Glimmers Of Hope Ahead For Downtown Retail Markets Still Struggling To Recover From Pandemic

It has been a long slog back to normalcy for retailers located in U.S. central business districts, as the coronavirus pandemic kicked off low office occupancy rates in March 2020 that have yet to recover. As business dried up, many downtown retail shops — especially independents — closed.

While survivors are still struggling, there are glimmers of hope across the nation for retailers as vaccines continue to roll out, confidence is on the rise and offices lease back up. 

Provided the coronavirus doesn't throw any more curveballs, it's only up from here, experts say.

"The vaccine, and the reduction in infections from the most recent peak this summer, are supporting the increase in [pedestrian] traffic, but there's still a long way to go before a full recovery for downtown retail," Springboard Marketing and Insights Director Diane Wehrle said.

The pain hasn't been spread evenly.

Retailers in residential neighborhoods have been recovering faster than those in CBDs worldwide, according to an analysis from the Mastercard Economics Institute, as reported by Bloomberg. Small and midsized retailers in residential areas enjoyed an 8% increase in sales this year compared to 2019, the report notes, but in CBDs, comparable sales were down 33%.

Pedestrian traffic in U.S. downtowns during the workweek, which has traditionally been a mainstay for retail in those markets, remains much lower than it was before the pandemic, according to the most recent Downtown Pedestrian Traffic Report by retail data specialist Springboard.

Still, downtown pedestrian traffic has been increasing recently, albeit slowly. In September, workweek traffic strengthened to 40.7% below its 2019 level, up from 44.7% below in August and 44.1% below in July, according to Springboard, which uses sensors to monitor pedestrian traffic in the densest part of a number of U.S. central business districts, including New York, Chicago and Los Angeles, and a selection of secondary downtowns, such as in Oklahoma City.

The most successful retailers are, unsurprisingly, those with a strong online presence, Wehrle said. As for physical stores, part of getting through the remainder of the slump will be a matter of holding the line on costs — but not by keeping stores closed.

"Shutting down completely isn't going to help retail recover," she said. "You have to be open to do business. There is a long list of other strategies that downtown retailers undertook last year, and which they are still doing as foot traffic is depressed."

That includes staffing cuts, carrying less stock, working out deals with suppliers, or putting a pause on remodeling and expansion plans, Wehrle said. 

New York City, especially Manhattan, is a special case when it comes to CBD retail strength since residential density is so high in the city. Even so, the pandemic hit NYC retail hard, with pedestrian traffic in NYC CBDs still 45.5% below the 2019 level, according to Springboard.

"New York CBD retail definitely took a punch in the gut, but we're also definitely past that period, though it might not seem that way," said Eric Menkes, co-chair of the leasing practice at real estate law firm Duval & Stachenfeld in Manhattan and a specialist in retail leasing. 

While rents and leasing activity around Times Square are still declining, SoHo neighborhood retail, he said, is vibrant right now, and Bleecker Street is coming back to life.

"I did some walking this weekend, and in literally half the vacant storefronts on Bleecker Street, I saw 'coming soon' signs or building permits in the window, which of course is a sign of work going on inside," Menkes said. "So I'm confident in both of those neighborhoods, but the revival of retail in the city is much broader than that."

More fundamentally, the pandemic has changed the way retailers and their landlords approach leasing in New York, Menkes said. 

"We're seeing a lot more shorter-term deals," he said. "That was a trend that began before the pandemic, but it has accelerated significantly. We're also seeing a lot of pop-ups. In the Meatpacking District, for instance, Gucci did a pop-up that did very well, and I believe Tiffany's just signed a lease for a pop-up in the West Village."

Not everyone is optimistic about the prospects for New York retail, however. A report by the Real Estate Board of New York found that about a third of storefronts in the Grand Central and Midtown East districts were vacant this summer. Historically, these corridors have seen a 10% to 15% retail vacancy rate.  

"The public and private sectors need to focus on measures that continue to increase vaccination rates and safely draw office workers back to the central business districts to ensure the storefronts and retail businesses that constitute the fabric of our city experience a strong and full recovery,” REBNY President James Whelan said in a statement.

On the other side of the country, Downtown Los Angeles retail is still struggling, though some neighborhoods, such as Arts District and Little Tokyo, are recovering better than others, partly because their walkability and smaller-scale streets give off a more welcoming vibe.

