In Part 1 of this series, I looked at trends in the retail industry and at the impact of the ongoing COVID-19 pandemic. In Part 2, I’m going to examine how those changes might affect the fabric and form of midwestern cities. While acknowledging the impact of the pandemic, I am largely going to focus on a future where the public feels safe being out in public, and lockdowns and social distancing are things of the past.
If you have read other posts on this blog, you know that I have advocated the idea that cities should move away from the suburban style sprawl that has dominated development in this country for the past six or seven decades. That style of development was facilitated by government expenditures which may have made sense in the short run but which had long-term cost implications that were conveniently ignored. Those cost implications are now turning into such a burden that cities are being forced to raise taxes and utility fees just to keep essential systems operational.
At the same time, I am not advocating a return to the past. The urban forms common a hundred years ago certainly had their merits, but they were not perfect and I would caution against a blind nostalgia for the way things were. Our society, our economy and our technology have changed dramatically, and we need to find an urban form that can accommodate and embrace those changes. Retailing is just one component of our economy, social life and urban form, but it is a crucial one because it reflects the impact of our changing society perhaps more clearly than any other.
The Impact on Cities
So what effect will the changing form of retail have on midwestern cities? It depends.
There are a few general conclusions about retailing that I will discuss briefly below, but these will not impact every city in the same way. I will try to identify ways for cities to evaluate the local impact of these trends, but each community will need to develop their own strategies for moving forward. Let’s start with the overarching trends that will be nearly universal:
Brick-and-mortar store closings will continue to outnumber store openings, meaning that the total amount of retail floor area will shrink. This means that a significant number of shopping centers will need to convert either partially or entirely to some other form of land use. Enclosed malls are particularly susceptible to failure, but other retail development types are not immune. It is important to understand that retail businesses will shrink well before retail buildings get demolished, leaving a period of time when empty buildings may lead to blight.
The “bricks and clicks” retail strategy (also known as “omni-channel” retailing) will become nearly ubiquitous, but large retail chains will dominate simply because they will have the resources to develop an easy to use online presence coupled with detailed data on their customers. Plus, large chains have huge advertising budgets, purchasing power advantages and advanced fulfillment systems. This does not mean that small retailers will not be able to compete, but they will need some clear way to differentiate themselves from the large chains. Affluent buyers in particular may prefer small retailers as a way to find unique products and high level service.
Technology will continue to have a huge impact on the future of retailing. Cell phone advancements and 5G networks will bring incredible computing power to your fingertips. Ongoing progress in artificial intelligence will allow you to do most of your shopping simply by talking to your phone. In just the past few years, speech recognition software has made huge strides forward (think Siri, Alexa and Google Assistant). When that is coupled with the mountain of data that retailers are gathering on your personal preferences, it will soon be possible to do much of your day-in/day-out shopping simply by having a conversation with an online robot that will know what you want almost before you do. This may sound a bit creepy now, but it will seem totally normal in just a few years.
Shopping districts that enhance the experience of shopping and which cater to the preferences and social priorities of younger generations will continue to prosper, but they will rarely be retail-only environments. There will almost always be work-play-live components to go along with the shopping component. It is also likely that any given metro area will only be able to support a handful of these mixed-use, experiential districts. A sense of discovery, creativity and authenticity are the keys to making these areas successful, but that is harder to create from scratch than most people realize.
All cities will be affected by these trends but the nature and degree of the impact will vary based largely on local demographics and economics. This variability will even show up within cities, with some neighborhoods being affected differently than others. A recently released study on shifting consumer behavior by McKinsey and Company highlights the differences between populations that are young versus old, or affluent versus poor. (1) In general, cities or neighborhoods that are young and/or affluent are shifting more quickly to online shopping, but they are also the groups most likely to be optimistic about their economic prospects and most likely to spend on nonessential goods and services as the impact of the pandemic wanes. Many stores will do reasonably well in these areas except for those that sell things readily available via the internet, or which have an outdated form, location, or product mix.
Areas that are older and/or poorer have been hard hit by the pandemic and have reacted by buying less and focusing heavily on value. On the other hand, these groups have generally been slower to embrace online shopping which means that the limited buying they do tends to go to local stores. Stores focused on value and on day-to-day essentials are likely to survive but retail chains that are dealing with bankruptcy are likely to target these areas for the early rounds of store closings. Consequently, residents in these areas are likely to have to travel further to find stores selling higher end products or specialty goods.
Actively Monitor Retail Health
Most cities pay close attention to their retail sales tax collections but don’t take any further steps to actively monitor the retail health of their community. Given the potential upheaval that could be coming, I think they should. Not only will store closings and commercial development defaults affect sales tax and property tax revenue, they will affect much broader issues such as community blight, property maintenance violations, and local employment options.
As a way to illustrate the issue, the list below is a brief survey of the current status of the nine large, enclosed malls that were all operational in the Kansas City region just 20 years ago.
