Expert Viewpoints

7/21/2020

How landlords and tenants should work together to build the new retail epoch

Nick Garzia

Hines's Atlantic Station in Atlanta

Retail is undergoing the most massive changes it's ever experienced. The pandemic has accelerated long-simmering trends that are radically altering both the landlord and tenant sides of retail real estate. Mixed-use projects will flourish, and it will be harder for single-use and more speculative retail developments to get built and financed--especially those more concentrated on food and entertainment. The surviving tenant base will spend more time evaluating the prevailing centers when making their next moves.

At Atlantic Station, Hines used the shutdown to accelerate a lot of our construction and got ahead on a number of projects. Our remodeled central park is now open and three new restaurants debut there this fall. It is arguably the best public space in all of Midtown Atlanta, which is saying a lot. As of today, only four of our tenants have not yet opened, and traffic is back to almost the same levels it was when we shut down in March.

What’s not often recognized is that retail is the use that unites everything in a mixed-use project--and the most critical to get right. Look at what almost every B+ and better mall is proposing – adding offices, apartments, hotels, and large open public gathering spaces. That’s on the landlord to do. But the retailers and restaurants need to play their role in the success of future projects. Here’s what they should keep their eyes on:

Omnichannel retail is king. With online retail sales poised to increase massively this year, retailers that have created strong online presences while continuing to invest in brick-and-mortar will see the most success. Pure-play brick & mortar and pure-play DTC brands are going to converge to the same point. A sale is a sale, and should not be viewed through separate lenses of online vs. in-store. When a shopper picks up a phone, he or she wants to know where the garment is or when it can be to them. Separating those worlds will only alienate potential shoppers.

Nick Garzia

Adapt quickly to changing customers. Property owners and retailers will have to adopt new understandings of how people will spend their money now. Apparel as 80% of a center tenant mix? Gone. New tenant balances must be worked at every center, with a greater emphasis placed on local retail that provides a unique draw. The problem with most regional malls is that they were all designed to be the same. Shoppers are weary of it.

Both full-service and QSR dining options have had to make adjustments to the crisis. The QSR players had an advantage already because a good chunk of their business was takeout. Even when bans are lifted to allow maximum occupancy, I think most consumers will be slow to hop on board. The dining sector, in our view, will lag retail growth in the next 18 months.

Recreation’s on the rise, along with athleisure. Consumer spending surged in May, with one of the main purchases being an increase is spending on outdoor, fitness, and recreational items. We expect to see continued spending by consumers in recreational purchases as Americans focus on outdoor activities and shift some of their public activities back to private.

The fastest-growing clothing products are easy-to-wear items, so the athleisure trend is here to stay. We will continue to see an increase in popularity as some companies shift to longer-term remote working. Retailers like Athleta and Lululemon will continue to grow and thrive. Lower-priced merchandise and fast fashion will also thrive, as consumers re-prioritize their spending post-crisis.

Expect center owners to work with you. The retail real estate industry must assume a collaborative stand with tenants through these unprecedented times. That doesn’t mean just agreeing to what the tenant wants. Understanding how a tenant makes money and what they can afford to pay is incredibly important. So owners, view your tenants’ requests for assistance as opportunities to strengthen the non-financial aspects of a lease. Reduce co-tenancy requirements, shorten terms, and remove exclusives or other cumbersome items that limit a landlord’s flexibility.

Nick Garzia is director of retail leasing for Hines. He currently oversees Atlantic Station, a 138-acre mixed-use development in Atlanta.