Retail, at its essence, boils down to a relationship between consumers and the purveyors of goods and services. For centuries, that connection occurred primarily in brick-and-mortar retail establishments – from the family-owned shops of the 1700s, to downtown department stores in the late 1800s, to shopping malls, discount chains and superstores that saturated the landscape in the 20th century. With the advent of e-commerce in the 1990s, and the near-total adoption of cellphones over the last decade, digital, mobile and cross-channel retail has become the norm.

Amid structural oversupply, massive shifts in consumer habits and preferences, and initially significantly low barriers to entry for e-commerce players, incumbent retailers have had to radically rethink the structure of the customer journey to maintain their relevance. The COVID-19 pandemic dealt a final blow to many of those who failed to adapt. Estimates suggest lockdowns and health and safety concerns accelerated e-commerce adoption by five to ten years, with people over age 65 comprising the fastest-growing cohort.

“Shopping is largely habit-driven and there are very few times in one’s life when you have an opportunity to reshape their habits,” said Josh Silverman, CEO of the online marketplace Etsy in an earnings call. “The classic three are when you get married, when you move (into a) home, and when you have a baby. And otherwise, your habits are pretty cemented. And you’re not really open to forming new habits. And so this is a moment when everyone’s habits are up for grabs.”

Analysts suggest some digital behaviors are likely to prove sticky, especially online grocery shopping, telehealth and streaming entertainment. The investment firm UBS predicts e-commerce will vault to 26 percent of total sales by 2026, and more than 80,000 U.S. stores – roughly 9 percent of the total -- will shut their doors. “Covid-19 has set fire to the old-growth forest that was pre-pandemic retail,” writes retail consultant and author Doug Stephens. “While devastating on a human and economic level, the effects of the pandemic will also clear out decades of rotting industry underbrush. Only the healthiest and genetically soundest species of retail business will remain.”

“Shopping is largely habit-driven and there are very few times in one’s life when you have an opportunity to reshape their habits,” said Josh Silverman, CEO of the online marketplace Etsy in an earnings call.

Retail health is driven by sales volumes and margins, which help drive rent appetite. Post-COVID, what will the strongest brick-and-mortar merchants look like? What function will they play in communities, and how should landlords reconsider the way in which retail deals should be structured? This white paper examines the emerging role of retailers as experience designers that facilitate social interactions, emotional experiences, and hands-on interaction, and the critical placemaking roles that they can serve when mixed appropriately with each other and the public realm. We discuss the near-term outlook, and prospects for a recurrence of the “Roaring 20s,” a period of cultural and financial exuberance similar to the decade following World War I. Finally we look at how the new retail paradigm both challenges and is challenged by development decisions, space design, public policy and investment underwriting.

“We are entering the world of “phygital”—physical and digital at the same time, where there is not a physical world or digital world in retail, but rather a completely connected one,” said Eric Hazan, a partner at the consulting firm McKinsey.

According to a recent McKinsey report, the future of shopping is connected. New virtual and augmented technologies are empowering customers to interact digitally within the physical store environment to address immediate needs and preferences. Brands like Uniqlo, Topshop, IKEA and Converse have offered virtual reality product suggestions for several years now, and retailers may eventually employ game or spatial-computing designers to up the ante, said Brian Solis, global innovation evangelist for Salesforce.com. “By 2030, 5G will have given way to 6G,” he noted. “We’ll have sensors, computer vision, artificial intelligence, augmented reality, immersive and spatial computing. How can these worlds play together in a way that is almost fantasy-like? Figuring that out takes imagination. It takes experience architecture—a new type of discipline and expertise. It’s about creating magic. Great retailers, in the future, will make you feel like you’re in a special place, designed especially for you, so that you take time out of your life to go to that place because it feels like the right place to be. It’s aspirational.”

Aside from enhancing individual brand loyalty through technology, retail can play a critical role in the social fabric of communities by providing a common meeting ground for shared and collective experiences. As department stores and shopping malls declined in recent years, owners and investors focused on creating social experiences to drive traffic, filling vacancies with restaurants, bars, movie theaters, “eatertainment,” fitness centers, family activity parks and exclusive pop-up stores.

Nevertheless, the pandemic dealt a lethal blow despite best intentions and sound strategies. Many of them -- particularly restaurants -- innovated quickly, adding take-out menus and incorporating flexible indoor-outdoor spaces. More than 10 percent of U.S. restaurants closed permanently, according to one report, the movie chain Alamo Drafthouse filed for bankruptcy in March 2021, and the full extent of the fallout may not be known for some time. The lucky survivors were based in geographies with less stringent lockdowns, received Payroll Protection Program (PPP) funds, had business models that accommodated delivery or extensive outdoor dining, or had flexible landlords who recognized the intangible value of retail for activation. Even flexibility, including 100 percent rent abatement, wasn’t enough to keep some food and beverage operators alive, exposing the fragility of the industry, and a need to rethink financial structures. Post-pandemic, these same businesses might benefit from a repeat of the “Roaring 20s” from consumers chomping at the bit to spend their disposable income and make up for lost time with family and friends.

