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02/18/2021

Three Important Questions for the Re-makers of Physical Retail

PREIT execs have answered the CBRE experts' question about mixing apartments and enclosed retail. They've invited residential builders to join them at Moorestown Mall.

The foundation for a retail reawakening already is in place. Now retailers and landlords just need to build on it.

Physical retail was hit hard in 2020 as customers stuck to shopping mostly for essential items and e-commerce gained momentum. Now we are beginning to see retailers positioning themselves for expansion later this year. In 2022 and 2023, that expansion will be even more significant. Surviving retailers with strong positions and new concepts will reap ample opportunities to capitalize on pent-up demand. Here, however, are questions they must answer in order to position themselves for brick-and-mortar growth in the post-pandemic years.

What data and new technology will lead to successful store optimization? 
Whether expanding, contracting, or reconfiguring an existing footprint, retailers will use data as a key driver in decision-making. New technologies like massive mobile data and geo-fencing are allowing retailers to be even more precise in making data-based decisions. They are evolving and expanding to account for factors such as co-tenancy and how the proper mix of surrounding tenants gives a certain retailer a heightened chance for success. 

Other new strategies are emerging that can help retailers rethink their real estate portfolios. A prime example is last-mile locations. As e-commerce activity grows, retailers may decide to cut down on the number of brick-and-mortar stores in a given area and instead add fulfillment centers there or nearby to support their expanding online customer base. They may decide to incorporate fulfillment into their existing store as well. This requires factoring in logistics data points such as drive-times, transportation infrastructure, and targeted inventory replenishment--new concepts to traditional brick-and-mortar retailers. 

What type of properties should occupiers target?
While some malls will not survive, it’s clear that many still have a bright future--albeit not as a traditional mall. Instead of asking what else a mall can be, we should be asking what else a former anchor space can be. 

Smart landlords are already repositioning properties to incorporate other uses into malls that can help drive traffic and daytime population beneficial to existing retail tenants. Medical is a key example of this. Everything from outpatient centers to day surgery to chiropractic practices have helped backfill space in well-located retail centers. Malls will take a page from this playbook, though their greater opportunity may be residential real estate.  Whether it be traditional multifamily or senior housing, active residential properties would be a natural, almost symbiotic relationship that existing retail tenants would desire. 

We can’t rule out office, either. As the workforce comes back to the office, many tenants may be looking to occupy low-rise locations closer to their employee-base to offer a more flexible working environment. Retail sites could lend to this strategy. Scottsdale Fashion Square in Scottsdale, Ariz. has added an 80,000-sq.-ft. expansion that includes co-working space. Dynamic mixed-use properties could be the most desirable locations for retailers looking to expand.

How can the store become a real part of the supply chain?
This is perhaps the true million-dollar question for brick-and-mortar retail. Standalone, last-mile fulfillment centers will be a part of the solution. But for those that truly want to maximize their current and future retail footprint, the game-changer comes with integrating fulfillment into existing stores.

Develop brick-and-mortar retail locations that serve the needs of both physical and digital shoppers and you’ll solve two problems at once: giving your best customers all the dynamic options they want and optimizing supply chains to maximize profits. The latter avoids many of the cost inefficiencies that come with e-commerce. Individually ordered products for last-mile delivery are often incredibly costly and erode profits for retailers. Incorporating existing stores into the supply chain could help alleviate some of the logistics issues associated with e-commerce. 

A recent report from CBRE outlined a hybrid model retail store that will focus on front-of-the-house, consumer-facing retail and a back-of-the-house fulfillment center. This model will give retailers personal interaction with their consumers and, at the same time, develop a more efficient e-commerce delivery and return model. 

We may not see these strategies being implemented until later this year, but it’s good to know that these discussions are taking place. It’s also good to see that many retailers--as well as private equity firms--envision a robust future for brick-and-mortar retail. 

John Morris is executive managing director of Industrial & Logistics and Retail and Bill Wright is senior managing director of Retail Advisory Services at CBRE.