Metro North Shopping Center. Almost entirely demolished, although the Macy’s which anchored the west end of the mall is still operating as a stand-alone store. The center opened in 1976 and contained 1.3 million square feet of floor area at its peak. Store closings became an issue in the early 2000s and the mall finally closed for good in 2014. A plan for a mixed use development with an outdoor retail “Main Street” has been approved and initial construction is beginning, but the new plan is predominantly retail which makes me doubt its viability.
Antioch Shopping Center. Largely demolished, although it has been redeveloped as more of an outdoor, big box power center. It was initially built in the 1950s as an outdoor mall, but was enclosed in the 1970s. Troubles appeared as early as the mid 1990s, and the mall was shuttered by 2009. The Sears store remained operational as the center was redeveloped but it has now closed and that end of the project has several vacancies.
Independence Center. Still in operation, although one of the three anchors (Sears) is closed. This shopping center opened in 1974 and contains roughly 1 million square feet of floor area. The previous owner defaulted on a $200-million dollar mortgage and simply walked away from the property. The current owner bought it out of foreclosure for a little over $60-million.
Indian Springs Shopping Center. Completely demolished and the site is vacant except for a police substation and transit stop. This 700,000 square foot center opened in 1971 and was having serious financial issues by the mid 1990s. It closed for good around 2007.
Mission Center Mall. Completely demolished, although a replacement project known as Mission Gateway has been started. This relatively small center (350,000 square feet) was built in 1989 and lasted less than 20 years. The mixed-use Mission Gateway replacement has been a major debacle and construction is currently stalled. The plans have been modified multiple times and it seems unlikely that the current developer will be able to get anything completed.
Bannister Mall. Completely demolished, but early construction work has started on a corporate campus for Cerner Corporation -- slated to contain over 4 million square feet of office space when fully complete. The mall opened in the early 1980s and contained over a million square feet of retail space. It started to decline in the mid 1990s and was closed for good in 2007. It is unclear whether the work-from-home trend accelerated by the pandemic will change Cerner’s plan for a large corporate campus, but I’m betting that the original plan will be modified and reduced in size.
Ward Parkway Shopping Center. Still in operation, although the enclosed mall portion of the project has been substantially reduced in size as part of a renovation that shifted the center’s focus to more of an exterior facing, big box format. Originally opened in 1959, this center went through several expansions and renovations until it eventually contained roughly 600,000 square feet of floor area. Several department stores have come and gone, and the center is now anchored by Target.
Metcalf South Shopping Center. Mostly demolished, although the Sears store is still standing (but vacant). The mall originally opened in 1967 and eventually contained approximately 800,000 square feet of retail space. Vacancies grew during the 1990s and the mall was mostly empty by the early 2000s. The mall structure was torn down in 2016 except for the Sears building which was owned separately by Sears. The site has partially redeveloped with Lowe’s as the primary anchor, along with a few pad sites and a senior housing project. The Sears portion of the site may also get redeveloped, although given the history of Sears I don’t expect anything terribly exciting.
Oak Park Mall. Still in operation and doing reasonably well. This is the largest mall in the metro area with 1.5-million square feet of retail area and five anchor stores. All of the anchor locations are currently filled although Nordstrom’s has announced that it plans to leave in 2023 for a new location on the Country Club Plaza.
The point of all of this is that retailing changes over time but it can take decades for a failed site to redevelop as something else and those redevelopment plans are not always successful. Dying malls are old news and have relatively little to do with the changes that are taking place now, but the same fate awaits many newer shopping centers that most civic leaders assume are doing fine. The main difference is that dying malls were largely replaced by new retail centers with a different format -- the shopping centers that are going to die over the next five to ten years will either not be replaced at all or will have a much smaller retail footprint.
Evaluate Financial Exposure
It is rarely a good idea for cities to give financial incentives to a developer for a project that is predominantly retail, but that is especially true if the incentives include bonds that are to be paid off using sales tax revenue from the project. The difficult retail environment is likely to mean that sales tax revenue will miss the financial targets that have been set. If the developer is on the hook for making up any shortfall, then the concern is that the project could go into default depending upon the financial resources of the developer. If the city is on the hook -- an extremely inadvisable but all too common scenario -- then the city may well have to divert funds to make up the shortfall at a time when tax revenue may be falling and budget demands are expanding.
Regardless of whether incentives were used or not, closing stores and failing retail developments can lead to long-term financial damage for cities. The shift to online shopping has an impact on local retail sales tax collections because few cities collect the same amount of tax revenue from online retailers as they do with physical retailers located in their community. Cities and states either need to figure out how to remedy that issue or develop a strategy for dealing with a declining rate of sales tax revenue per capita. The decline of local retailers will also eventually impact property tax revenue, although property valuations tend to decline slowly.
