What Hybrid Work Means For Urban Retail

The streets of cities aren’t as desolate as they were a year or two ago, but many still carry an air of emptiness. Perhaps there’s a lack of shoulder bumping on walks to work, a lunch break free of lines, or a subway ride that no longer mimics a game of sardines. Residents may prefer these changes to city life, but a city less dense of its daily inhabitants is a city less appealing to retail.

Placer.ai recently released a report analyzing December retail foot traffic in the US’s four largest cities. New York City was down 4%, Los Angeles down 1%, and Chicago and Houston flat to 2019. Similarly, JLL released a city retail report earlier this month that cited Placer.ai data from December 2021, indicating total urban retail traffic across the country was down more than 15% from 2019. This decrease in traffic, especially in office corridors, is likely due to the newly adopted hybrid work model. According to Kastle Systems, office re-entry was less than 28% as of mid-January, indicating many employees are still working from home.

Urban residential corridors have fared better than office and tourist corridors

The lack of retail traffic is constant across neighborhoods in most cities, but the residential corridors have recovered faster than office and tourist areas. For example, in December of 2021, foot traffic in urban residential corridors was down 16%, while office and tourist areas were down 24% compared to 2019. Many people moved out of cities during the pandemic and returned last year. However, a hybrid work model means they still spend a lot of time at home and in their local neighborhood. As a result, office neighborhoods are slow to recover.

Similarly, travel restrictions have slowed the recovery of tourism. According to the Bureau of Transportation, international air travel was down about 30% last week, while domestic air travel was down 8% compared to 2019. And Canadians traveling to the US by car, train, or bus was down 46% in 2021 compared to 2019. This decrease in tourism results in lower retail traffic in the tourist corridors of cities across the US.

In the short-term, landlords are succumbing to turnover and flexible use-cases

When the pandemic first started, there was a lot of discussion around how landlords and tenants were re-negotiating leases and including flexible terms like lower base rent and higher percentage rent. These terms have continued with urban retail, where demand has not returned to pre-pandemic levels. As a result, more pop-ups and experiential concepts are opening in cities, taking advantage of short-term leases. For instance, last year, Chicago welcomed the Museum of Ice Cream, The Office Experience based on the television show, and The Dr. Suess Experience.

Meanwhile, retail categories that have done well over the past couple of years, like athleisure and home goods, are also taking advantage of flexible lease terms. For example, Arc’teryx, a Canadian outdoor apparel brand, opened three stores over the past year in city locations—West 4^th in Vancouver, Union Square in San Francisco (one of the only 2020 deals in this tourist-centric neighborhood), and Soho in New York City. Meanwhile, Joybird, a direct-to-consumer furniture brand owned by La-Z-Boy, opened several stores over the past year with continued growth plans.

In the long-term, urban office corridors may be re-developed

Overall urban retail real estate investment was up from 2020, at $1.45 billion across 52 deals, but total volume remains 14% lower than 2019. In addition, sales price per square foot was down 12.8%. The cheaper real estate may be an opportunity for developers and landlords to re-develop urban office corridors, especially since traffic may never return to pre-pandemic levels. For example, developers or owners may convert office buildings into residential homes, hotels, or even industrial use-cases. Or they may transform retail locations into concepts that don’t require foot traffic, such as ghost kitchens and localized e-commerce warehouses. If these changes are necessary to keep neighborhoods alive, cities will also have to be more lenient in their permitting.

The pandemic has changed the way people live and work long-term. The consequences of that change are slowly coming to light, including the effect on retail. Despite people moving back into cities, a hybrid work model will continue to impact retail locations based in office corridors. As a result, landlords continue pandemic rent concessions in these areas. But in the long-term, for retail to thrive, a re-development and mash-up of the tenant mix will have to take place. How that will manifest, only time will tell.