The state of retail in Minnesota and around the country is a huge question-mark. The obvious effect of the ongoing COVID restrictions has delivered an unwelcome shock to the operations of even the very best brick and mortar retailers. Nobody can say with confidence when the cloud of uncertainty around COVID and the restrictions on store operations will be lifted (or, more importantly, when customers will feel safe walking into a crowded store). The pandemic has had a double-down effect on what already was roiling the retail marketplace: online sales and delivery services. Online retailing has exploded across a broad spectrum of products and services. While the trend for online was certainly growing pre-COVID, nobody could have predicted the accelerant-effect of the COVID restrictions on retail and many more aspects of our economy (think restaurants, automotive, etc.).
While online sales still make up far less than a majority of overall retail sales, the percentage gap between online and bricks-and-mortar retailing has shrunk noticeably, with e-commerce now accounting for 21.3% of total retail sales; up from 15.8% in 2019. According to Digital Commerce, total online spending jumped 44% in 2020 over 2019 spending or $861.02 billion (this excludes B-to-B transactions). Regardless, the sheer magnitude of our economy (total retail sales exceeding $4 trillion) means we will always need retail boxes for some types of products and services.
In years past, when a retail site was closed for any reason, it was only a question of time before a new retail concept took its place. Landlords had to make accommodations, for sure, but the re-tenanting of the space was virtually certain especially for popular retail settings like 50th and France or Southdale or countless other high-traffic locations throughout Minnesota. It is far from certain how this transition will come about in the post-COVID/online world. It’s not only the financial ramifications of losing a tenant in a mall or prime storefront on “main street” but also the emotionally deflating impact of vacant space on the passersby. Even if one’s personal situation is positive, seeing empty storefronts sends a chill and a reminder that things change, often for totally uncontrollable reasons. Certainly not as much fun window-shopping.
Imagine the challenge it must pose for large retail operations, such as regional malls, who took hits from all sides over the past year. They were shuttered entirely for months (unless they were fortunate to have an “essential service” business such as a grocery or a pharmacy retailer). Apparel, hospitality, and entertainment, all staples of retail centers, were forced to shut down for months or were allowed to hiccup along with severe restrictions on operations. Many were forced into the online space without planning or operating capacity to make the shift and suffered in spite of the efforts of local jurisdictions to assist. The real body-blow for large retail centers has been the ongoing closure of large retail brands like Penney and Sears. With few exceptions, every large retail center had one or both as tenants to attract the budget-conscious shopper while also catering more broadly to those seeking higher-end brands. Now these brands are disappearing from retail centers, and many more like it, leaving large chunks of empty space with no obvious back-fill option. To make it more complicated, often these anchor stores occupied a pad that was owned by an entirely different legal entity, if not the retailer itself; lease restrictions or bankruptcy proceedings make it much harder to immediately reposition the space for another user
A further complication is that cities across Minnesota and nationally want to see large retail centers turned into pedestrian-friendly neighborhoods, with apartments, hotels and other high-traffic users. Even assuming the legal restrictions on these alternate uses is not a factor, the value of these users to a large retail operation with multiple users, multiple pad owners, each with competing business objectives and expectations is a real challenge. Cities have tried to force these discussions through their authority as local zoning regulators. Some point to Southdale in Edina, and it’s neighbor Galleria, as a perfect example of a successful transition. Not all owners of regional centers agree, or else they would all be rushing to complete their own conversions. It’s much easier to try and rework the boxes within the traditional retail format, especially given the legal framework governing retail centers.
One bright spot, admittedly of limited scope, is the extent to which large bricks-and-mortar retailers have been able to use slower or even vacant store locations as fulfillment centers for their online businesses. Avoiding the capital expenditure for distribution centers that companies like Amazon are incurring is a clear advantage.
So, how does this work itself out? The way it always has; there will be winners and, sadly, losers, but the free-market economy we live under always finds a way to establish a new normal. This may not be the normal we want or can easily afford in the short term, but the version of “normal” the marketplace will support. One certainty: online retail is here to stay, but so is bricks and mortar retail.