Q&A: Retail’s Rise Through Adaptive Reuse

As we may be heading to a predominantly e-commerce-oriented world, the traditional brick-and-mortar spaces are transforming. Bilzin Sumberg's Adam Lustig reveals how retail center owners are adapting to the ever-changing retail environment and how space conversions make room for improvement.

Adam Lustig, Bilzin Sumberg
Adam Lustig, Bilzin Sumberg

The closing of a large number of stores has left many wondering what the future of brick-and-mortar retail holds. However, retail commercial real estate attorney Adam Lustig of Bilzin Sumberg says this does not mean this type of retail is going away. In fact, it is just changing into something that can be defined as an experience now, having its own sense of community.

Additionally, the retail industry is going through changes, adjusting to the new ways consumers prefer to shop. The traditional department store-anchored suburban shopping mall is being replaced with mixed-use urban developments where people can live, work and play.

CPE: How has the retail sector changed over the last years and which are the most important milestones in its evolution?   

Lustig: The rise in e-commerce over the last several years has caused a dramatic shift in the retail sector and in the way in which consumers shop. The single biggest factor in that shift has been the exploding growth of Amazon.

CPE: With e-commerce on the rise, is there any chance for the traditional and digital to blend into the same landscape? Will e-commerce boost the development of more technology-oriented shopping centers? 

Lustig: Retailers and shopping center landlords must embrace e-commerce and use technology to enhance the customer’s experience. Retailers who can blend their brick-and-mortar and online platforms and deliver an omnichannel experience to their customers will be the ones that succeed moving forward.

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CPE: Class A assets are in high demand, although there’s a large inventory of vacant structures which are a blight on communities. However, more and more developers and investors are choosing adaptive reuse over building from scratch. Why is that? 

Lustig: Malls in good locations with empty big boxes are a great candidate for adaptive reuse. Given that the infrastructure is already in place, it is often more cost-effective to adapt the existing structures and re-purpose them for lifestyle, entertainment and/or fitness uses than to demolish a building and start from scratch.

CPE: How are retail owners adapting to experiential retail? 

Lustig: With the increase in online sales, shopping center landlords are seeking to add retailers that provide experiences that a customer can only have by coming to the shopping center or mall, such as fitness centers, movie theaters, restaurants and other entertainment uses.

CPE: At the beginning of 2017, financing was going strong for quality retail projects. Has this changed in any way? On the other side, retail bankruptcies were at a record pace. How does this downfall impact the retail sector? 

Lustig: With the large number of retail bankruptcies last year, financing has gotten more difficult for retail. Class A shopping centers in primary markets are still attractive, but Class B and C shopping centers in second and tertiary locations are looked at unfavorably by lenders.

CPE: With so many stores closing, what will become of all the empty space left behind? 

Lustig: Much of the empty space will be filled with fitness, restaurant, entertainment and other experiential-type uses, and in some cases, educational and medical uses. Empty big boxes will be divided into small spaces and back-filled or redeveloped. 

CPE: What are the most frequent fresh business models retail owners approached this year? Any upcoming trends we should keep our eyes on? 

Lustig: Keep an eye on mixed-use transit-oriented development projects with retail and residential components and on the demand for improved logistics and transportation, as retailers must be able to compete with Amazon and deliver products in two days or less.

Image courtesy of Bilzin Sumberg