It's a pain but if you have alot of products to change it's worth downloading csv file and updating that way.
1. download file
2. import into Google Sheets (trust me on this)
3. delete product id, variant id, and product url data (not headers)
4. find and replace PHYSICAL with SERVICE
5. Download new csv
6. import into squarespace
You will now have new items but also the old ones.
Now you need to change inventory of old csv to 0 and upload those. Will make easier to identify old ones to delete.