As the owners of failing shopping centers start to contemplate redevelopment, they may look to cities for financial assistance. Cities should keep in mind that financial assistance for retail projects does not create new retail dollars to capture, it simply moves existing retail dollars around. Citizens will pressure civic leaders to do something about the blight of a failed shopping center, but financial assistance should be avoided unless the developer is proposing something truly innovative.
Plan for Vacant Storefronts
Retail vacancy rates are rising and likely to continue rising for some time. Isolated vacancies in an otherwise economically vibrant community should not be problematic, but communities need to be alert for clustered vacancies in a particular shopping center or shopping district. When vacancies pile up they become harder to fill and can lead to disinvestment in the property. Rent revenue to the property owner falls because of both the vacancies themselves and because the tenants that remain insist on lower rent levels. Falling revenue leads the property owner to spend less on maintenance which eventually leads to the early stages of blight.
Another trouble sign is a shift in the type of tenants to those that cater primarily to people who are economically distressed. Pawn shops, dollar stores, used car sales, and payday loan services all pay rent, but they send a visual signal of economic decline which scares away conventional retailers, as well as the more affluent residents that retailers covet.
As I pointed out earlier, the most popular forms of retail development tend to change over time as shopping behavior changes. Enclosed malls, big box power centers, life-style centers and more have all been popular at various times during the past few decades. Unfortunately, the physical structures that make up a shopping center tend to last a lot longer than the retail trends that determined their form. Thus, every city has commercial development left over from a previous retail phase that is at least somewhat obsolete. Add to this the likelihood that the amount of needed floor area for brick and mortar retail is going to decline rather than grow, and you end up with a high probability that many retail centers will want to redevelop to improve their chances of survival.
The problem is that not all shopping centers or shopping districts will survive and many developers will underestimate the scale of the changes that will be necessary to do so. Some developers will think that updating the building facades, adding some landscaping and re-branding the center with more modern graphics will be sufficient. In most cases, it will not. Many centers will have to go through a fundamental shift in land use in order to really regain a solid financial status, and it generally will be a more radical shift than simply replacing a failed anchor tenant with medical offices or a branch library.
One option will be to replace retail floor area with multi-family residential, office and entertainment structures, essentially changing a retail-only shopping center into a mixed use development. Although this approach has shown some promise, getting the details right is often challenging. In most cases, adding residential units effectively means demolishing retail space which many shopping center owners are reluctant to do. It is tempting to add a few units to the periphery of the site and hope for the best, but a half-hearted effort is not likely to work. To be effective, this strategy typically requires hundreds of new residential units configured to be an integral part of the center with a great deal of attention paid to the quality of the residential experience. This requires skills that few shopping center developers possess. In addition, many shopping centers are surrounded by freeways and wide arterial streets which tend to cut them off from the remainder of the community, thus reducing their appeal as a place to live.
Another option is to convert some retail space into warehouse space for online retail fulfillment. Amazon has reportedly been looking at converting former JCPenney and Sears locations into fulfillment centers although as of now no deals have actually been done. Other options might include some type of hybrid solution that includes retail, online fulfillment and merchandise returns, but again, I don’t know of any actual examples. The advantage of this approach is that it would provide close-in locations that would facilitate same-day delivery -- something which is crucial for the continued expansion of online shopping. The disadvantages are that shopping center floor plates and loading facilities may not be appropriate for fulfillment operations, and the surrounding retailers in the center would get little benefit which might accelerate the decline of the overall center.
Consider Changes to Zoning Requirements
The bottom line is that most dying retail centers are going to require major surgery, not band-aid solutions. To maximize the chances of success, cities may need to revise their zoning regulations to enable creative solutions. Examples might include 1. expanding the list of permitted uses to enable more of a mixed-use center, 2. reducing minimum parking requirements to allow a more productive use of the oceans of asphalt that typically surround most shopping centers, or 3. providing more design flexibility for outdoor eating areas, drive-thru service or curb-side pickup locations. Although cities may resist allowing changes to what used to be their hub of retail activity, delaying the inevitable may result in complete failure.
The problem is that zoning changes are useless without a developer willing to take advantage of those changes. Cities should consider working jointly with the development community to craft regulations that address changing retail trends while still being practical enough to attract developers and development financing. Generally speaking, the development industry is not very forward looking -- they tend to simply repeat what has worked in the past -- so cities will need to push developers to be innovative.
Thoughts? As always, share your thoughts and ideas by leaving a comment below or sending me an email at doug@midwesturbanism.com. Want to be notified whenever I add a new posting? Send me an email with your name and email address.
Notes:
1. “The great consumer shift: 10 charts that show how US shopping behavior is changing”; Tamara Charm, Becca Coggins, Kelsey Robinson, Jamie Wilkie; McKinsey & Company; August 2020; https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-great-consumer-shift-ten-charts-that-show-how-us-shopping-behavior-is-changing
