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Repurposing and Reinventing the Retail Sector

November 6, 2020 | Sebastian Jaramillo

Prior to the pandemic of 2020, the retail real estate sector was already in trouble. The mandatory closures and quarantines further accelerated the industry’s decline, as the market already faced decreased demand due to a surge in online purchases. Thus, posing the question: reuse, redevelop, or reconsider?

In response to current market conditions, commercial real estate owners are reinventing the retail wheel. Brokers and market experts state that coronavirus had led owners to reposition retail, restaurant, hotel and office properties to avoid permanently losing tenants, leading to the repurposing of spaces. Long gone are the days of mega malls. Currently, the only uptick in demand comes from online retailers in search of fulfillment stores to serve online clientele. 

Given the decrease in demand, inevitably, the rental market will face lower rents and lower returns. Notwithstanding the substantial decline in rental income, a significant number of landlords will have no choice but to accept the lower rents until the market readjusts. 

However, the expectation is that the demand for fulfillment stores will not fill the supply offered by the retail market’s downturn, thus resulting in the tear down of retail spaces.  The redevelopment process comes with many challenges, aside from the monetary costs. However, these spaces tend to be zoned commercial, which presents its own set of re-zoning hurdles. Furthermore, large-scale malls and street-level retail locations do not lend themselves to an easy process to get approval to rezone these spaces. Although a lot of retail spaces have difficulties in redevelopment, there is an upside. Large and medium sized malls typically have the space necessary to be redeveloped into almost any type of project (re-zoning issues aside). Furthermore, typically these malls are located near public transit or major highways which makes them attractive for repurposing as industrial or even large-scale residential projects.  

Repurposing or redeveloping these spaces will likely take several years and will re-shape the future of the retail market.