Retail Follows People – Enter the ‘Shadow’ Central Business Districts and Suburban ‘Instant Downtowns’

There is unmistakable evidence of lagging post-pandemic retail recovery in the Central Business Districts (CBD’s) of our major U.S. cities. Explanations include a decrease in day-time business populations as folks elect to work from home, at least part-time. Additionally, upticks in downtown crime even prior to the pandemic are seen as contributing to a decline in CBD footfall. But there are other “migratory forces” at work that are also factors.

Urban dwelling millennials are now starting families. And just like their Boomer parents (or grandparents) during the suburban flight of the mid-twentieth century, these Gen-Ys are exchanging city life for suburban, or even exurban living. Their desire for back yards and better schools, along trading commuting for “zooming” are playing a role in their relocation.

An Expert’s Read

I reached out to Moody’s Analytics’ Director of Economic Research Thomas LaSalvia, to see if their data supported my postulations; apparently so. “This is exactly the sentiment coming from retail real estate brokers in New York, San Francisco, and Chicago.” LaSalvia went on. “Retail follows people and people-patterns are changing. The fact that major office building employers are not bringing workers back full time has dropped the foot traffic, which has impacted street level retailers.”

According to Moody’s analytics vacancy stats bear this out. From the first quarter of 2020 to the third quarter of 2022 downtown Chicago retail vacancies grew from 15.6% to 18.2%, while the Chicago metro vacancy only rose from 12.2% to 12.4%. Downtown San Francisco’s retail vacancies over the same periods rose from 4.5% to 8.2%, while the greater San Francisco metro vacancy rate merely moved from 4.5% to 4.9%.

In my hometown of Minneapolis, CBD retail traffic erosion has been more pronounced. Even before the pandemic, retail vacancies in the downtown core ranged from 10% to 20%. According to Cushman & WakefieldCWK
the Minneapolis downtown retail vacancy rate for the first half of 2022 had risen to 35%, compared to a neighborhood retail vacancy rate of 7%.

Nicollet Mall, the once vital downtown pedestrian mall, anchored by the beloved and bereaved Dayton’s Department Store has become a shadow of its former self. Neiman Marcus, Saks Fifth Avenue, and other national specialty retailers have closed their doors. Most had pulled up stakes long before the city embarked on a 2018, $75 million streetscape upgrade.

Now a task force of City Council members, building managers, brokers, and downtown pundits, led by Minneapolis’s Mayor Jacob Frey are working to develop a “retail revitalization” plan in the wake of a spate of additional store closings on the mall.

The “Shadow” Central Business District

However, all is not ruinous retail-wise in downtown Minneapolis. In stark contrast to the vacant storefronts in the heart of the central business district, things are bustling a mere stone’s throw to the north.

Minneapolis, like Chicago, Milwaukee, San Francisco, Portland, and other major metros have a “shadow” central business district. These urban pockets have become magnets for both NexGen professionals and empty nesters alike. They feature hip lofts, gastronomic gathering places, and a trendy mix of specialty retailers.

In Minneapolis, the “corridor of cool” is the North Loop warehouse district, bordered by the Mississippi River to the north, and business and sports facilities to the south. It is our version of Chicago’s River West, San Francisco’s North Beach, and Milwaukee’s Third Ward neighborhoods. They all share a similar DNA, a gene pool of humble, low-rise brick buildings on the edge of these cities’ metros.

These factories and commercial warehouses built in the early 20^th century, were overlooked during the massive mid-twentieth century downtown urban renewal projects that stripped away much of our cities’ rich architectural heritage.

Immune to Recking Balls

Ironically, these modest warehouse buildings and the land they stood on were “not worth demolishing” given their proximity to the CBD cores. Hence, they remained low-use, commercial warehouses through the latter half of the past century.

Insightful developers that began purchasing these properties knew their soaring ceilings, exposed brick, and heavy timber construction could be repurposed into high demand digs. The additional bonus was their street-level commercial spaces which would morph into coffee shops, restaurants, bars, and local merchants’ shops.

In the North Loop neighborhood, brokers say there’s less vacant commercial space now than before the pandemic. And nationwide similar trends are playing out. Deb Carlson, senior director of Cushman & Wakefield’s retail team, attributed the strength of retail real estate to a resurgence of consumer interest in small, independent retailers.

New “Instant Downtowns” in the Burbs

The trending millennial relocation is happening at a unique crossroads in suburban retailing. The loss of many mall anchors, specialty retailers and a dramatic drop in footfall, are undermining the viability of the nation’s Class-B, and Class-C shopping center properties. Such “mall fall” will likely result in many finally succumbing to the bulldozer.

Meanwhile, the best A-class mall owners and developers have been in triage mode, as many properties are undergoing tenant remixing and redevelopment. However, a more visionary group of owners and developers who understand the vast implications of unified commerce and “new retail” are rewriting the mall playbook, entirely.

Transactional to Experiential

Retailers and brands that once focused on transactions must now up their stagecraft to retail theater where stores become experiential hubs. To meet these new needs the overall planning and architectural design must be reprogrammed to support dynamic human engagement. It is a vastly different game plan.

Many of the subject properties were born as open-air shopping centers in the 1950’s through the 1970’s and subsequently converted into enclosed malls in the 1980’s. Now many will morph into mixed-use centers, on steroids.

Innovative center developers are reimagining their malls and centers into “instant downtowns.” This approach has less to do with manipulating leasable retail space and more about creating entirely new communities.

Formula Win

The new formulas include multifamily housing, open-air retail, a wide range of food and entertainment, co-working spaces, healthcare, wellness, fitness facilities, recommerce, and even farmers markets. They are designed to appeal to work-at-home millennials as well as empty nesters.

The national brands that once dominated mall corridors will be augmented by regional and local retailers as well as short-term incubator spaces and “pop-ups” keeping things dynamic and relevant. Even chef-driven restaurants, and food halls will take the place of typical chain establishments, to mimic the urban neighborhoods that the new suburbanites left behind.

Parking Lots to Parks

With the new emphasis on walkability and “dwell time” within and around these new neighborhoods, developers understand the benefits of lush green spaces, and outdoor activity centers to evoke a “sense of place.” Dallas-based Centennial Real Estate’s redevelopment of Hawthorn Mall in the Chicago suburb of Vernon Hills is entering its second phase and will include a three-acre outdoor park and plaza.

Initially built in 1973, the Hawthorn Mall redevelopment, first announced in 2019, included new retail and dining options, luxury multifamily housing and indoor/outdoor gathering spaces. The expanded Hawthorn 2.0 plans include 162 units of seniors housing, a 25,000-square-foot grocery store and 109,000 square feet of open-air retail. Jeff Rutzen, general manager of the center says the objective is to “create a modern, connected day-to-night community.”

The Take Away

Only the developers that approach these properties with a “clean slate” mentality, and very deep pockets are likely to create sustainable communities. The Litmus test the shopping center “redevelopers” will be whether the resulting projects will be seen as glorified shopping centers or something else entirely.

Suffice it to say the convergence of e-commerce’s growth, the pandemic’s aftermath, and the next life stage of the 72 million-plus millennials have contributed to dynamic new people patterns. The ripple effect of such tectonic change will be felt in our cities and suburbs for decades to come.