Blog Post

Reverse Urbanization: How New Localization Trends Impact Retailers

April 7, 2021

Reverse Urbanization. There’s been plenty of talk about how cities are emptying out, that new remote working paradigms and changed attitudes and priorities among the younger generations are driving people out of densely populated downtowns and towards smaller cities and towns.

Is there anything to this idea? Or, is it just a fashionable position to take, a knee-jerk reaction to the social distancing requirements demanded by the pandemic? And how should retailers respond, especially since brick and mortar stores are already operating on thin margins as a result of Amazon and digital shopping channels?

Let’s explore the concept of reverse urbanization and see what the data says. With better insight into where people are choosing to live and work, retailers can follow their customers and ensure they get the most out of their leases.

Reverse Urbanization: How COVID-19 accelerated long-term trends

By now, much has been said about the impact of COVID-19 on how we live and work. The important takeaway for retailers looking to understand new localization trends, however, is that COVID-19 didn’t introduce fundamentally new behavioral trends. Instead, it accelerated those trends, forcing consumers to commit to lifestyle changes they would have eventually adopted in a much more gradual fashion.

We can identify two such trends that have special relevance for retailers:

  • The shift to a remote work culture
  • The exodus from the densest, biggest cities

For example, the first COVID-19 cases in the US were reported in January 2020. However, the US Census Bureau reported that over the course of 2019, 5.1 million Americans left major cities while only 2.6 million moved into those cities.

Additionally, 17 percent of US workers worked from home at least 5 days a week before the COVID-19 pandemic, which accounts for a not-insignificant portion of the population. (If you’re curious, that number reached 44 percent after COVID-19).

The takeaway here is that these trends aren’t a flash in the pan resulting from COVID-19. The pandemic made these changes in localization highly visible and pronounced, but there are still persistent, underlying forces driving them in the long term.

And as long-term trends, they have big implications for how retailers plan their real estate strategy. Is that expensive New York outlet worth the investment? Will the lack of in-office workers mean that investing in brick and mortar stores is a crapshoot? Well, not quite.

Reverse Urbanization: The future isn’t fully remote, nor is it rural

While the pandemic showed businesses that remote work is entirely possible, there are still aspects of business that can only be conducted in person. And, once the threat of the virus subsides, people will want to connect in person to one degree or another.

We can look to major tech companies’ recent leasing decisions as proof. In 2020, companies like Facebook, Netflix, Apple and others committed to leasing multiple millions of square footage in Manhattan despite a raging pandemic.

Instead, it seems likely that businesses will embrace hybrid working models, where employees come into the office once, twice, three times a week and work from home for the remainder. This means office workers will remain tethered to central business districts — only that their tethers will be longer, enabling them to live further away from the city.

At the same time, demographics data shows that people are indeed moving away from highly dense cities, but they’re not fleeing from cities altogether. Instead, more Americans are moving to medium-sized cities where the cost of living isn’t as high, but where they can still benefit from the cultural and professional opportunities that city living affords. Cities in Arizona, Florida and Texas have proven to be particularly attractive due to their affordability, pleasant climate and attractive tax schemes that draw business.

Powerful forces still drive urbanization

Adding to the confusion is the fact that there are plenty of on-going factors that ensure shoppers will still congregate in urban centers.

Under the Biden administration, we can expect a more permissive attitude towards immigrants than under the Trump administration. It’s a long-established observation that immigrants tend to congregate in cities rather than suburban or rural areas. In fact, immigrants are likely to be the primary source of population growth in these regions.

In part, this is because Millennials aren’t having children, and it seems like Gen Z won’t either. While this means there may be fewer people around to shop even if immigration steps up, it also means that more members of the Millennial generation (and potentially Gen Z) will congregate in cities. The suburbs have traditionally been attractive to individuals starting families, where it’s easier to buy a house and find high-quality school systems. Without a family, the new generations may prefer the cultural and professional draw of urban centers.

What does this mean for retailers?

Clearly, reverse urbanization writ large isn’t the case. If it were, retailers might have an easier time evaluating where to locate their stores or whether they should go fully digital. If consumers were all in the countryside or all in cities, their decision would be much simpler.

This dynamic and nuanced dispersion, however, presents a challenge for retailers looking to optimize their lease portfolio. What’s more, picking the optimal location for a brick and mortar store has never been more important considering that more and more shoppers are getting their products online. The physical store isn’t dead, but it does need to be carefully tuned.

Retailers need to source the right data when evaluating the performance of their existing storefronts and the suitability of a prospective location. Using store and labor data, they can assess how well a given location is performing and extrapolate that performance to similar prospective locations.

Crucially, any kind of data-driven analysis has to ingest the data contained within a retailer’s lease portfolio — after all, without a lease, there is no store. Using contract management systems (CMSs), retailers can centralize their leases to gain a thousand-foot view of their localization strategy.

Modern CMSs also provide AI-based capabilities like optical character recognition and natural language processing to support advanced searching. This is an especially essential capability for leases, which are typically written on non-standardized landlord paper.

With a centralized and searchable lease portfolio, retailers can track the stores that are up for renewal and target their analyses to ensure that they aren’t locked into an underperforming location. With the diminished but still dense populations found in urban centers, retailers will need to evaluate whether they can reduce costs associated with expensive high street locations. To that end, leases often contain data that can inform additional commercial cost reduction strategies as well as hidden concessions, potential abatements and other terms that can be taken advantage of to plug revenue leakage or mitigate a crisis (like the COVID-19 pandemic).

But for many retail legal departments, the idea that a CMS can provide data analysis and not just secure contract storage is a new one. To learn more about the capabilities of a modern CMS, you can read about Exigent’s CMS solution here.