Big Shoes to Fill

Developers are thinking strategically and creatively about how to fill large open spaces in their shopping developments–and creating new projects and paradigms in the process. With a significant number of department stores and other large-format retailers struggling and closing stores, owners and developers need to be proactive about filling those spaces. But larger spaces can be tougher to fill–due to a relative scarcity of potential replacements, as well as challenges associated with unusual and limiting layouts and floor plans.

Consequently, owners and developers need to be deliberate, strategic and creative about how to fill those gaps. New concepts and new retailers offer some potential candidates, and, increasingly, non-retail uses such as entertainment and multifamily have become more prevalent in what were previously more traditional retail centers.

So what large-format replacement options are available? What creative non-retail uses are the most promising, and what do owners and developers need to do to ensure that those uses are a good fit for their center? Answering those questions may give us some insights into what the next generation of retail spaces will look like.

New and emerging options

One of the ways landlords are effectively filling power center vacancies is through a wide range of emerging concepts capable of slotting in to those larger spaces. Kroger’s new specialty grocery concept Main & Vine is one of a long list of grocery options that includes new names like Whole Foods 365 and expanding brands like Sprouts and ALDI. Total Wine & More is another bigger-box retailer that continues to expand as well.

Outside of the grocery sector, brands like DSW and Ulta Beauty (both of which are ramping up new store development), Macy’s Backstage, and potentially Kohl’s–which is planning to test out a new smaller format–are the kinds of retailers that fill larger vacant spaces. Additionally, Forever 21’s new F21 Red concept has largely taken mall locations, but is also beginning to look at power center locations.

When it comes to department stores, the options are much more limited and the leasing calculus becomes more complex.

Creativity and variety

The list of non-retail solutions that developers have used to replace closed or underperforming department stores is extensive. From educational and institutional uses to medical facilities, different solutions have been attempted–with varying degrees of success. In recent years, integrating new residential, entertainment, hospitality and restaurant elements has become the preferred strategy for many developers.

One former Macy’s location in downtown Pittsburgh has been purchased and is in the process of being wholly converted into a $100 million multilevel retail and mixed-use space that includes a 155-room hotel, 312 luxury apartments, and a range of entertainment and restaurant options.

Southdale Mall in Edina, Minn. has undergone a comprehensive restructuring that includes a new food court, more diverse retail options, and a luxury apartment development built right into the mall parking lot. At the nearby Gallery at Edina, a Westin hotel is attached directly to a traditional enclosed mall.

Other centers have eschewed the add-on method and have attempted to execute a more comprehensive and sophisticated transformation, electing to reposition traditional retail centers as experiential mixed-use environments. The Mosaic District in Virginia is one such project, where an aging movie theater was downsized into an independent art-house theater with retail boutiques, townhomes and an array of dining options. The Town Center of Virginia Beach is another project that has been around for some time and has elected to continue to densify by responding to vacancies with additional office, hotel, residential and new retail components.

Partly as a result of this approach, the line has been blurring between a lifestyle center (which has always been somewhat of a vague term to begin with) and the specialty retail component of a mixed-use development.

The market–not the format

No matter how developers choose to respond to department store closures and other large vacancies, it is critically important that they build to the market, not to the format. The potential is different at every site and in every market. In some cases, convenience retailers like gyms/health clubs and pharmacies have taken newly available spaces. While educational and medical uses are still in play in certain markets and in select circumstances, residential, hospitality and entertainment concepts have emerged as more popular and reliably viable candidates.

Generally speaking, creative replacements have helped developers move away from the typical formulas associated with power center, neighborhood center and regional mall. Developers are finally building to the potential of the market, which is undoubtedly a good move for the overall value of their property portfolio. In some cases where residential and hospitality uses have been introduced, grocery-anchored community/neighborhood centers are being redeveloped and repositioned in the market to become something new and different entirely.

Beware the bubble

The addition of multifamily components to retail centers is something you didn’t hear much about a year or two ago. Today, however, it seems like that’s all you hear. The ubiquity of the multifamily solution does give rise to concerns about a potential bubble effect-especially because there is already a plethora of multifamily coming online that is not associated with retail. In three to five years, that is something that could become a bigger issue, particularly in places like Atlanta, Chicago, and some California markets where there has been a glut of residential construction. Developers should proceed with caution, and be sure to carefully evaluate the market feasibility of any new multifamily component in the context of both the specific project site and the broader marketplace.

It is also important to understand the relationship between a multifamily residential product (or a hotel brand and type) and the underlying consumer segmentation (psychographics) of the retail trade area. Is the market suitable for new luxury condos in a grocery-anchored neighborhood center? Do you place smaller scale urban apartments above retail boutiques and quick service restaurants? These type of questions should be addressed in a retail and mixed use market and feasibility analysis. Such analysis provides guidance to the developer/owner, and their leasing teams, faced with the need to redevelop their retail properties into new centers that may be enjoyed for the next generation.