In 1990, the economy was booming, and enclosed shopping malls around the U.S. were everybody’s favorite for shopping. Anchored by such stalwarts as Sears, Macy’s, Hess’s, Montgomery Ward, Saks Fifth Avenue and the like – all were thriving. Bookstores, (Waldenbooks, B. Dalton, Barnes & Noble) shoe stores, (Kinney, Thom McAn, Foot Locker) and electronics retailers (Sharper Image, Circuit City, Radio Shack) peppered the malls, with the larger ones often being single destination. Strip malls were the darling of small investors, and grocery-anchored centers as choice real estate investments were still in their infancy. Blockbuster, Media Gallery and Hollywood Video were soon to displace the Mom & Pop video rental and music stores (Sam Goody and Media Play suffering a similar fate) with thousands closing by the mid-2010s leaving Redbox kiosks in grocery stores the lone survivor. Large footprint electronics stores, regional and national (HH Gregg, Steinberg’s, Best Buy, Circuit City) were thriving on large TV and new personal computer sales, but they were soon to feel the pinch from online sales.
By the beginning of 2010, the American buying public had transformed radically. The largest single factor was the emergence of online sales, now 10 percent of all retail, and destined to climb dramatically. (In comparison, 35 percent of all retail sales in China today are online). Large retailers such as those mentioned above were finished. Kmart merged with Sears, and then folded the entire empire. Even Walmart, the king of the big discount stores back then, had to radically alter its platform to accommodate e-sales, as did Target, and Kroger as well as others had to offer food delivery to compete with Amazon’s Whole Foods.
Amazon! The single biggest disrupter of retail, (38% of all e-commerce sales) along with smaller forces such as eBay, has transformed the buying landscape. The demise of so many shopping malls and big-box retailers happened while e-commerce warehouse construction flourished. The last mile was still elusive, and drones, timed combination lock boxes, and the traditional delivery players (UPS, FEDEX, USPS) filled the bill – until Amazon decided to go all-in – or all-out – with their own Prime network of contract delivery drivers, and by the end of 2019 fully half of Amazon deliveries were through this “Last Mile Program."
The impact on retail real estate? Malls, for the most part, are severely devalued. Neighboring shopping centers/strip malls are suffering high vacancy rates with little leasing activity in a booming economy. Restaurants that fail are usually razed, or often radically revamped, to add more seats and squeeze down the kitchen size. Different outlot players appeared, but fast food was still dominant.
And “Lifestyle Centers” sprang up – retail, residential, hospitality, parks, entire new mini-communities. The concept is still in its beginnings, often struggling for identity, but it has caught on in many places with Gen Xers and Millennials, who prefer apartment and walkability to suburban car-dependent home ownership.
In 1990, having a downtown office was the ultimate, but suburban office parks with free parking were springing up, and slowly vacancy rates in CBDs climbed above suburban. Many new CBD office buildings built in the ‘80s became a little dated, older ones more so, and there was little downtown residential to offset the suburban advantage of proximity to homes. But all company employees were in the office, clustered by departments, and being near the courthouse and county records kept attorneys and commercial real estate players nearby.
Slowly the Internet age took over, accelerating in the new millennium, and gradually, WiFi-connected employees started working from coffee shops and other cafes – and from home. The growth in office space stopped, and actually reversed when shared space – first called “hoteling” (where employees, at different times, shared work stations) began to flourish. And in the post 2010 era, companies like WeWork began offering space with WiFi on a monthly rental basis, so satellite offices in urban areas didn’t need a leased space-- which when not in a small suite, would be in Regus or HQ offices that provided clerical help. As laptop/WiFi usage evolved, the need for the assistance vanished--only copiers/scanners/printers were needed, along with amenities like coffee, beer, big screens. Flexibility was the goal, though the WeWork model appears to have grown too fast and a bit recklessly.
The effect on office real estate? Lease rates plateaued, and only the best-located buildings increased in value. The conundrum included parking now being more uncertain, the impact resulting from driverless cars, and more and more employees who don’t drive cars to work. And with lease rates leveling out and yet construction costs and land costs continuing to escalate, far fewer new office buildings are being built as this segment of the industry struggles to meet the needs of tomorrow. Open office plans, more included services in tenant space, and high-capacity Wi-Fi lead the suite of attractions to lure new tenants in existing Class A buildings. Class B buildings struggle, with only painful price reductions as an offering, and Class C? Many are being converted to residential, especially in active urban Primary and Secondary markets, as younger workers seek walkable living. Time will tell on the office market and its future prospects.