Downtown LA's population growth has also helped to offset some of the retail losses caused by missing workers, CBRE Senior Vice President Derrick Moore told Bisnow. In 2011, the area had around 45,000 residents. Now there are at least 80,000 residents, and city planners are anticipating more growth in the area over the next two decades.

In other parts of the country, population and business growth are also buoying retail prospects, even as workers prove slower than expected to return to offices.

Strong population growth in Austin, for example, has bolstered optimism about the not-too-distant future for downtown retail.

Office space occupancy in the Austin CBD is around 85% as of Q3 2021, while overall retail occupancy in the CBD stands at a tight 96.3%, according to NAI Partners data. Local hotels are back up to 60% occupancy. 

Leasing signs are strong, according to CBRE First Vice President John Heffington. 

"We're seeing deals consummated at rents higher than prior to the pandemic," Heffington said. "Also, we're seeing an increase in the number and quality of tenants who are looking to open locations in Downtown Austin."

Even so, the market isn't quite out of the woods, local experts say.

"Recovery has been patchy in the Downtown Austin retail real estate market for current tenants," Heffington said. "Restaurants with a strong nighttime component are reporting sales that are better than their pre-pandemic numbers, but other tenants have yet to see sales reach pre-pandemic numbers and probably won't until we see a more robust return to the office by employees."

The area in Downtown Austin seeing the strongest retail rebound is the area south of Fourth Street, "where more residential properties exist and support the restaurants and retailers," said NAI Partners Retail Services Senior Vice President Kevin Murphy, who is based in Austin.

The firm has noticed an uptick of interest in properties along Congress Avenue between Sixth Street and the capitol, "but until the office market and state facilities come back in full force, retailers are cautious about investing in the area north of Sixth Street," Murphy said.

"Still, potential tenants are preparing for the gates to open, and any good vacancy will be backfilled promptly."

In Miami — another growth market until the pandemic hit — some retail properties were able to weather the worst of things by revamping their marketing strategies. 

After Brickell City Centre, a mixed-use shopping and entertainment hub in the city, closed in March 2020, the property shifted its marketing strategy to amplify its brands across digital channels, not only to continue to sell goods, but to keep the center in the minds of shoppers by the time it reopened in May of that year, Brickell City Centre Director of Retail Marketing Michael Sneed said. The center also provided resources to tenants during the pandemic, like advertising delivery options for restaurants. 

The property is one of only a few Miami shopping destinations that saw foot traffic rise in the first half of 2021 versus the same period in 2019, according to Sneed. Though Brickell City Centre is a CBD retail property, it has never been wholly dependent on office worker traffic. As residents venture out more, and tourists continue to return to Miami, Sneed expects those foot traffic figures to improve. 

"Even with the current staffing shortages, retailers who offer personalized service — which usually cannot be found online — will come out on top, as shoppers may have to look harder for gifts this year," Sneed said. "Supply chain and worker challenges continue to be a reality, however, so we expect shoppers will start early."

Elsewhere in the country, even as many shops closed, other retailers employed various strategies to stay in business, waiting for the time when people would be more willing to shop.

Such pivoting took various forms. In Fort Wayne, Indiana, Creative Women of the World boutique upped promoting its products via social media, and since clothing sales dropped, the shop began stocking more food products and other items that sold better during the pandemic, WPTA reported.

In Colorado Springs, a beleaguered independent clothier is moving to a smaller space to focus on alterations, tailoring and custom-designed clothing, CPR News reports, and in Pittsburgh, the Downtown Partnership gave away $100 vouchers for people to spend in Downtown shops, $80 at restaurants and $20 at retailers, the Pittsburgh Post-Gazette reports.

Retail operators not dependent on workers filling office space arguably fared best during the pandemic. 

Downtown Oakland, which even in better times didn't attract a mass of workers, is still lacking much foot traffic even on weekdays. But enough people live in the area now to keep demand for retail strong, operators say. 

Quane Woods, whose restaurant in Downtown Oakland, Gus's World Famous Fried Chicken, opened shortly before the pandemic, said she was able to pivot to a takeout model without too much trouble, because the storefront the restaurant occupies isn't that large.

Downtown Oakland has seen its residential population grow over the past two decades The ZIP code 94612, which covers much of the city's CBD, had 11,700 residents in 2000 and 14,300 in 2010, according to the Census Bureau. By 2019, the population was more than 15,700.

"Our business fluctuated during the lockdowns, but we always attracted enough customers to stay open," Woods said. "As an independent, we don't just serve food, but bring something unique to the neighborhood."