The biggest commercial real estate investment opportunity in the next decade will be in reinventing and repurposing shopping centers. It is the great challenge for investors of my generation. The Baby Boomers built shopping centers and malls all across the country and now, as 80,000 stores close across the US by 2025, generations X and Y will reinvent the asset class as new development activity stays in decline and infill redevelopment increases.
A Change in Demand
The economics bear this out as the shift is led by location, existing infrastructure and supply. According to UBS “An overwhelming amount of retail stores will need to close in the next few years to satisfy the declining consumer demand for in-store shopping.” From a supply and demand perspective, supply will significantly outstrip demand and Net Operating Incomes will go down and CAP rates will go up leading to more favorable pricing. At the same time, the United States population is expected to grow 20% by 2050 from 326,000,000 to 438,000,000. This population growth tells us that all of this vacancy will be reinvented somehow. It will likely take some time for rents and pricing to recover but all of the space will be used.
In the 1960’s, 70’s and 80’s, shopping centers and malls were being built at a breakneck speed with retail construction peaking in 1985. The Baby Boom after World War II dramatically increased the number of American Consumers and all that consumption, along with the widespread adoption of consumer credit, fueled economic growth and swelled the ranks of the middle class. But, by the early 1990’s, increasing numbers were purchasing products through home shopping channels and then online. In the 1990’s shopping center development dropped by 70%. Today, according to CoStar, there are 1,2470,789 malls and shopping centers in the United States totaling 14 billion square feet. That is enough space for every person in the united states to have 45 square feet all to themselves.
American retail is overbuilt and now online retailing and other technologies are going to shine a bright light on that weakness. With better pricing, it makes sense to re-purpose those properties for modern retail and other uses. By re-purposing an existing shopping center, a property owner starts with a preexisting great location, minimal CFF and government fees, existing parking, and existing sewer, water and storm drain capacity. They have existing income streams from current tenants that property owner can choose to keep or move on. In most American cities, it makes more sense to find new purposes for older sites than it does to build buildings from ground-up.
Five Characteristics of Successful Post-Amazon Shopping Centers
Now we enter the Post-Amazon era. Below are five characteristics that we expect to see in the shopping centers that will thrive now, survive the next downturn, and improve into the next expansion.
- Shopping Centers without Shopping Carts: If you can put it in a cart then Amazon can deliver it to your house instead for about the same price. New format centers will have government and medical uses. They will become office campuses and flex space warehouses. They will have restaurants and event spaces and churches. Shopping centers will provide space for people to gather and collaborate and work and be healed. New development in the coming decades will be minimized as all this retail space is repurposed to serve a growing, increasingly Hispanic population.
- The Struggle with Safeway: Higher end traditional grocery stores have been struggling to reinvent themselves and find their retail place. My local Safeway features long lines (only three check stands open) and high prices. In talking with a national food manufacturing client, I was told that they recently reduced staff in order to offer lower prices to compete with online retailers and then they realized that what differentiates them from online retailers is customer service so they doubled back down on hiring staff which impacts their ability to offer lower prices. It is a tight-rope walk. Eventually, grocery delivery becomes more automated as self-driving cars deliver groceries from a warehouse to your house on a regular basis. As we speak, Amazon is slicing Turkey deli meat in a warehouse near you and shipping it in a cold pack to people in your neighborhood along with fresh eggs and apples.
- The Shopping Center as a Third Place where Community Happens: The shopping center of the future is much less focused on “shopping” and more focused on “living”. This is where you grab lunch and coffee with friends and family, work out, get dessert and maybe go to church. This is where community happens.
- Rise of the Mixed-Use Center: The Post-Amazon shopping center has medical and governmental uses. Why build a new DMV when it can take part of a center? Why build a new clinic when an arm of a shopping center can be repurposed? Along the same line, there will be increasing opportunity to build apartments as part of centers. Especially as old anchor stores are torn down and turned into multi-level multi-family buildings.
- Senior & Hispanic Focus: The fastest growing age segment is the 65-69 age group. 10,000 people per day in the US turn 65. The average baby boomer is 65 today and in 10 years will be 75. This group likes physical retail. They need medical services like dialysis and pharmacies. They enjoy going out to eat and are looking for a sense of community. This segment should be well considered in a redeveloped shopping center.
The Hispanic population, according to the PEW Research Center, the Hispanic population will grow from 55,000,000 in 2015 to 110,000,000 in 2050. Especially in California and the Southwest, this trend will impact the ideal store mix for shopping centers. By 2050, nearly half of the State’s population will be Hispanic—by far the largest racial group. Private equity groups like KKR get the trend and have invested in Hispanic grocery chains Cardenas Markets and Mi Pueblo.
Bottom line: opportunity exists at the nexus of population growth and a shifting retail value proposition. Now is the time to zig when others are zagging and shopping centers have shifted from an easy off-the-shelf investment asset class to an expert’s only zone. Also, with a downturn likely coming in the next 24 months be selective and unwilling to pay today’s top of the market prices. Overall, where there is distress and uncertainty, there is opportunity and we believe shopping centers will be a good space to work in during the coming years and decades.
Written by Joe Muratore, CCIM