Exterior of Macy's retail store

More fallout from the work-from-home revolution: retail chains that catered to commuters in urban centers are shutting their downtown stores and moving out to smaller suburban locations.

Their absence will make it harder to lure office workers back to city centers, worsening the plight of office landlords.

Many of the new stores are in locales, especially affluent ones, where residents make large numbers of online purchases, Bloomberg reported.

For example, when the COVID War ended, upscale clothier Abercrombie & Fitch chose not to reopen its store in Water Tower Place, a once Top of the Mall, mall in downtown Chicago.

Instead, it opened a boutique in the suburb of Lakeview, where a significant number of residents were buying through the company’s website.

The company’s online sales in the area increased “because customers have a little bit of comfort and confidence knowing there’s a location nearby where they can go and quickly return or exchange something,” Samir Desai, Abercrombie’s chief digital and technology officer, told Bloomberg.

“We’re definitely exploring the strategy further and especially thinking about a neighborhood-based store strategy versus just strictly inside a mall,” he added. “You’re seeing that strategy work.”

“It’s part of a pattern among U.S. retailers that are abandoning malls and large-format stores in city centers in favor of neighborhood locations that aim to serve the work-from-home generation,” Bloomberg said. 

Retailers are using e-commerce and demographic data to see where active shoppers are concentrated and new stores can be most strategically located.

The new stores are smaller than downtown or mall shops and tend to be nestled in largely residential areas.

With consumers forsaking malls for online shopping, “that favors neighborhood mall streets where there might be a fitness experience or something else that they’re engaging in and that’s taking them there,” Desai said.

Macy’s has adopted a similar tack.

Customers want to shop inside their own ZIP codes, CEO Jeff Gennette said in a January presentation, adding that “off-mall is quite attractive.”

Retailers moving to where their customers live takes another bite out of downtown economic ecosystems that have already been decimated as workers abandon their central offices in city centers.

Offices in 10 major U.S. cities are frequented by about half the workers that used to flock to them every weekday, according to Kastle Systems, which monitors swipe card use.

Fewer amenities downtown gives workers another reason not to return.

“The shape of the challenge for an economic development entity in a city is to now figure out what kinds of businesses are going to work here, what kinds of services are going to be needed in a place that has a different population trajectory,” Christopher Wheat, president of the JPMorgan Chase Institute, said to Bloomberg.

The institute recently completed a study on the COVID War’s impact on brick-and-mortar retailers.

Los Angeles, Miami, New York, San Francisco, and Seattle are among major cities that ended 2021 with fewer retail businesses downtown than at the end of 2019.

In contrast, the clothing industry saw its second-highest number of new store openings–1,395–in 2022, with a significant number in the ‘burbs,’ CoreSight Research reported.

“You may be spending much more time near your home and shopping a lot more in your home than you were shopping at places that were near your workplace or on the way to your workplace as those patterns change,” Wheat noted.

The company plans to experiment with the strategy used in Chicago in other cities in the coming years.

TRENDPOST: This is another facet of our Top Trend 2023, “Office Building Bust”.

As we have correctly forecast in a series of reports, the shift to remote work has robbed landlords of tenants, forcing them to cut rents and squeeze their margins. 

Many major real estate investment firms will not survive; operators will sell out or take shelter in bankruptcy, especially if their buildings are older and in need of repairs or upgrades to compete for tenants with newer, more well-appointed office towers.

The loss of office workers is now rippling through downtowns’ economic ecosystems, shutting down businesses ranging from restaurants to clothiers to flower and gift shops.

That speeds the downward spiral of commercial real estate in city centers.

We said in “As Forecast: Office Building Bust Begins to Bite” (20 Dec 2022) that some creative landlords will meet city-dwellers’ need for experiences by opening their empty office space to yoga studios, music academies, coffee houses, adult education centers, and other service-oriented enterprises… but that will do little to reverse the negative impact from the work-at-home trend.

These landlords will find interested partners in city agencies that will need to provide waivers or changes to zoning ordinances, building codes, and other regulations to accommodate these new tenants.

However, landlords will be stuck holding many buildings, even newer ones, unable to pay their way. 

Eventually, the owners will default on their taxes or mortgages. Ultimately, cities will wind up owning portfolios of empty office buildings that no one can afford to keep up.

At that point, the real estate will be sold for cheap, relatively speaking, and buildings will be demolished to prepare the sites for new lives in a new economy.

There will also be a sharp downturn in city hotels that depend on business travel… which has not rebounded to pre-COVID War levels, since many meetings are now held remotely. And now, with interest rates rising many will have to pay more on loans coming due.

As reported in The Wall Street Journal, “Roughly $30.9 billion, or about 30% of the $101.63 billion securitized hotel loans in the U.S., are set to mature by 2024, according to commercial-real-estate brokerage firm Newmark Group Inc.” They also reported that “As many as 10 hotel owners in the U.S. filed for bankruptcy this January, compared with just two in January 2022, according to New Generation Research Inc.”

We have documented this evolving trend in a series of articles, including:

● “Commercial Real Estate in a Tailspin” (20 Oct 2020)

● “Deloitte Abandons More London Office Space” (26 Apr 2022)

● “GM Softens Back-to-the-Office Requirement After Worker Backlash”(4 Oct 2022)

● “New York City’s Workforce Sharply Shrinking” (24 Jan 2023)

● “Office Occupancy Half of What It Used to Be” (7 Feb 2023)

● “Study: One Billion Square Feet of U.S. Office Space Will Be Empty by 2030” (28 Feb 2023)

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