepts will still do things in downtowns, but for the vast majority of growing retailers, you see very few of them thinking about the downtown markets,” Masinter said.

There are, of course, exceptions. Masinter referenced Nashville’s Fifth + Broadway development, which includes an apartment tower, an office tower, shops and restaurants, a food hall, a rooftop music venue, and the National Museum of African American Music in the heart of that city’s downtown. But the CBDs where retail tenants are planting their flags increasingly are tied to massive investments by the private and public sectors, such as a development adjacent to a new or renovated sports venue, like Bridgestone Arena in Music City.

In some cities, the growth proliferating in markets either immediately outside of, or miles away from, downtown isn’t always to the detriment of the city center. While preferences are changing, it’s not always the case that tenants are running away from downtowns, said David Caputo, data scientist at Moody’s Analytics Inc.

“It’s more that retailers are trying to have their foot in both the CBD and suburbs, to have both pieces of the pie instead of abandoning it altogether,” Caputo said.

Changing retailer strategies

Perhaps more than any other real estate-using industry, 21st century retailers are sensitive to risk.

Their industry as a whole has gone through a major shift with the rise of e-commerce, with more than 400 announced retail bankruptcies between 2010 and 2022, according to data platform Statista. Because of that, little new retail development has occurred over the past decade, and many centers have closed or been redeveloped.

Among properties and markets tracked by JLL, there was 216.9 million square feet of designated retail space nationally in 2008. That number plummeted to 41.6 million square feet in 2023.

That’s created an environment in 2024 where the retail real estate sector is actually undersupplied in key markets, including high-end suburbs that retailers increasingly are targeting in their location strategies.

Foot traffic continues to be a key factor in retailers’ planning, and since the pandemic, more people are spending time at or close to home. That frequently means the suburbs, and that’s made leasing real estate in suburban lifestyle or power centers a compelling draw for local, independent small businesses as well as national chains.

And much like today’s office tenants, retailers want the latest and greatest in not only location, but also in space. Many downtown retail properties haven’t been revamped in years and may not be a good fit for what today’s retailers and food-and-beverage tenants are seeking.

Even in legacy retail corridors like Michigan Avenue in Chicago, spaces aren’t 100% germane to what retailers want today, said Ed Coury, senior managing director at New York-based retail advisory firm RCS Real Estate Advisors.

“They’re not looking for 20,000 to 30,000 square feet; they’re looking for smaller space,” he said.

Business owners in the market for retail space today are generally attracted to either urban districts with an authentic feel — think the Bishop Arts District in Dallas, Coury said — or centers that are what he called “highly curated, somewhat homogenous and architecturally controlled.”

The latter of those centers often feed off existing uses, such as a large office park or a significant amount of nearby residential development. The massive mixed-use Legacy development in Plano is a good example of that, Coury said. The retail portion of that area includes the 415,000-square-foot Legacy West development.

“If it’s quality with a quality ownership and a thesis as to where they’re taking the property, that’s pretty attractive to retailers and food-and-beverage guys,” he said.

And for a lot of retailers, having their brand on display in a district with heavy foot traffic, agnostic of it being urban or suburban, continues to be important to market their brand, said Ermengarde Jabir, senior economist at Moody’s Analytics.

Despite the car-centric nature of most areas outside of U.S. downtowns, retail brands still want a presence on the street, Masinter said.

“It’s the brands you would normally see in one of the malls in town, but they want to be on the street,” he said. “Once you start to get that kind of momentum from really interesting retailers and restaurateurs, office rents and new residential buildings, it becomes a very attractive place. I think that’s a trend you’re going to continue to see.”

Where does the changing retail market leave downtowns?

What’s happening in U.S. downtown retail environments varies significantly across cities, but many major gateway markets with flagship retail districts continue to see elevated vacancy more than four years after the pandemic’s onset.

San Francisco, for example, has seen a mass exodus of retailers in Union Square, a longtime retail hotspot. The latest domino to fall is with Macy’s Inc. (NYSE: M) and the expected closure of its 700,000-square-foot flagship there. Union Square’s direct retail vacancy at the end of 2023 was 20.8% compared to 5.5% market-wide, according to Avison Young data.

