The Survival of Shopping Centers: New Looks vs. Old Restrictions
The death of brick-and-mortar retail has been predicted for the past twenty years, but while the office sector continues to struggle to recover from the COVID-19 years and demand for lab space fluctuates sharply, shopping centers have managed to hold on. This has been attributed to multiple causes, from the integration of logistics and fulfillment services into traditional retail storefronts to the simple fact that many people still want to see and touch what they’re buying before they purchase it. Changing market conditions have forced retail landlords to become flexible as to what a shopping center can offer.
This flexibility reflects realism driven by necessity. Retail mainstays such as Rite Aid, Bed Bath & Beyond, Christmas Tree Shops, Paper Source, and Claire’s have all filed for bankruptcy in recent years, sometimes more than once—and that’s just to name a few. The lengthy list of retailers in bankruptcy, including numerous shopping center standouts with long operating histories, continues to grow. Department stores are increasingly a memory, and CVS and Walgreens, both historically strong anchors, are closing stores nationwide. Though initially reluctant, landlords have adapted in order to fill vacancies.
Uses that have stepped up to fill the gap (and sometimes literally The Gap) generally focus less on offering goods, and more on offering personal services and experiences that the internet cannot replicate. This shift has encouraged landlords to embrace shopping centers uses that were once disfavored, or even taboo. These days, shopping center leases that come across my desk are more often for services than retail sales: medical office or medical spa, restaurant (usually fast food or fast casual which includes internet ordering and delivery), or a fitness/recreational use—including the occasional escape room or swim school. Last month, I negotiated a lease for a store reselling used goods, which was unusual not only because of the nature of the use, but also because it is one of the few leases I have worked on recently where the tenant is involved in the sale of durable consumer goods.
The common theme of such uses is particularly interesting: they all appear on longstanding lists of shopping center restrictions intended to protect traditional tenants against seemingly incompatible or even unsavory uses. Medical office and related uses, massage studios, restaurants, recreational uses, and secondhand sales, if not shunned entirely, were significantly limited as being drags on shopping centers that demanded too much parking or were incongruous with retail sales. Clearly, this perception has shifted; there is increasing recognition that what draws people out of their homes and into shopping centers has changed, and so shopping centers must change too.
E-commerce has not ended brick-and-mortar stores, but there is no denying its enormous impact. Americans have increasingly become consumers from their couches. Necessity, it seems, is also the mother of reinvention, forcing shopping centers to reinvent themselves in order to survive. This transformation is leading in directions previously frowned upon—swimming pools in shopping centers?—but as it turns out, come on in, the water is fine. Today’s customers can drop the kids off at swimming lessons, and then get the grocery shopping done, pick up prescriptions, or treat themselves to a session at the golf simulator or spa while they wait, all at the same center.
If these customers generate traffic and revenue for shopping centers, does it matter if they showed up for a medical spa instead of a bookstore? The simplest answer may be “No, so long as the customer goes to the other stores too”, but it can be more complicated than that. This takes us back to those old lease restrictions and a challenge in navigating the new retail landscape. It may be archaic at this point to prohibit recreational uses or limit how much square footage restaurants and bars can occupy, but to the extent that these restrictions survive in existing leases, they are still enforceable. In the long run, one expects that outdated restrictions will be phased out as leases turn over or are modified as older leases are extended, but in the short term, waivers from existing tenants may be necessary. For the legal practitioner, this requires (as always) careful review and consideration of existing tenants’ rights when contemplating a new shopping center. When rights of existing tenants conflict with proposed use, a strategy for resolving that conflicts is needed, as existing tenants may be reluctant to waive their rights solely on assurances that a new future of retail has arrived, and may require compensation or concessions from the landlord.
