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City Centers' Challenging Changes Featured Signal of Change: SoC1195 November 2020

Author: Martin Schwirn (Send us feedback.)

September 2020's SoC1181 — Retail Interruption discusses the dramatic changes that the retail landscape has experienced during the past six months. But many of these changes are only continuations of existing developments. The effects of changes in retail will have an impact on cities—particularly city centers. Politicians and city planners are concerned that downtowns could lose their attractiveness. Such a loss of urban centers' appeal could lead to cascading effects for entire regions. But the notion that city centers' main, if not sole, function is to enable commerce is misguided. Indeed, redesigning urban centers into spaces for relaxation and sporting activities could increase livability in cities and metropolitan areas. Meanwhile, the notion that changes in retail are the only major changes that are affecting cities is crucially limited; the coronavirus-disease-2019 (covid-19) pandemic's driving increasing numbers of people to virtual communication and online collaboration is also reducing urban environments' commercial appeal. Cities are still centers for meetings and interactions that drive innovation and economies, but perhaps conducting professional activities will one day cease to require in-person meetings. What will city centers look like then?

City planners are starting to envision (or fear) a world in which city centers do not play the traditional role of commercial fulcrums for entire regions.

Many retailers are shutting down some of their stores or reducing the footprint of some of their stores or doing both. What will happen to these empty retail spaces? In the shopping-mall world, such a development can be devastating. A large retailer is often the anchor store to which smaller retailers attach. Consumers go to malls to visit a large department store but then buy food and specialty items at smaller stores. In fact, many rent contracts between mall owners and small retailers guarantee the presence of an anchor store, which ensures foot traffic for the small retailers. The loss of a major department store can have devastating ripple effects on a mall, which may be one reason why Simon Property Group (Indianapolis, Indiana)—the largest mall operator in the United States—has invested heavily in buying retailers such as Forever 21 (Los Angeles, California) and J. C. Penney Company (Plano, Texas) out of bankruptcy.

In many cases, vacated retail spaces fail to find new retail renters. Although online commerce has caused dramatic carnage in the retail industry, it might actually become an unlikely savior of retail spaces. For instance, Simon Property Group is working with (Seattle, Washington) to turn vacated retail spaces into distribution hubs for the online retailer. Similarly, consumer-electronics retailer Best Buy Co. (Richfield, Minnesota) is revamping about a quarter of its stores to become hubs that will support the online orders that it must fulfill. This concept, which is not completely new, is gaining acceptance. October 2017's SoC969 — Reconsidering Brick-and-Mortar Stores mentions that a physical presence might represent the competitive advantage that retail chains need to counter online-only retailers. At the time, Target Corporation (Minneapolis, Minnesota) claimed that about 75% of people in the United States live in a 10-mile vicinity of one of its stores. Such a store footprint can help Target fulfill online orders within hours rather than days, which could prove crucial to countering Amazon's increasing push to fulfill orders in shorter and shorter periods.

Recent moves by outdoor-recreation-products retailer REI (Recreational Equipment Inc.; Kent, Washington) highlight a related development that will affect urban centers. As June 2020's P1503 — The Great Working-from-Home Experiment notes, the covid-19 pandemic has resulted in a sudden and dramatic scale-up in working from home. As a result, the need for corporate office space could be much smaller going forward, freeing up real estate in the downtowns of many cities. REI recently completed the construction of a new corporate headquarters in Bellevue, Washington; however, in the face of drastic human-resources and operational changes, the company has put the brand-new 8-acre campus, which it never even occupied, on the market. REI's headquarters will now comprise several satellite offices in the Seattle, Washington, area, and headquarters employees will work remotely.

Since the start of the covid-19 pandemic, many white-collar employees have gained the freedom to work from essentially anywhere, which is affecting residential real estate. For example, real-estate agents in and around New York, New York, are reporting massive increases in demand for suburban single-family homes and corresponding massive declines in demand for residential property within the city. The number of properties that sold in the borough of Manhattan, which many people see as the heart of New York, was 56% lower in July 2020 than it was in July 2019. The residential-real-estate situation is similar in San Francisco, California. According to Zillow Group's (Seattle, Washington) 2020 Urban-Suburban Market Report, inventory of homes in the city has increased 96% year over year in the wake of a wave of new listings that hit the market during the covid-19 pandemic. The entire San Francisco Bay Area may be experiencing changes that could set the tone for many other regions for years to come. Several tech companies—including Alphabet (Mountain View, California), Facebook (Menlo Park, California), and Twitter (San Francisco, California)—have instituted generous remote-working policies. In fact, many tech workers are now leaving or thinking about leaving the Bay Area. The pandemic's effect on human-resources policies has given many employees the opportunity to escape crowded conditions, long commutes, and very expensive living environments to look for places that offer what they consider more livable conditions. Observers already wonder what the effects of this development will be on collaboration, idea exchange, and innovation in the region. After all, for decades, policy makers in many other regions have viewed the Bay Area's concentration of highly skilled technology, engineering, finance, and marketing professionals as a prerequisite for market success.

The makeup of cities tends to change gradually. Sudden and dramatic transformations rarely occur in urban environments, because populations, infrastructures, buildings, traffic networks, and employment options typically require time to fade or to emerge. However, the covid-19 pandemic has accelerated many developments, and city planners and managers are starting to envision (or fear) a world in which city centers do not play the traditional role of commercial fulcrums for entire regions. But policy makers, architects, and developers already imagine the potential for cities to have less traffic, more space for relaxation, a broader variety of options for entertainment, and a greener and more sustainable environment in general. City centers might change with time and start offering the amenities that many people—perhaps even the people who are now in the process of leaving cities—crave.