Retail is making an unexpected comeback as one of the hottest asset classes in real estate. Over the past year alone, demand for retail space has skyrocketed by nearly 42 million square feet, with 200 million square feet absorbed since the start of 2021. The U.S. is now facing the tightest retail supply in recorded history, with just 4.8 percent of space available as of April 2024, according to CoStar.
The retail real estate market has shifted after years of closures and bankruptcies that led to tenant move-outs. Three distinct retail sectors have contributed to the most significant gains in demand. Food and beverage retail has bounced back strongly from the pandemic, as more people are ready to dine at restaurants. The off-price retail segment is also powering growth, attracting thrifty consumers seeking quality products at discounted rates.
Another retail sector that continues to shine is experiential stores. After the lockdowns of the pandemic and social distancing, younger consumers are eager to get out and snap Instagram-worthy photos. With experiential retail, the emphasis shifts from products to immersive experiences. This includes pop-up art galleries, escape rooms, and interactive stores. These spaces blur the lines between commerce and entertainment.
Experiential retail is not a new concept, but it has breathed fresh life into the brick-and-mortar comeback following the pandemic. Retail giants have taken notice and continue investing heavily in these concepts. Ace Hardware is the latest example of a retail chain launching a new experiential store model.
Dubbed Elevate Ace, the home improvement retailer will invest over $1 billion to add the concept to new and existing stores over the next five years. The experiential concept will feature brand showrooms, new product assortments, outdoor spaces with live goods displays, and enhanced customer service.
A handful of stores will feature the new concept later this year, but the company said the full rollout will start in January. Dale Fennel, Ace Hardware’s VP of merchandising, said experiential retail is “one of the absolute imperatives” for the company and the overall future of retail.
Plenty of other big retail firms are following suit. The athletic goods retailer Dick’s Sporting Goods opened seven new Dick’s House of Sport locations last year. Those stores reported robust double-digit comp growth in July compared to combo store locations of roughly the same size.
House of Sport is designed much differently than a typical Dick’s Sporting Goods store. While it has most of the same merchandise, the experiential stores have batting cages, golfing simulators, and rock climbing walls. By 2027, Dick’s Sporting Goods plans to have up to 100 House of Sport locations across the U.S. Dick’s also plans to launch a next-generation 50,000-square-foot store inspired by the House of Sport format with the same experiential concepts.
A renewed desire for experiences
Experiential stores tend to get more visits, and people spend more time in them because of their unique components. “Our data suggests that experiential stores do anywhere between 15 and 30 percent higher visits per location,” said R.J. Hottovoy, head of analytical research at Placer.ai.
Given data like this, it makes sense that many retailers are investing heavily in experiential stores. The youngest generations are demanding more in-store experiences. According to one survey, about 81 percent of Gen Z, the first generation to have smartphones their entire lives, prefer to shop in stores. More than half say they do so to disconnect from the digital world.
New technologies are driving the rise of immersive, experiential shopping that resonates with today’s “experience hunters.” Research shows that these experience-driven consumers are heavily influenced by the unique, hands-on environments that blend entertainment with shopping, shaping their purchasing decisions.
Post-pandemic, a renewed desire for shared experiences is spilling into retail spaces, with people craving outdoor adventures and in-person connections. After a tremendous boost throughout the pandemic, e-commerce sales growth has slightly decreased. According to Boston Consulting Group, online sales are still forecasted to account for 41 percent of global retail sales by 2027, an enormous increase from its share of just 18 percent in 2017. However, while online shopping is convenient and efficient, it lacks the thrill of discovery and fun that more consumers may seek in their retail experiences. Retail may be digital first now, but physical stores are not dying off as some expected.
All these trends have significant implications for retail landlords. Experiential retail shouldn’t be confused with temporary pop-up stores or branded events. Instead, experiential stores need long-term leases and want to become known as ‘destination shopping.’
Due to their high capital demands, experiential stores also require high-traffic locations. Experiential retail locations require heavier investments from tenants, so the stores need visibility and access to everyday shoppers and tourists to drive brand awareness and traffic.
The profitability of experiential stores also significantly differs from traditional brick-and-mortar stores. Due to high initial investment, experiential stores usually take three to five years to become profitable from in-store sales. However, experiential locations significantly enhance omnichannel sales. People who visit the stores may not necessarily buy anything, but they’re more likely to purchase from the retailer online later.
Landlords looking to attract experiential tenants might need to offer higher tenant improvement allowances and consider longer build-out periods. High-visibility, ground-floor locations with ample windows are ideal, and landlords may need to provide more comprehensive data about local demographics, traffic patterns, and employment sources to help make a compelling case to potential tenants.
Lease agreements can also be structured around a percentage of omnichannel sales, reflecting the higher value of customers who engage online and in-store. This model aligns rent with the performance of the experiential location and its subsequent impact on online sales.
Landlords can further capitalize on experiential retail by developing a complementary ecosystem of retailers. This may mean curating a mix of tenants that attract similar customer bases. Integrating food and beverage options, hosting events, and installing special features enhances the location’s attractiveness and capitalizes on the increased foot traffic.
Not everyone is keen on the experiential retail trend. Daryl Schmidt, VP of national leasing at Cadillac Fairview Corporation, said the trend toward entertainment to drive foot traffic to malls across Canada and the U.S. has drawbacks.
“There is no question you are seeing more entertainment uses, but the cold, hard reality is they don’t want to pay a lot of rent,” Schmidt recently said at ICSC Canada in Toronto. “Selfishly, for Cadillac Fairview, our highest and best use is a much more traditional fashion-oriented store or a general-purpose store. That’s at the top of our pecking order.”
Schmidt’s Cadillac Fairview Corp. owns 35 million square feet of retail space in Canada. He added that large entertainment-type stores attract much foot traffic but do not have many “cross synergies with the rest of the retail brands.”
Large entertainment-type stores are just one type of experiential retail, though. All retail locations seek to create an experience. Experiential shopping could be defined as any type of store setting where customers can have an experience beyond directly purchasing products. This includes experiencing a product through technology, artwork installations, or more. Not all experiential store concepts are as capital-intensive as others.
The battle between traditional shopping and e-commerce may also be misleading. Many thought brick-and-mortar was dying, and everything would switch to online shopping, but now the most successful online retailers are establishing brick-and-mortar locations. While shopping is perhaps digital-first now, consumers still want a personal, IRL connection with brands.
Moving forward, an experiential component to retail may become an expectation as the technology used along the customer journey evolves. The line between stores, e-commerce, restaurants, and event spaces may also blur. There are endless ways to innovate experiential concepts, and developers and landlords may look at retail centers in more holistic ways.
Retail spaces can be curated and viewed as part of a total shopping and lifestyle experience. In the ‘experience economy,’ this is what increasing numbers of young consumers demand, and the retail industry is shifting to meet these demands. Retail landlords are devising ways to capitalize on a trend that looks less like a fad and more like the future of shopping.
