Reinventing Retail: COVID-19, E-Commerce Challenge Industry’s Future

An industry already troubled by the rise of e-commerce pre-pandemic has only seen its future even more challenged as the nation deals with what many see as only the beginning of the second surge of COVID-19.

It’s left even the retail industry’s most well-respected brokers puzzled.

“I don’t think anyone has the slightest clue of what’s going to happen,” said Reid Frazier, CEO of Evolution Commercial Real Estate in Sterling.

Frazier said it could be until next summer before there is a clearer picture on what the future of the retail industry will look like, and it’s anyone’s guess how many businesses will be left standing once COVID-19 is in the rearview mirror. The other unknown is what the consumer mindset will be at that time, he said.

“There’s so many different moving pieces with this,” Frazier said.

The “retail apocalypse,” as some have termed it, has seen some of the industry’s former giants shutter their businesses during the height of the pandemic, or even prior to it. Malls, once the darling of the shopping industry, have now given way to mostly empty department store anchors, with blacked out windows a sign of some of the vacancies within their walls. Many industry pundits have suggested that malls reimagine themselves to be more of a destination or entertainment center, with some, like Fair Oaks Mall nearby, adding a Dave & Busters in a former department store space last year. An August report by Coresight Research estimates that 25% of the country’s remaining 1,000 malls are expected to close in the next three to five years.

Speculation has only grown over the years about the future of Loudoun’s only traditional mall, the Dulles Town Center in Sterling, which opened in 1999. While the mall has lost its fair share of department store anchors and retailers over the years, it has done little to quell the whispers of a closure or reinvention of some sort.Kimberly Mazhari, director of marketing for Dulles Town Center, declined to comment for this article, but said there would be more to share in two weeks.

One development of note, though, is a recent listing of parking lot space available for lease or sale outside of the Macy’s department store. The listing by KLNB lists three pad sites, from three-quarters of an acre to a full acre. KLNB declined to comment for this article.

Buddy Rizer, head of the county’s Department of Economic Development, has been working on a book for several years called “The Retail Conundrum.”

“I’m amongst the people who believes there’s a great future for retail, but we need to rethink it,” he said. “I think that we do have the opportunity to look forward to a time when we have a vaccine, when we have a little more confidence. I still think the right kinds of retail are going to be very successful.”

Rizer said he sees retail destinations that offer more of an outdoor gathering place are going to be the ones most successful going forward. While he would not divulge any conversations between his department and Dulles Town Center’s developer, Lerner Enterprises, he expressed optimism about the center’s future.

“When you look at Dulles Town Center, Lerner Enterprises is a smart developer and they know what they’re doing. I think you’re going to see us working with them on integrating more uses in and around Dulles Town Center, and thinking about how that can still be vital. I still think there’s great opportunity there, but it’s hard to say exactly what it is. Something more like a mixed-use opportunity is something we’re going to have to look really hard at,” he said.

While malls have shown signs of decline over the past several years, experiential retail has been the growing trend, for those who seek an experience they can enjoy outside of the e-commerce world. But even that industry has been challenged, as it can sometimes contain a high-touch environment many consumers are weary of in the COVID world. It’s an industry that many malls have latched onto, with the same Coresight report noting that 90% of mall tenants nationwide are of the experiential retail variety.

Other uses that have been suggested for malls include fulfillment or shipping centers for e-commerce giants, like Amazon, with a recent report citing discussions between Simon Property Group and the global giant to use vacant department store space as warehouses.

Locally, Simon Property Group is also the owner of the Leesburg Premium Outlets, which were closed for a little over two months during the height of the pandemic in the spring. While the outlets have shown no apparent signs of trouble, the property owner is seeking permission from the Leesburg Town Council to add more personal service uses, like hair salons and tailor shops.

Simon Property Group explained in its statement of justification that allowing the additional uses will help the outlets to keep pace with its competitors, offer greater retail choice, and a more robust shopping experience for its visitors.

“Doing so will help meet shopper expectations and keep the Center financially competitive,” the statement read.

Frazier said that shopping-center type developments that encourage a “live, work, play” atmosphere will continue to be successful, even post-COVID. He noted that having an outdoor atmosphere as part of the shopping experience is going to be more desirable than large, enclosed spaces that many shoppers are looking to avoid.

Dulles Town Center mall

It might surprise some that, even with the current economic uncertainty, retail deals are still being closed. Frazier attributes the still robust market activity to many would-be entrepreneurs having the opportunity to finally write up their business plans and execute them during the months of at-home social isolation, or businesses that were already looking to expand finally pulling the trigger.

“It’s going to be a little bit of a roller coaster ride through the next 12 months, what businesses are closing, what businesses will backfill those. It’s going to really rely on landlords and tenants to make very educated decisions. It’s going to be more important than ever for tenants and retail operators to evaluate their real estate more so than what they’ve done before. How much space do you really need? How do we set up our retail establishments that post-COVID are still going to work while not sacrificing our culture in a sense,” Frazier said.

Dave Parker, who has spent more than 30 years in the commercial real estate industry and now runs a consulting firm out of his Round Hill home, also said he has been hearing mostly good news about the current state of the local retail market. But some statistics give him pause.

Retail vacancy in Loudoun at the end of the first quarter of 2020 stood at 3.4%. That number now stands at 6.2%.

“In two quarters in Loudoun retail what happened is your vacancy climbed by 82%. You have 200,000 square feet more [available]. These vacancy numbers can be pretty volatile in a small market like this. If it becomes a sign, a signal, that’s not a good trend,” he said.

Parker also thinks it could be well into 2021 before the retail industry picture, for better or worse, comes more into view. He also pointed to the mystery surrounding whether there will be any more government assistance programs to businesses, and if some loans will be forgiven. Another wrinkle is whether lenders will start asking for more money from borrowers if retail buildings begin to lose value.

“When value decreases the lender has the right to ask the borrower to put up more cash. It happened in 2007-2009, it happened in the ’90s. It happens periodically. The hope is if you own these buildings, you’re hoping you magically stay leased up at a rental rate that says to anyone who wants to appraise or value the building ‘I’m doing fine.’ I’ve seen a number of defaults on buildings, and large retail projects that have already collapsed under this,” he said.

Overall, Rizer said he is bullish on the future of the retail industry in Loudoun.

“Both [the Department of Economic Development] and the landlords and developers, we all understand that we’ve had a real seismic shift that has only been accelerated by the pandemic,” he said. “It may be painful in the short term, but I think in the long term the right kind of retail especially in a place like Loudoun still has a great chance of success.”

One thought on “Reinventing Retail: COVID-19, E-Commerce Challenge Industry’s Future

  • 2020-10-22 at 5:21 pm
    Permalink

    I’m curious to see what they announce in the next couple of weeks.

    Not that anyone asked but, walking through the mall recently, I thought they should convert some of the stores to restaurants and increase the amount of indoor dining. In the winter, the big open heated spaces could do well.

    The core problem, as mentioned in the article several times is that, brick and mortar now accommodates fewer patrons which translates to less revenue. Rent needs to come down substantially for businesses to be viable. Commercial owners (and their banks) need to take a haircut.

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