The retail landscape has shifted dramatically over the last decade or so – while traditional malls and brick-and-mortar stores used to dominate, the rise of e-commerce and the popularity of online shopping have complicated the asset class. Many traditional retailers have struggled to adapt to shifting consumer preferences, and the subsequent bankruptcies and foreclosures have impacted the overall market. Developers looking to evolve to meet the future of retail real estate should be aware of the trends guiding the industry, from the rise of experiential retail to leveraging technology to drive more value out of retail assets.
Here you’ll learn more about the seven trends reshaping retail as an asset class, and how adapting can help your firm overcome challenges and take advantage of opportunities:
Trend #1: Adaptive Reuse of Underperforming Assets
The era of e-commerce is here – and as a result, many defunct big-box stores and malls remain vacant or underutilized. Innovative developers are reimagining struggling retail assets as mixed-use, residential, or light industrial properties. The strategy, known as adaptive reuse, is most commonly used in the push to convert abandoned post-pandemic office space into residential units. However, adapting underutilized retail spaces is also a sustainable, creative solution to the declining demand for in-store shopping.
Zoning laws can sometimes pose obstacles to adaptive reuse of retail, but rising demand for housing and the increasing popularity of walkable urban infrastructure is making community buy-in easier to secure than ever before. Developers should plan to communicate the many social and economic benefits of transforming defunct retail space with stakeholders and the surrounding community. Be sure to highlight how past adaptive reuse projects have the potential to create vibrant community spaces, address ongoing housing shortages, and meet local needs for healthcare facilities that reduce the strain on hospitals.
Trend #2: Demand for Mixed-Use, Lifestyle-Oriented Developments
Consumers in cities are more likely to use integrated, live-work-play environments. In the future, retail assets will be more likely to succeed as part of mixed-use development projects that offer lifestyle benefits for residents and the broader community. Mixed-use developments make retail more convenient, meaning there’s a higher and more consistent volume of foot traffic through the property.
Retail assets will therefore be more successful as placemaking anchors, not as standalone assets. The diversification of mixed-use properties offers for your portfolio also has long term advantages in terms of net operating income as properties with income streams from residential, retail, and office property are more resilient to market shifts. In addition, mixed-use properties typically have higher occupancy rates and generate higher rents than single-use properties.
Trend #3: Experiential Retail
Experiential retail is an increasingly popular strategy for retailers looking to draw in new shoppers and build an omnichannel sales strategy, and help build brands. The idea is for the retail space to be interactive and feature extensive brand messaging. However, experiential retail shouldn’t get confused with brand pop-ups or temporary events, as the spaces are meant to be long-term leases where shoppers visit with the destination in mind. For example, Third Street Promenade in Los Angeles features long-term interactive installations for consumers, such as usable pickleball courts and miniature golf courses in what were once mall-front stores. The tactic prioritizes social-media savvy visuals to further promote the spaces and products and drive foot traffic from a broader audience.
Developers should keep in mind that experiential retail spaces are more capital-intensive and can take longer to generate returns. However, the strategy has long-term business benefits as well, especially as customer acquisition through social media becomes more difficult. Real estate owners benefit from experiential retail spaces because they increase the customer dwell time, as attendees are likely to shop across several spaces at once. With an experiential retail experience as a core tenant, owners can attract foot traffic to surrounding high streets and stores as well.
Trend #4: Focus on Necessity Retail
Neighborhood-serving retail, also known as “necessity retail,” will continue to be a reliable pillar as developers look to make projects more resilient to market shifts. Necessity retail is anchored in convenience and responds to consumers’ daily needs, such as grocery stores or Buy Online, Pick Up Stores that act as distribution centers. Unlike luxury goods stores, necessity retail is recession resistant and has “sticky demand” as it responds to needs that don’t go away.
Focusing on necessity stores as anchors for mixed-use development will be a key component of the future of retail real estate. The stores are shown to stabilize cash flow – for example, grocery-anchored retail assets continuing to experience some of the industry’s lowest vacancy rates. Retailers renting for a necessity purpose are also often willing to sign long-term leases, offering predictable income. Mixed-use developers hoping to bolster portfolios through diversification should consider including neighborhood-serving stores as part of their retail offerings.
Trend #5: ESG as a Core Value Driver
Looking toward the future, ESG developments, with solar rooftop panels, EV charging, and LEED certifications, are often attractive features for prospective tenants and can add to the long-term resiliency of a property. Retail real estate is increasingly being viewed through the lens of community, and many developers and REITs are implementing ESG performance tracking as part of annual reports. In the retail space, common ESG features include green building design, renewable energy integration, and designing to withstand extreme weather with climate-resilience in mind.
ESG is considered a value driver across asset classes, becoming increasingly vital in the valuation process for a property. Investors are increasingly prioritizing projects with a commitment to green building standards. Buildings with ESG alignment also offer other financial benefits, such asr lower operating expenses and better margins in the long term. Developers who prioritize ESG for retail assets will be meeting a larger trend in development and will be able to future-proof their portfolios amid climate-related disasters.
Trend #6: Rise of Smaller Footprint, Flexible Retail Spaces
Modular design for retail space is also on the rise, allowing sellers a flexible way to quickly establish pop-ups, storefronts, or showrooms. In a time where the retail environment is so rapidly changing and subject to market shifts, the ability to scale up and down as necessary can be useful to owners. Modular construction, where parts are pre-fabricated off-site and then assembled at the property, is becoming an increasingly popular approach across the commercial real estate sector. The design and construction strategy offers many benefits for developers, increasing efficiency, adaptability, and sustainability of an asset.
Trend #7: Omnichannel Integration
Omnichannel integration, where a seamless customer experience is created across physical stores, websites, mobile apps, and social marketplaces, is transforming how retail assets are built and monetized. Retail assets act as a fluid ecosystem under an omnichannel integration model, with store locations serving as brand experience centers, fulfillment hubs, return and exchange locations, and marketing platforms. The shift in store function means developers are deprioritizing selling space and looking for flexible spaces with more room for logistics.
Designing Retail for a Dynamic Future
The future of retail will be flexible, tech-enabled, mixed-use spaces that meet both community and consumer needs. Though the asset class has faced challenges in recent years as e-commerce and the pandemic reshaped consumer habits, the industry has evolved alongside these changes. Adaptable developers can help future-proof their portfolio by anticipating consumer needs and the shifts in the retail tenant market. Implementing the right strategies and tools can ensure your retail assets remain resilient and profitable, even as the asset class undergoes an evolution.
Modern real estate development software can help developers leverage AI, automation, and analytics to build successful mixed-use development projects in any market. Development teams can build reliable budgets and schedules starting in early project planning with a platform like Northspyre. Using the platform, your development team can run different budget scenarios, evaluate bidding opportunities, and consider historical data to avoid obstacles with the potential to derail your project timelines. In a time of economic turbulence and amid rising construction costs, it’s more important than ever to ensure predictable outcomes on complex development projects.
Book a demo to learn more about how Northspyre can help you bring projects from any asset class in on-time and on budget.
