Retail as a Predictor of Office’s Future
For the last 15 years we have been warned that the “death of retail” was imminent, murdered by Amazon and Doordash. There was solid logic to the fear, as e-commerce has exploded as a share of retail spending, from less than 5% in 2010 to 10% immediately before the pandemic. The confinement measures of 2020 caused a spike to 15%, where is has remained. If you think this feels similar to the “Work From Home” trend, keep reading!
In addition to the e-commerce wave, the other “logical” argument was that the U.S. was “over-retailed”.
Has retail died? No, retail fundamentals are stronger than they have ever been. National vacancy rates of 4.2% are at all-time lows and store openings outpaced closings this year. Despite DoorDash, the $83 billion that consumers spent in restaurants in June was the highest on record. Meanwhile, supply over the past decade has been at all-time lows as negative sentiment has kept away developers and capital.
This ride hasn’t come without casualties. New concepts like Direct-to-Consumer brands (Allbirds, Warby Parker) have boomed and some have busted, while some big legacy retailers like Circuit City, Sears and JCPenney have gone through bankruptcy. This creative destruction is healthy, shaking out stale concepts while customer tastes change.
Within retail, all subsectors (grocery anchored, lifestyle, etc.) are performing well except for malls, especially those that are lower quality. Occupancy rates there have diverged from the rest of the market, notably underperforming the more convenient neighborhood retail.
What do we make of this? Well, what is the point of retail space? Partly it is a place to go and get “stuff”. If that is all your space offers, then yes, Amazon will eat your lunch. Retail must compete on cost, convenience or experience. In my town, the Toys-R-Us (stuff) converted to a trampoline park (experience) and the Olympia Sports (stuff) is now a yoga studio (experience).
Smart retailers have adapted, restaurants now allow more contactless payment, some retailers have altered their floorspace to be more of a “showroom”, acknowledging that shoppers can fill orders online. Nike stores have run clubs, Lululemons have yoga classes, Lego stores have play areas, Starbucks offers a Reserve Roastery brewing experience, Nordstroms has spas and cocktail lounges. A Jordan’s furniture store near me offers rope courses. Heck yes, we want to go buy furniture! These retailers offer more than “stuff”.
Office today is like retail in 2010. Like e-commerce, remote work had been increasing before the pandemic caused an acceleration. At the same time, consumer demands and tastes have elevated, and these customers are waiting for better options that can compete on cost, experience, or convenience. On the supply side, much of the existent office stock is the equivalent of a Class B mall, and is in the early days of a death spiral. However, other office buildings are the equivalent of the neighborhood Whole Foods, offering good service in a convenient location. Some office owners will be Circuit City, while others will be more like Apple, Lululemon and Nike, tying a good-enough product with a positive brand and a fun experience.
I expect that we similarly will look back 15 years from now, and the “Death of Office” will seem overblown. The Office “malls” will be largely empty, demolished and converted (good riddance) into something better. Many owners will lose money, and sell to owners more willing and capable of creating the workspace that people want. Just like retail, office will evolve from a “need” to a “want”.
