The Future of Retail Panel – LOA Takeaways

This morning I had the pleasure to attend a panel of retail and real estate experts organized by the Commercial Observer here in New York City on the future of retail.  Panelists included Gene Spiegelman, Vice Chairman of Retail Services for Cushman and Wakefield, Isaac Chera, Principal of Crown Acquisitions, Susan Fine, Principal of Oases RE and Ryan Engel, Director of Business Development and Real Estate for Peloton. Below are our main takeaways:

How much is e-commerce affecting retail?

• E-commerce has continued to capture a growing share to total retail sales (it has expanded from less than 5% in 2009 to over 10% last year).
• The continuous growth of e-commerce has affected real demand for retail space. Thus, as retail rents were rising in past few years, demand for retail space was decreasing due in part to increasing online sales. Supply and demand for space are not following the typical curve due to new technological disruptions on how people shop.
• Retailers that are in trouble now were already in trouble before; e-commerce is just accelerating that process (e.g. Macys, Sears)
• In this context, an increasing number of retailers are seeing retail space (bricks and mortar) as a showroom and marketing platform where customers can try and interact with the products and brand and then order online.  Strong concepts like Apple Store, Bonobos, Warby Parker and Peloton illustrate the trend.
• Also, in this current retail landscape we tend to see the number of service businesses go up (personal care, food and dining) and leases for retail businesses tend to get shorter

Will retail rents go down?

• There is a lot of space in the market now and since demand for space is not following the typical supply and demand curve, rents will likely go down in a few areas; in NYC this will happen in SoHo, the Meatpacking District and some sections of Madison Avenue. Overall, according to panelists, rents will remain flat for a few years.
• Despite higher vacancy rates panelists are “cautiously optimist”.  According to them, the online trend is not sustainable: “there’s only so much UPS and delivery traffic the City can accommodate”… “Stores are still the best way to distribute to the customer”.

What’s next for retailers? What are the next trends?

• Despite growing of e-commerce, a number of existing retailers are quickly adapting and many interesting retail concepts emerging (as mentioned above, Apple, Bonobos, Warby Parker and Peloton).
• Panelists expect to see more online companies (large and small) opening bricks and mortar locations, especially in short term leases, pop-ups, etc.
• The stores that are (and will continue to) succeed have a strong focus on providing not only strong products, but an incredible service. For example, Starbucks has over 700 stores in Manhattan alone and their service accounts for a large portion of that success.
• Retail experience will be increasingly curated to each individual customer. For example, the new Amazon bookstores resemble a traditional bookstore, but uses online data to suggest additional books based on customers shopping and browsing histories.
• Big data is the next ‘thing’; increasingly retailers are using it to connect to consumers and personalize offerings. Panelists observed the retail industry is doing a better job at capturing and using big data than real estate: “there’s so much data out there and we haven’t figured out how to put it together yet”.

What do "Emerging Trends in Real Estate" mean for the commercial district practitioner?

The Urban Land Institute (ULI) and PwC just released “Emerging Trends in Real Estate" 2016 and there are quite a few insights and takeaways for commercial district practitioners. These come in the form of market-based opportunities and threats that will need to be considered - and acted upon - in the coming years.

Here are a few of the findings, as well as some practical takeaways on the impacts and actions that might be necessary....

Opportunities continue to grow in secondary markets – what ULI calls “18-hour” cities. This is great news for many smaller downtown's looking for investment. These are places that still provide investors better upside opportunities, in part because the dense primary markets are already stiff with investor competition. 18-hour cities offer lower costs while maintaining some if not all of the excitement of 24-hour cities. A great competitive advantage is brewing here.

Takeaway: If you are in one of these “18-hour” cities, places like Nashville, Austin, Denver, San Diego…the time might be ripe to revisit your district with an eye towards redevelopment opportunities. Now is the time to find investors and developers who might be more receptive to your pitches.

For all the hoopla surrounding downtown development, suburbs are still a force to be reckoned with. The report suggests that it will only be a matter of time before millennials, many who have deferred starting families, will start heading out to the suburbs to raise families. While 37% of millennials indicate a preference for urban living, we all know how quickly these preferences change when people become parents. That might not be good news for cities that don't stay ahead of these changing preferences. 

Takeaway: Downtown – and its surrounding urban neighborhoods - need to start thinking about how to meet the needs of millennials as they graduate from roommates to partners and families. This will require thinking more holistically. How are the local schools – all the way from elementary to high school? Is the neighborhood safe? Is housing affordable and adequate? And how is the physical environment? Are there safe bike lanes for tots who are learning to bike – i.e. dedicated lanes rather than sharrows? Are sidewalks and crossings - and the whole pedestrian environment for that matter - safe for those ages “8 to 80”, as Gil Penalosa founder of 8 80 Cities, likes to say. Are there adequate playgrounds within walking distance of people’s apartments and homes? While the report didn't mention this explicitly, let's not forget the growing senior demographic. Are these easy places to walk to grab a bite to eat if driving is no longer an option. If not, get cracking!

Work lifestyle and expectations are changing – and this is good news for downtown and other similar urban environments. The growth in co-working spaces is growing as the “gig economy” heats up. Is your city up to meeting the demands of these businesses and the workers they bring? 

