As shopping centers fill vacancies and square off with Amazon.com, retail continues to adapt to the times. “In today’s retail market, store closures allow landlords and property managers like us to be creative with the vacancies and find the highest and best use for the space,” said Taylor Alvey, vice president of leasing at Phoenix-based Vestar. “This often includes repositioning a section of a center by bringing in much-needed tenant types or unique users, like creative office space, hotel, or food.” 

At The Gateway mixed-use center, in Salt Lake City, Vestar transformed a former sporting-goods anchor space into a headquarters for Recursion Pharmaceuticals and its roughly 400 employees — all of whom are now “built-in” shopping center customers.

Some retail categories are still seeing rapid growth. In the first quarter of this year alone, retailers announced plans for some 2,500 new stores thus far, on the heels of nearly 3,200 openings last year, according to Coresight Research. Dollar General leads the pack, with 975 stores planned for 2019, followed by Dollar Tree, with 550 (including 202 Family Store units), and Aldi, with 159. 

Ross Stores says it will roll out 100 U.S. stores this year, while competitor Burlington, which, unlike Ross, has an online presence, is planning to open about 50. Brick-and-mortar beauty retailers, too, are growing again, with Ulta Beauty on track to open about 80 stores and Sephora adding on 35. Tractor Supply Company has 80 stores of its own in the works, and crafts retailers Hobby Lobby and Michaels are on a roll as well, with the former set to open 65 stores and the latter planning on 12.

Countless new gourmet restaurants and dining halls are making food service the new mall anchor. Food tenants have risen steadily on a percentage occupancy basis, from the former 2 percent to 4 percent standard to the present 10 percent, says Naveen Jaggi, president of the JLL Americas retail advisory and capital-markets practice. “The new retail centers are committing up to 15 percent of their space to eateries,” Jaggi said. Younger consumers are seeking out authenticity by flocking to community-based restaurants and merchants, he notes. “These are a lot more enticing to that consumer.” Mall diners tend to have longer visit times, and landlords are building in more family-oriented concepts to entertain them, Jaggi says. Among the new ones are Let’s Play, a children’s indoor play-center concept. “Discovery Zone came and went, but they left a void,” he said. Filling that void now are Crayola Experience, KidZania, Legoland and Round One Entertainment. 

Another common misperception is that centers are quickly being emptied of tenants. Neighborhood and community center retail vacancy rates have barely moved from 9.9 percent at year-end 2016 to 10.2 percent a year before, according to a January report from Moody’s-Reis, concluding that vacancy rates “show how the retail sector has withstood the structural changes in the industry.” Though many had feared soaring vacancy rates and plummeting rents as department stores continued closing, “this did not occur, as the doomsday prognostications proved to be overblown,” the report summarized. “If the retail sector was able to sustain the store closures over the last year, it can survive anything.”

The scenario is no surprise to industry old hands like Bill Rose, senior managing director of the Marcus & Millichap institutional-property advisory division, who points back to the office-space scares of the not-too-distant past. “Recall when analysts earlier predicted a decline of office properties because working remotely was so appealing?” he said. “It turns out humans prefer real-world interaction more, and office occupancy is just fine.”

Jaggi points to Target’s robust 2018 holiday same-store sales, which jumped by 5.7 percent from the previous year’s period, as evidence that store reinvestments and such additions as delivery services are paying off. Home Depot enjoyed a 7.2 percent year-on-year sales surge in 2018, including a 10.9 percent rise in its fourth quarter (ended Feb. 2). And though Home Depot has frozen its U.S. store count for now, the company also says it is hiring some 800 additional tech workers. Best Buy, once predicted to become a sure victim of rising online electronics sales, instead adapted its business model without closing any significant numbers of stores and wound up enjoying a 3 percent jump in U.S. comp-store sales for the fourth quarter of 2018. “Those kinds of performances in a mature retail economy make a statement,” Jaggi said. “Retailers are playing offense and getting better at the customer experience.”

And there are still other facts that fly hard in the face of any supposed “retail Armageddon.” Approximately 85 percent of retail activity is commodities-driven, for one thing, and this includes groceries, gas purchases and various services; the remaining 15 percent — which tends to get most of the negative headlines — involves discretionary retail, according to Nick Egelanian, president of retail real estate services firm SiteWorks. Furthermore, Black Friday 2018 traffic at physical retail sites and shopping centers registered a barely 1 percent decline in visits relative to the year before, according to ShopperTrak — hardly an apocalyptic scenario. Meanwhile, ICSC’s The Halo Effect: How Bricks Impact Clicks research report shows that the opening of a first store in any market can translate to an increase in website traffic of nearly 40 percent. 