Early on in the pandemic, we had a glimpse of just how strong the brick-andmortar shopping rebound can be, particularly in the luxury markets. After just two months of lockdown, the Hermès Guangzhou flagship store, the second largest store in China, took in $2.7 million dollars on its reopening day in April 2020. Shoppers posted their buys – from crocodile skin Birkin bags to furniture and tableware -- on China’s social media channels. “Renewed consumer confidence coupled with stimulus and a rapid vaccine rollout has meant that luxury consumption returned at surprisingly fast pace,” noted The Bain & Company Luxury Study 2021 Spring Update, released in May. “The rebound in the US has exceeded expectations; improved macroeconomic conditions, a buoyant stock market, increasing consumer confidence and a fast vaccine rollout are contributing factors to a strong recovery.”

Experiential operators are also poised to benefit. For instance, perennial hotspots that hold either institutional or distinctive appeal, such as House of Prime Rib in San Francisco, immediately sold out of indoor tables in March 2021 as the city reopened. “In the near term, just going to a bar or a place with a variety of people to interact with will be entertainment,” said Leslie Lundin, co-founder and managing partner at Los Angeles-based LBG Real Estate Companies. “Given the newfound desire for direct interaction with other real people, places and things, in the near term, entertainment venues won’t need to work hard to draw crowds.”

“Renewed consumer confidence coupled with stimulus and a rapid vaccine rollout has meant that luxury consumption returned at surprisingly fast pace,” noted The Bain & Company Luxury Study 2021 Spring Update, released in May. “The rebound in the US has exceeded expectations; improved macroeconomic conditions, a buoyant stock market, increasing consumer confidence and a fast vaccine rollout are contributing factors to a strong recovery.”

Scenes of large multifamily buildings lining city streets with vacant storefronts became ubiquitous during the pandemic. They served as painful reminders of the crucial role physical retail plays in neighborhood activation and placemaking.

Humans are fundamentally social beings, yearning for interaction and unique experiences. Retail can facilitate organic, meaningful and memorable interactions and provide the space for programming that ignites a community. Retail must push the envelope of design and operational innovation if it is to play a role in reviving downtowns and neighborhoods. Yet even before the pandemic, retail vacancies were on the rise, due in large part to rapid changes in physical infrastructure requirements and increasing government regulation and costs, particularly in urban centers. The pace of innovation in retail has outpaced that of development and certainly of regulation.

As the customer journey has changed, physical space must keep pace. For example, brick-and-mortar retailers are being forced to navigate the surge in demand for fulfillment and last-mile distribution centers. They handled 10 percent of online orders in 2020, a figure expected to rise to 20 percent by 2026, UBS estimates. This shift demands better back-of-house functionality and efficient loading space. Power is another crucial consideration. A 7,000-square-foot restaurant typically requires up to six times more amps of electrical service to run appliances, coolers and lighting than comparable non-restaurant space. But building owners and developers are failing to adapt to changing operational needs. Retail spaces are often afterthoughts in mixed-use projects, forcibly occupying ground-floor spaces more as a function of local planning ordinances than a true desire for placemaking.

Unfortunately, certain jurisdictions appear to be acting contrary to the long-term interests of retailers and ultimately the public realm. Rather than passing legislation that encourages owners to fill these vacancies, in March 2020 San Francisco voters authorized a vacant property tax on ground-floor retail space. The reasoning for the tax was that landlords were supposedly to blame for the prohibitively high rents that drove ‘mom-and-pop’ retailers out of business, a line of logic that is seemingly contradictory to regular market forces. While there are certainly a few bad actors, the reality, as described by Reuben, Junius & Rose, a leading San Francisco land use advisory firm, lies within the city’s high costs of employment (minimum wage, health insurance), onerous permitting processes and other headwinds discussed previously.

The future of retail flips the notion that tenants should be treated as arms-length entities positioned “on the other side of the table” and who are viewed simply as a direct source of net operating income. For retail to succeed, it must be deliberately woven into its physical surroundings and the wider community. The more deeply connected retail is to the other product types – the more it actually aligns with the way human beings use space and is integrated with the operational priorities of landlords– the more successful it will be. The winning strategy is not about bringing in a few “check the box” amenities, but consciously selecting the ideal uses helmed by the right operators who are then positioned into the right spaces. The goal is to curate an experience that people want by mirroring the way people actually interact with their communities. Situating retail within an overall placemaking strategy will create a competitive advantage that results in higher rates of absorption and price elasticity among prospective tenants, while also driving demand for other nearby uses such as housing and offices.

For retail to succeed, it must be deliberately woven into its physical surroundings and the wider community.

Most importantly, the future success of physical retail depends on a new alignment between landlords and retailers, from purely short-term, transactional relationships to longer-term partnerships.

What is the future of brick-and-mortar retail? The most successful companies will be omnichannel experience designers, offering physical venues for shared and collective experiences, while integrating key technologies to serve consumers’ needs and preferences. Successful retailers will flourish in communities that take a thoughtful approach to permitting, zoning, taxation and regulations to ensure spaces are quickly activated and enrich the quality of neighborhoods. Prosperous retailers will partner with landlords who understand the unique demand drivers of their communities, and provide smartly designed spaces with up-to-date systems to support the occupiers’ operational goals.

Most importantly, the future success of physical retail depends on a new alignment between landlords and retailers, from purely short-term, transactional relationships to longer-term partnerships. Sponsors and investors must be willing to shoulder more underwriting risk in exchange for higher long-term value. This scenario is already playing out across the globe. A decade ago, a British government commission declared that highstreet shopping districts, which had once formed “the hearts and towns” of communities, were in crisis. Vacancies soared, foot traffic evaporated and local economies declined -- a death spiral exacerbated by the pandemic. “The best returns on investment will come from maximum collaboration based on local partnership,” the report stated.