Is mixed use is the future of retail?

With at least 2,200 store closings confirmed among various retailers and Macy’s announcement to close nearly 125 stores the current American retail landscape is transforming.

These closures are affecting the real estate landscape, and the prepared retailers are taking a closer look at reinvestment options and details on sale-lease transactions. Most retailers, however, have been caught off-guard, according to Sebastian Jaramillo, partner with Miami-based boutique firm Wolfe Pincavage.

“The model is changing quickly and I think it caught a lot of not just developers, but a lot of tenants with their pants down. It’s not drawing enough consumers as it used to,” he said. “The increase of online purchasing just keeps growing year by year . . . bricks and mortar just can’t keep up with that.”

Jaramillo said that he’s seen developers moving from building large malls and spaces with dozens upon dozens of retail stores to more mixed-use developments. Smaller shopping centers can pivot more easily to meet the needs of their specific area as the area itself chances.

“Smaller shopping centers that can turn on a dime easier have been making adjustments and switching their space to fully retail to mixed use: adding apartments, adding office space, and making it a little bit more attractive,” Jaramillo said.

Not only is it easier to market these types of mixed use spaces, but in many metro areas where land is priced at a premium, smaller shopping locations are a less risky proposition. In more densely built-up area, people don’t want to fight traffic to get out to larger shopping areas, and so more centrally placed, mixed-use developments are more attractive.

Jaramillo notes that some of the attractiveness for these mixed use developments comes from the storefront office space. If the price is right, offices move in and have the added bonus of having advertising space as opposed to going into an office building where you can’t really advertise the location as much.

“There is a benefit there, and I think that might be where the market is headed,” Jaramillo said. “The question remains: is there still enough parties interested in all the retail space we have? We have to see toward the end of 2020, with the end of this year, but the market is already gloomy in that sense.”

In smaller and perhaps even more rural markets, the consumer is affected greatly by retail closings. Sure, plenty is available online, but before, if you went to one mall and had access to hundreds of stores, it’s very limiting to have options curtailed to whatever’s available online. Jaramillo said that those consumers are going to have fewer and fewer options, whereas in a larger metro with more foot traffic, larger retail developments may be able to hold out longer.

It’s an interesting place to be as an investor because interest rates are still very low, but Jaramillo suggests trying to refi as much as possible while not leverage the properties any further in case there is a significant downturn. Long-term, however, it’s hard to see the situation reverting to where it was.

There’s always opportunity, but Jaramillo suggests looking for assets that do have the potential to be converted to something else, or to buy properties that are already in distress and so maybe there is already some upside to it—either because of their land value or because they can be converted to smaller retail for mixed use or something else.

Another thing Jaramillo points out is that rents may have been higher than a lot of markets were able to support.

“There were major chains still within some of these walls that kept paying the rent so the market seemed to indicate there was a demand still, but really for the smaller chains or for the individual stores, they never really had the ability to go into these spaces and participate because they were priced out of the market. So I think one possibility’s also moving towards more efficient, more space-conscious stores,” he said.