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The New Catalysts

08/22/2023 | By John Cumbelich

Each era in retail real estate has its own cohort of catalytic anchor tenants and users around which new projects revolve.  I’m old enough to recall the then still-growing regional mall sector of the 1980’s, and the department store anchors who then ruled in retail.  Times change.

Interior facing regional malls gave way to exterior facing power centers, with anchors like Target and Home Depot, and the junior boxes and out-parcel users that populated those projects.  The subsequent rise of e-commerce dented the business model for numerous brands in categories like consumer electronics, office products, discount apparel and sporting goods, stunting growth in the power center category, but also opening new opportunities for retail development.

New development in the post-Covid era has come to be defined by an inchoate mix of catalytic anchors that no longer rely on department stores, and only selectively upon brands like Walmart, Target and Lowes, whose years of galloping expansion have been significantly curtailed.  Today, brands from Tractor Supply to Grocery Outlet, power drive-thrus like Chick-fil-A, In-N-Out Burger and Dutch Bros, quasi-retail uses like truck stops and self-storage, and hospitality brands in the Marriott, Hilton, Wyndham and Hyatt portfolios all compete for high quality retail real estate in markets nationally.

As the mix of active, well-funded catalyst users continues to evolve, the retail real estate market has also become increasingly segmented both along both economic and ethnic lines.  Evidenced by the continued growth of extreme value brands like Dollar General, Dollar Tree, Grocery Outlet, dd’s Discounts and Ross, as well as specialty grocers such as Tokyo Central, Vallarta, El Super, 99 Ranch Markets and Cardenas; many brands are choosing to dive deep into targeted demographic silos, rather than spreading a more generalized offering broadly across multiple demographic audiences.

While the power center era is not over, new projects in this space have become far fewer in number, built around select users such as Costco and Sam’s Club (see example), and the shortened list of junior and out-parcel users that have best navigated the storms of e-commerce and Covid, including Burlington, Home Goods, Boot Barn and Five Below, and quick-service restaurants (QSRs) such as Panda Express, Panera Bread, The Habit and Chipotle.

Just as notable as today’s catalyst growth brands are users whose growth has faded post-Covid.  Most notable on this list is Amazon whose swing and miss at a grocery store roll-out continues to baffle landlords, investors and industry watchers.  Perhaps more impactful to retail development has been the cessation of growth by the entire pharmacy industry.  CVS, Walgreens and Rite Aid were growth stalwarts that co-anchored retail centers for decades, yet they have become far more active in the real estate disposition business than in adding net store count.  With tens of thousands of stores nationally, changes to the pharmacy industry through acquisitions (CVS and Target) and insurance industry changes, have effectively shut down new growth for a retail sector that was formerly a key puzzle piece to new projects.

Mega stores like Bass Pro Shops, Scheels and Cabela’s have likewise backed off of growth, raising questions about the ability of these categories to re-start growth in the future. The growth of traditional auto dealerships has stalled, as consumers embrace the shift to EV brands like Tesla, Rivian, Polestar and Lucid.  Still other small concepts that expanded heavily in recent years but then reconsidered include poke shops, boutique fitness concepts, mattress stores and yoga studios.

While change in the retail landscape is a constant, both the frantic pace of change through the tumultuous Covid and post-Covid era, and the dizzying array of user categories that are in competition for quality retail real estate today have added a chaotic dimension to marketplaces nationally.  Or to put it a different way, the new normal of projects developed around power drive-thrus, self-storage, EV dealers, truck stops and ethnic grocers, is not very normal.