Observations & Conversations
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Why is it so hard to get the deals done and
bring the national chains to the downtowns? |
I’ve been reading a lot lately about the
resurgence of downtowns and how the national chains are eyeing urban markets as
a vehicle for expansion. The 2000 US Census showed that population growth in
urban areas out paced that of the bucolic suburbs by about four percent. Ten to
15 years ago getting a retailer to even consider an urban site was next to
impossible since they were caught up in the power center craze and malls were
still being built to serve the suburban markets. Today, not many malls are
proposed, power centers are now just a series of big box users that have
acquired adjacent parcels and neighborhood centers are located on major
thoroughfares allowing for a regional draw. The suburbs are becoming saturated
and a housing shortage looms, especially rentals. So as a natural course in the
evolution of retailing, we’re coming full circle to viewing downtowns as a
viable place to do business and young professionals, some with families, are
moving back to the city for affordable housing without spending three hours a
day commuting.
A few retailers that are taking it to the streets include The Childrens Place
who’s opening a store in downtown Newark, NJ this year; Apple Computer plans to
open a store in downtown Palo Alto, CA and Home Depot plans to test 50,000 sq.ft.
stores in urban areas with a store scheduled to open next year in Chicago, and
another planned for Brooklyn, NY. The Dealmakers sells a database of 5,600
national and regional retailers (it’s called Tenant Search and call us at
800-732-5856 for a demo) and for kicks I checked to see how many of these chains
are looking for sites in urban/downtown areas and about 20% are inclined to open
stores in non-suburban markets. An impressive figure, so why is it so hard to
get the deals done and bring the national chains to storefront locations? The
answer is multifaceted with the most obvious obstacles being it’s hard to
assemble parcels for new construction and most retailers prefer not to retrofit
older buildings (I’m always amazed when retailers pass on sites that don’t meet
their exact configuration, even though the floor space and storage is doable and
all the projections show the site could be a very profitable store, they just
don't want the extra work even if it’s for a B or A location); secondly crime is
an issue and third; parking, parking and parking.
The more esoteric deterrence behind retailing in downtowns is that retailers
think that the same merchandise that sells in suburbia most definitely won’t
work in urban markets and because the customer base isn’t 100% lily white, the
less affluent urban customer doesn’t have the disposable income that you find in
the suburbs and they’ll be robbed blind. First, even if a ladies apparel
retailer’s average sale is $500 and they only operate in major malls... they’re
insane if they think the same merchandise is going to sell as well in Sioux
City, South Dakota as it does in Dallas, Texas. If a national retailer plans to
stay in business, they have to buy differently for regions of the country (which
most don’t). The excuse about being required to buy differently for urban
markets isn’t valid, since if they are worth their salt they are already buying
differently for certain stores. As far as comparing disposable income, if I were
selling $50 jeans would I rather stake my future on a thirty something earning
$40,000 annually with a $1,200 a month rent obligation and a student loan or
would I have confidence in tapping the pockets of a family earning $80,000
annually with a $200,000 mortgage; three kids to feed and clothe; two car
payments; $30,000 of credit card debt and all the extra baggage that comes with
the territory... I’d put my money on the thirty something. As far as being
robbed blind, I don’t know of any retailer that doesn’t battle crime everyday
from teenage shoplifters at the mall to armed robbery at the local convenience
store.
Developers are also becoming less reluctant to do business in the urban areas,
especially since public sector money for improvements is still flowing. I
recently read about a six-acre site in downtown Oklahoma City that the city had
put out a RFP on and two different developers responded. One proposal, estimated
at $25 million for retail and 300 residential units, entailed $1 million going
to the city for the land acquisition and in turn the city would provide $750,000
for road improvements and a $3.5 million “forgivable” loan, plus $8 million in
tax credits over a 10-year term. The other proposal, estimated at $20 million
for 45,000 sq.ft. of retail, 50 town homes and a 200-unit luxury apartment
building, offered $200,000 for the land and didn’t ask for entitlements from the
city, but the developer wants to hold off on building the apartments until the
200+ units currently in development and located within seven blocks of the site
are absorbed by the market. The city is forming a study committee to evaluate
the proposals. How much you want to bet that the developer asking for freebies
wins the bid? Unfortunately another problem with retail in a downtown/urban
setting from the developer’s perspective is the insanity and utter stupidity
that often prevails when attempting to do business with and appease the
political beasts in bureaucracies. I know a lot of developers that absolutely
refuse to venture into the murky waters of free money and government giveaways
because the apron strings are always too tight and they have little patience in
waiting for committees who form study groups and then form another committee to
evaluate the study, however the ones that are willing to deal with the red tape
make phenomenal returns.
In a few weeks, we’ll be at the ICSC Florida Dealmaking in Orlando. Be sure to
drop by our booth and say hello, also we’ll have the Tenant Search on CD-ROM
demo so pick one up. Until next month,
Ann O’Neal, Publisher