The ease with which consumers can log on and get all their shopping done without ever leaving home has worried retail real estate investors for years. Would consumers eventually decide shopping in person was a waste of time and energy and shop exclusively online? The idea that the end of physical retail was slowly playing out before our eyes even became known, rather dramatically, as the retail apocalypse.
Then, the pandemic happened. And even those who still enjoyed shopping in person felt safer making purchases from their laptops. Thousands of retail stores closed their doors for good as a result. And suddenly, the retail apocalypse felt more real than ever before.
Let's survey the damage, look at where physical retail stands right now, and explore the role open-air retail spaces are playing in the recovery of this real estate sector.
Staying inside
Voluntary social distancing combined with mandated closures at the height of the pandemic hit retailers hard. Most larger brands had strong e-commerce platforms already in place and were able to adjust their strategies to stay afloat through the worst of it. But, ultimately, a record 12,200 U.S. stores were permanently shuttered in 2020.
Fortunately, people began feeling more comfortable getting back out there in 2021. As a result, the number of stores closing last year was slashed by more than half. In fact, that number was even slightly outpaced by store openings during the same period. The gain was small, but the fact that physical retail is trending in the right direction is a big deal.
An interesting side effect of the pandemic has been an increased desire to get outside and get some fresh air. For many, avoiding the virus meant working, going to school, and working out at home. Even occasional outings like shopping and dining were put on hold. The result for many has been a newfound love of the outdoors. That could mean hiking, boating, or sports. It's also spilled over into everyday things like choosing outdoor dining over indoor and getting some fresh air while shopping.
The great outdoors
There are essentially two types of open-air retail spaces. First, you have grocery-anchored shopping centers. These have been around for decades and feature a large grocery store with several attached stores easily accessible from the same parking lot. These generally smaller spaces could sell anything from clothing to furniture or could even be gyms or restaurants.
This concept has always worked well because the essential nature of the grocery store draws plenty of foot traffic to the surrounding stores. They would otherwise have to bring in this traffic on their own, which may be difficult with their advertising budgets. And while they're far from a hot new trend, according to commercial real estate services firm CBRE, grocery-anchored shopping centers saw their second-most active quarter in 10 years last quarter. So, while home grocery delivery certainly picked up during the pandemic, it hasn't hurt these shopping centers.
Then, you have open-air malls. These are shopping centers featuring all the same stores you would find in a traditional enclosed mall. These lifestyle shopping centers, as they've also been called, are becoming so popular that some traditional mall owners are actually "de-malling" their properties.
De-malls are extensive remodels where the interior hallway and common space are eliminated so that each store can only be accessed from the outside, thereby transforming a traditional mall into a single-building shopping center, or open-air mall. Beautiful landscaping and charming seating areas are often part of the package, enabling shoppers to enjoy their time outside between stores and even encouraging them to linger.
According to research from commercial real estate service firm JLL, open-air malls drew rents nearly 50% higher than those commanded by traditional regional malls last year. And data from analytics firm Placer.ai revealed that the top 20 open-air malls in America's highest population markets reported almost 8.1 million visits in August 2021. That's compared to a pandemic low of 1.3 million visits in April 2020. Physical retail is officially back, and these open-air spaces are playing a starring role in the recovery.
Get a little fresh air
But what about the looming shadow of e-commerce that threatened to devour physical retail even before the pandemic began? Despite huge setbacks and a few dire predictions, according to CBRE, online shopping currently represents just one-fifth of core retail sales. So, it looks the retail apocalypse isn't happening anytime soon.
In the meantime, investors may want to take a closer look at how the retail properties in their portfolios are being handled and make sure they include -- or plan to introduce -- plenty of fresh air.
