In a global ranking of real estate per person, the United States is No. 1, and not in a good way. The consultancy PwC did an analysis last year of per capita leasable shopping center space in countries around the world. For places like France, Germany, the United Kingdom and Japan, average retail space was less than 5 square feet per person. In the U.S., that number is more than 23.
“We are clearly overretailed in America,” says Byron Carlock, head of PwC’s U.S. real estate practice. “Suburban sprawl created a situation where we just believed that every time there was a new intersection with four corners we needed to put up four strip centers. We’re learning differently now.”
As the pandemic continues to crush most of the retail industry, this oversupply will require some consideration about how much retail space is actually needed and what we should do with all the rest.
“Some prognosticators think we’re not only overretailed, we’re underdemolished,” Carlock says. “There will be retail that will be demolished and repurposed, and then there will be retail that continues to support our lifestyles and is relevant and is useful and is important.”
And a significant amount of physical retail space will continue to be relevant, Carlock says, especially necessity-based grocery stores and other neighborhood-oriented retailers like drug stores. Even during the pandemic, more than 80% of retail purchases were made in stores or through retailer delivery services like those available at grocery stores, according to PwC’s research.
But as e-commerce continues to grow, Carlock says retail space will begin to shrink and transform.
“We’re already seeing the repurposing of space,” he says. Underused retail is being turned into other things, including health and wellness studios for yoga and cycling, urgent care medical facilities, last-mile fulfillment centers for e-commerce deliveries, and educational facilities for community colleges. “All of those things had started pre-pandemic,” Carlock says. During the pandemic, the reuse of retail space has continued, thanks to what he calls “pretty attractive rates” for both leases and sales. In New York alone, for example, retail rents dropped nearly 13% in major commercial areas for the third quarter of 2020.
Despite the environmental benefits of reusing rather than demolishing buildings, other spaces will likely see the wrecking ball. Carlock expects that the demolition of underused retail will make room for other types of land use that are in high demand, particularly apartment buildings and even some mixed-use development. “If you think about it, all that retail real estate is not in trouble because of its location. It’s probably pretty well located to demographically attractive users, but there’s just too much of it,” he says. “So tearing down a 1950s or ’60s strip center and putting up a new mixed-use apartment building makes sense.”
Though the U.S. is an outlier with its 23 square feet of retail space per person, other large countries with dispersed development patterns have relatively large amounts of shopping space. In Australia, the amount is about 11 square feet per person, according to PwC’s analysis. In Canada, it’s about 16.
Carlock says the U.S. may not be getting down to a compact European retail rate of 5 square feet per person anytime soon, but it could begin edging closer to a Canadian 16. That would represent a 30% drop in shopping spaces in the U.S. And if reuse and replacement continues as Carlock expects, that could also mean 30% more space for the kind of development people actually need.