5Qs about mixed-use centers for CoStar’s Drew Myers

Whether it be new live-work-play town centers built in growing suburbs or regional malls filling empty boxes with offices or clinics, mixed-use projects are helping to re-invigorate physical retail across the country. To gauge the mixed-use center’s importance to the future of retail, we posed these questions to CoStar consultant Drew Myers.

There’s so much reporting of store closures by big retailers in the news. How do you rate mall and shopping center operators on their efforts to find new ways to build traffic?
I think, generally, they’ve done a good job adapting to disruptive forces in the market. They’re bringing in tenants in the health and beauty and food and entertainment sectors. Those types of tenants make up 39% of the square footage in centers since the start of 2017 compared to 25% in 2008. Another thing they’re doing well is subdividing space into smaller boxes. We track store openings and closings, and stores 25,000 sq. ft. and above have been the focus of the store closures. Stores 25,000 sq. ft. and up had 32% higher closings than stores under that size.

With empty Macy’s and Penneys in malls being repurposed into hospitals and hotels, the meaning of the term mixed-use appears to be expanding. How do you define it?
There are two definitions. One is more specific to retail centers — situations where owners are repurposing vacant retail space with medical tenants and office space, for instance. The broader definition is new developments that integrate several forms in one site, creating one live-work-play environment.

Will all current retail venues, from malls to grocery-anchors, evolve into mixed-use centers?
I think there will always be room for traditional retail. There are only 95 projects of all the ones that CoStar tracks that are retail-led mixed use projects. These are difficult to build. There are land assemblance issues, zoning complications. So while the concept may be appealing, it’s very difficult to do. Another way of looking at this question is that traditional definitions like mall, power center, and grocery anchored center are starting to fade away. No longer is a grocery tenant like Whole foods removing a potential mall location from consideration.

CoStar has reported that retail tenants are willing to pay 15% to 25% premiums for space in mixed-use centers. Why?
A new mixed-use center in a suburb with good demographics is going to attract a premium rent because it recreates a city environment. Cities are mixed-use by nature. A lot of it has to do with density. The malls with the highest sales per square foot have an average commercial real estate density of 6.5 million sq. ft. within a half-mile radius. Retail-led mixed-use centers average close to 6 million sq. ft., while B malls average less than 2 million sq. ft. of density.

What are some of the challenges retailers face in this changing environment?
Household and commercial density are drivers of retail performance, but that doesn’t mean every retailer can move into these denser environments. Retailers are evaluating where are the best places to stay, expand, and close. In so doing, they have to evaluate where their productivity will stay strong over the long haul. Another challenge they face is changing tenant rosters. Can they adapt to interact with these newer age tenants. Will replacing a Macy’s with a cinema give them the traffic they desire? Will they have to change their store layouts? Find new, more compelling formats?