Though digital sales continued to grow as a percentage of the whole (about 10 percent in 2018, with a predicted increase to 13.7 percent by 2021), that base whole is projected to rise by between 3.8 percent and 4.4 percent this year, according to the National Retail Federation. And demand remains strong for high-quality class-A retail assets, with the mall, neighborhood/community center and power center sectors seeing cap rates stabilize from 4.79 percent to 7.84 percent, according to a North America survey from CBRE. Occupancies remain in the high 90 percent range at class-A malls, meanwhile, says A.T. Kearney. 

Moreover, store closings tend to happen more frequently at the low-foot-traffic centers than at any of the nation’s top 200 malls, argues Morningside analyst Kevin Brown. Top owners such as Simon and Macerich derive some 80 percent of their net operating income from upscale centers in high-foot-traffic areas, he says. And such centers typically collect lease-termination fees whenever a store closing does occur, and they can then choose a successor from a long list of interested prospective tenants, Brown notes. 

Declining malls, including many in the rust belt, also tend to be located in smaller markets, and, on the whole, their fortunes are simply a reflection of the precarious economic health of those particular regions, not of the condition of the retail industry in general, argues Jaggi. Still, those old warhorse malls that make few accommodations toward change, if any, “just don’t belong anymore,” he said.

Also seldom reported is the role of private equity in many chain-store closings. Lots of now bankrupt retailers were actually still viable at the time of their demise, observers say, but because private-equity firms had saddled them with high levels of debt, any necessary store renovations and upgrades then became painfully unaffordable. Some private-equity firms do admit to not fully understanding the complexities of chain retail before buying in; these firms tended to overlook such concerns as price erosion, cost inflation, ongoing capital needs, marketing support, reinvestment costs and the ongoing need to respond quickly to changes in consumer desires, says a Bain & Co. report.

The list of private-equity-owned chains that went bankrupt includes Claire’s Stores, Gymboree, H.H.Gregg, The Limited, Mattress Firm, Nine West, Payless ShoeSource, Rue21, Sports Authority, Toys ‘R’ Us and True Religion. Michaels and Dollar General, for their part, remain healthy after filing IPOs following their private-equity buyouts.

Other now defunct retailers had been on the watchlist for years, so their fate was really no great surprise, according to Alvey. “They’re ones that we’ve been preparing for and talking about well in advance, because they’re overstored or overleveraged,” he said.

One important and often overlooked fact in the department-store exodus is that such anchors, once tethered to malls as traffic drivers, either owned their spaces outright or else paid minimal rent, which means that their departures actually created significant leasing upside for the landlords, sources say. A few department stores are even showing signs of new life: Nordstrom says it has plans to open seven stores this year, Kohl’s has aims of its own for four, and Dillard’s says it will build two, according to Coresight. And Barnes & Noble has announced the rollout of five stores for this year.

Ultimately, there is perhaps nothing more immediate in the retail universe than the act of shopping in a physical store, many sources say. Indeed, an online Ipsos/Google survey conducted last year found that nearly 80 percent of shoppers will make a store run whenever they need something. And some 60 percent of the respondents to that poll said they would rather patronize a brand that has physical locations than to shop online-only brands. But the top reason U.S. consumers have for choosing brick-and-mortar over the digital option is that they want to physically see and touch an item before they buy it, according to Austin, Texas–based tech firm BigCommerce. This is true among 28 percent of Generation-Z members, 29 percent of the Millennials, 40 percent of GenX-ers and 45 percent of boomers, the firm says.

Eli Randel, vice president of strategy at Marina del Rey, Calif.–based Commercial Real Estate Exchange, is among those who remain upbeat on physical retail. “Consumers have made it clear that they continue to favor brick-and-mortar for the majority of commerce,” Randel said. “Plus, Americans continue to dine out, and those centers built around experiential services and restaurants as a source of foot traffic are thriving.” 

Further, Vestar “never felt that the industry is experiencing a retail apocalypse,” said Alvey. “We continue to see new concepts emerge and traditional mall tenants looking to occupy space in other types of retail.” 

Given the healthy demand for consumer goods and services, “investors will continue to invest in retail properties,” Rose is predicting. “Amazon will be one of those investors as they roll out their new physical-store experiences.” Indeed, says the Marcus & Millichap report: “Retail center owners have repopulated storefronts with a variety of service-oriented businesses, from health care to fitness to dining to a variety of entertainment.” 

But undifferentiated and unremarkable stores are still destined to perish, some warn. Many of the tired business models and highly leveraged retailers have already been weeded out, Randel says. “But most of the survivors have adapted well to click-and-mortar strategies,” he noted. 

Jaggi concurs, asserting that the future will surely belong to the most-adaptable players. “The retailers willing to spend more to innovate,” Jaggi said, “will survive.”