Putting people first in retail – entering the ‘shadow’ CBD and suburban ‘instant city center’

There is unmistakable evidence that the post-pandemic retail recovery in the central business districts (CBDs) of major US cities is lagging. Reasons include fewer people going to work during the day, as people choose to work from home, at least part-time. In addition, even before the pandemic, rising crime in the city center was cited as contributing to the decline in footfall in the CBD. But there are other “migration forces” at play, which also play a role.

Millennials living in cities are now starting families. Like their Boomer parents (or grandparents) who fled the suburbs in the mid-20th century, these Gen Yers are trading city life for suburban or even exurban life. Their desire for a backyard and better schools, as well as a desire to “get off the ground” in exchange for a commute, played a role in their relocation.

Expert Interpretation

I reached out to Thomas LaSalvia, director of economic research at Moody’s Analytics, to see if their data supports my hypothesis; apparently it does. “That’s exactly the sentiment among retail realtors from New York, San Francisco and Chicago.” LaSalvia won. “Retail follows people, and people patterns are changing. The fact that major office employers aren’t keeping staff full-time is causing foot traffic to drop, which is affecting high street retailers.”

Job opening statistics bear this out, according to Moody’s analysis. From the first quarter of 2020 to the third quarter of 2022, downtown Chicago’s retail vacancy rate increased from 15.6% to 18.2%, while metro Chicago’s vacancy rate only increased from 12.2% to 12.4%. The retail vacancy rate in downtown San Francisco rose from 4.5 percent to 8.2 percent over the same period, while the vacancy rate in the Greater San Francisco metro only rose from 4.5 percent to 4.9 percent.

In my hometown of Minneapolis, the loss of traffic to CBD retail was even more pronounced. Even before the pandemic, downtown retail vacancy rates were between 10% and 20%. According to Cushman & Wakefield
The retail vacancy rate in downtown Minneapolis has risen to 35% in the first half of 2022, compared to 7% for neighborhood retail.

Nicollet Mall, once an important pedestrian street in downtown, centered around the much loved and bereaved Dayton department store, is now a shadow of what it used to be. Neiman Marcus, Saks Fifth Avenue and other national specialty retailers are closed. Most had already divested long before the city began its $75 million streetscape upgrade in 2018.

Now, under the leadership of Minneapolis Mayor Jacob Frey, a task force of city council members, building managers, brokers and downtown authorities is working to develop a “retail revitalization” plan in response to the mass closure of stores in shopping malls.

“Shadow” CBD

Retail in downtown Minneapolis isn’t all bad, however. In stark contrast to the vacant storefronts in the heart of the CBD, a stone’s throw to the north is buzzing.

Minneapolis shares a “shadow” central business district with major metropolitan areas like Chicago, Milwaukee, San Francisco, Portland, and others. These urban pockets have become magnets for NexGen professionals and empty nesters alike. They feature funky lofts, gourmet enclaves and trendy specialty stores.

In Minneapolis, the “Cool Corridor” is the North Loop warehouse district, bounded by the Mississippi River to the north and commercial and sports facilities to the south. This is our version of Chicago’s West River, San Francisco’s North Beach, and Milwaukee’s 3rd Ward neighborhoods. They all share a similar DNA, a gene pool of the humble, low-rise brick houses on the subway fringes of these cities.

These factories and commercial warehouses were built in the early 1920sday century, was neglected in the massive mid-twentieth century downtown urban renewal projects that stripped our cities of their rich architectural heritage.

immune to wrecking balls

The irony is that these humble warehouse buildings and the land they sit on are “not worth demolishing” given their proximity to the CBD core. As such, they remained low-used commercial warehouses in the second half of the last century.

The discerning developers who set out to purchase these properties knew that their soaring ceilings, exposed brick and heavy timber structures could be repurposed for high-demand excavations. An added bonus is that their street commercial space will be turned into coffee shops, restaurants, bars and shops for local traders.

In the North Loop neighborhood, there are fewer vacant commercial spaces now than before the pandemic, brokers said. Across the country, similar trends are playing out. Deb Carlson, senior director of Cushman & Wakefield’s retail team, attributes the strength in retail real estate to a resurgent consumer interest in smaller independent retailers.

Suburbia’s new ‘instant downtown’

The millennial relocation trend is happening at a unique crossroads in suburban retail. The loss of many mall anchors, specialty retailers, and sharp declines in foot traffic are sapping the viability of U.S. Class B and C mall properties. This “mall collapse” could cause many to eventually succumb to the bulldozers.

Meanwhile, the best Grade A mall owners and developers have been in shunt mode, as many properties are undergoing tenant restructuring and redevelopment. However, a group of more forward-looking owners and developers, who understand the firm meaning of unified commerce and “new retail”, are completely rewriting the mall playbook.

transaction to experience

Retailers and brands that were once transactionally focused must now elevate their stagecraft to retail theater, making the store the center of the experience. To meet these new demands, the master plan and building design had to be reimagined to support dynamic human engagement. It’s a very different game plan.

Many themed properties were born as open-air malls from the 1950s to the 1970s, before being converted to enclosed malls in the 1980s. Now, many people will turn into mixed use centers and use steroids.

Innovative center developers are reimagining their malls and centers as “instant city centers”. This approach has less to do with manipulating leasable retail space and more to do with creating entirely new communities.

formula win

New formats include multi-family housing, open-air retail, a wide range of food and entertainment, co-working spaces, healthcare, wellness, fitness facilities, re-commerce, and even farmers markets. They’re designed to appeal to millennials and empty nesters working from home.

The national brands that once dominated mall corridors will be augmented by regional and local retailers, as well as short-term incubator spaces and ‘pop-ups’, keeping things alive and relevant. Even chef-owned restaurants and food courts will replace typical chain stores to mimic the urban neighborhoods left behind by new suburbanites.

car park to park

With a new emphasis on walkability and “dwell time” in and around these new neighborhoods, developers understand the benefits of lush green spaces and outdoor activity centers to evoke a “sense of place.” Dallas-based Centennial Real Estate is entering phase two of its redevelopment of the Hawthorn Mall in the Chicago suburb of Mount Vernon, which will include a three-acre outdoor park and plaza.

Originally built in 1973 and first announced in 2019, the Hawthorn Mall redevelopment includes new retail and dining venues, luxury multifamily housing and indoor/outdoor gathering spaces. The expanded Hawthorn 2.0 plan includes 162 units of senior housing, a 25,000-square-foot grocery store and 109,000 square feet of open-air retail. The center’s general manager, Jeff Rutzen, said the goal was to “create a modern, connected community day and night”.

take away

Only developers who approach these properties with a “rags-to-riches” mentality and deep pockets have the potential to create sustainable communities. The litmus test for mall “redevelopers” will be whether the resulting project will be seen as a glorified mall or something else entirely.

Arguably, the convergence of e-commerce growth, the aftermath of the pandemic, and the next life stage of the more than 72 million millennials has contributed to a dynamic newcomer model. The knock-on effects of this tectonic change will be felt in our cities and suburbs for decades to come.

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