In downtown Los Angeles, the retail vacancy rate in the first quarter of 2024 stood at 6.9% compared to 4.7% in that market’s suburbs, according to JLL. In Chicago, the overall CBD retail vacancy rate was 7.5% in Q1 2024 and 5.2% in the suburbs.

But retail vacancy in some of Chicago’s key urban retail corridors may actually be much higher, according to other market trackers. Chicago’s Michigan Avenue went from 25.9% at the end of 2022 to 28.2% in 2023, according to Stone Real Estate Research Services. Chicago’s Central Loop jumped to 26.6% in 2023 from 24.8% in 2022, while the LaSalle-Wacker corridor had a whopping 36.2% retail vacancy rate at the end of 2023 — an increase from 34.5% the year prior.

Chicago’s West Loop did see its vacancy drop, from 28% in 2022 to 25% in 2023, according to Stone.

Not all downtown retail is struggling, though, and some key corridors are showing gains. The SoHo Broadway submarket in Manhattan, which includes about 1.5 million square feet of retail, ended 2023 with a vacancy rate of 16% — still elevated compared to years past, but a notable change from 23% at the end of 2022, according to the SoHo Broadway Initiative.

Still, for downtowns that haven’t historically had a flagship retail district, or for CBDs where retail groups are disproportionately reliant on sales from a daytime office population, the outlook is bleaker.

“The footfall that these stores need to be able to meet costs and operate profitably — whether it’s a food-based location or some other retail — really comes from people being in the office five days a week or, at minimum, four days a week,” Jabir said. “The fact that a majority of people that go to the office go maybe 40% of the time they used to previously really has impacted these retail locations, to the point where they’re not profitable.”

And with ground-floor retail space being a key amenity draw for office tenants today, a lack of new leasing interest for retailers to occupy that space, as well as more tenant departures, could feed into the pervasive urban-doom-loop narrative.

What may bring retailers back downtown

Because vacancies are still rising in some CBD retail markets, landlords have had to become more willing to negotiate to lease space, including offering concessions and lowering their asking rents, said James Cook, senior director of Americas retail research at JLL.

“A lot of times, if you have an office building or multifamily building with ground-floor retail, those retail rents aren’t where they’re making most of their money,” Cook said. “It’s often an amenity. If they have a vacant spot, they’re certainly motivated to lease it out to a retailer or a restaurant.”

Some retailers may be taking advantage of the current weakness in the commercial real estate market — and betting on the future — by purchasing their real estate in key corridors. Italian luxury fashion brand Prada, for example, bought the 724 Fifth Ave. building it’s long occupied in New York last year for $425 million.

But it continues to be the case that retail follows the people, not the other way around. So if downtowns struggle to bring in more foot traffic, that will make it tough for retailers to want to be there, even with incentives like reduced rent.

More housing is floated as a key strategy for many downtowns, with office-to-residential conversions a major focus for groups hoping to bring people and revenue back to city centers. A greater amount of housing would mean more seven-day-a-week population in downtowns, Jabir said — compelling for retailers, restaurants and service businesses.

Downtowns also continue to have one crucial advantage over their suburban counterparts: a plethora of destinations and attractions like stadiums, theaters and nighttime activities that lure people outside of the 9-to-5 workday.

The University of Toronto’s School of Cities, which has tracked cellphone activity across 62 downtown metropolitan areas in the U.S. and Canada since January 2020, recently found economic diversity is a key indication for which downtowns are thriving post-pandemic.

The study found that in every North American downtown analyzed, cellphone activity after hours is outpacing activity during work hours.

“I think, ultimately, the city is going to have to reset what it means to be in the CBD, and retail will service whatever that is,” Cook said. “There is not the same concentration of restaurants, entertainment, concerts, plays, all of that stuff in the suburbs. As a cultural destination, the CBD wins.”

By: Ashley Fahey
Source: Austin Business Journal