Take away: For those districts where real estate development is an opportunity - what is your downtown organization doing to remain attractive to this changing worker lifestyle? Can your organization become proactive in helping to re-position or reuse existing assets to make them more attractive to investors looking to develop this product type? Have you thought of a game plan for how you are going to meet the needs of this growing worker segment? In 2013, the Downtown Brooklyn Partnership, the parent organization that manages three Business Improvement Districts in downtown Brooklyn, NY, helped lead a study and strategic planning process called the Brooklyn Tech Triangle (check out their website and plan here). The effort brought together the public, non-profit and private sectors to ensure everyone was working from one playbook when it came to strategies and investments that would ensure that the area remained attractive to the tech employers - and by extension tech workers. 

Housing in short one word: affordable. The report suggests that the lack of affordable housing for a variety of incomes is especially problematic. Recent housing production has been skewed “toward the luxury end [and] a shortfall of supply in the mid-to-lower end of the residential market is putting upward pressure on pricing…exacerbating already severe affordability issues.” Simply put, the development of luxury product has far outpaced other housing types lately, and the limited supply of more affordable options is being acutely felt in many markets. Without housing for a variety of income ranges, ULI suggests that markets will stagnate a bit. How can a business survive if its workers cannot afford adequate housing or are relegated to a lifestyle that involves a 3-hour round trip commute? As ULI states, “developing improved housing options for everyone…is passing from the realm of “nice to do” to “must do.”  

Take away: Has your community sought to address issues of housing affordability? Do your housing incentives support the creation of affordable housing, for people from both low and moderate income bands? Does your downtown zoning framework outline a clear and transparent process for development, one that offers developers the ability to ascertain costs and development timeline with some degree of precision? 

Parking - we still don't know what the future holds, but hold on tight, because change is coming. The ULI report mentioned trends that are notable, including the decline in driver’s licenses among younger drivers, driver-less cars, car sharing that supports a reduction in car ownership, etc., all things that will change parking demand.

Takeaway: We still don't know what this means, and quite frankly in my opinion, our zoning framework is probably not prepared to accommodate these changes without significant alternations. Keep your eye on what cities of your ilk are doing as they respond to the changing dynamics of parking. 

Infrastructure investments are critical, but don't hold your breath for public money to solve the problem. The need to invest in downtown infrastructure has never been more acute. Deferred maintenance on things from the water supply and distribution, road and bridges, rail and public transportation access, etc. will be our undoing. The cities and downtowns that address these issues will retain a competitive advantage over those that don't. 

Takeaway: In light of this challenge, there may be a need - and opportunity - for BIDs to take on bonding for public improvements as a benefit to their constituents. But keep in mind - in some states BIDs are restricted from or have limits to the amount they can leverage towards bonds, so the enabling legislation for your individual state needs to be considered carefully. 

Food. Food. And more food. 

The trend towards food as an activity, food as a lifestyle choice continues, and downtowns are naturally occurring foodie destinations. The growing demand for interesting food offerings, especially from among those with more discretionary dollars in hand bodes well for downtowns. 

Takeaway: Is your city positioned to take advantage of this trend? Food destinations are usually places where food offerings are clustered. The experience of choosing a place to eat become almost as interesting as the meal itself. In some places these are called "restaurant rows", though food trucks are muscling in on restaurant territory in some places. Is your organization marketing your food options adequately through social media? Do your events give food establishments opportunities to introduce themselves to new customers? Have you found ways to add complimentary experiences - including street buskers, nice places to stroll after dinner...what I call ambient or impulse entertainment? Since most dining happens at night - what is the arrival experience? Is parking adequate and is it safe and comfortable to walk to and from a car? Can you encourage retailers to remain open later on some nights to give diners another thing to do before or after they eat? The list goes on...

Big banks are getting bigger, while small banks are specializing, and the guy in the middle will have to choose. What this means is that financing for smaller projects may become harder because they won't attract the big banks.

Takeaway – Don't despair, this means that regional banks will likely fill in the gap. Have you developed relationships with your local regional banks? Do you have access to – or can you create – dedicated lending tools to help promote development and investment in your district? Projects in the $20 million to $50 million range are what ULI suggests are the sweet spot for smaller investments. Have you looked at your district with an eye towards cultivating developers and projects – either new development or reuse – that meet this criteria?

Finding a way to incorporate these trends into downtown and commercial district strategic planning efforts will remain critical in the coming years. So good luck!

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P3 (Public-Private Partnership) PAVILION

We are excited to share this opportunity with folks in the field....

Every December the International Council of Shopping Centers puts on the NY National Deal Making Conference.

We have always found the event a great way for public or non-profit entities to market retail investment opportunities and to build valuable relationships in the field.

Some cities/non-profits choose to walk the floor, while others invest in a booth as an effective part of a retail and real estate marketing campaign. Either way, participation is incredibly valuable to those looking to build relationships and make deals. This year we are thrilled that ICSC will be providing a few ways to get in the door at an affordable rate.

On a first come, first serve basis, ICSC is offering discounted entry for a limited number of applicants, as well as low-cost, turn-key kiosks as part of the new P3 Pavilion (P3 stands for "Public-Private Partnerships").

The P3 Pavilion kiosks are a nice turn-key solution for municipalities and/or non-profit entities who want to have an exhibit space without too much hassle. The Pavilion will feature 10 kiosks under a unified branded pavilion that is exclusively for use by cities, counties, economic development agencies and non-profit main street, downtown or economic development corporations, agencies or associations (including BIDs and BIAs).

Pavilion package includes:

• One (1) kiosk 
• Two (2) stools 
• Company ID Sign 
• One (1) wastebasket 
• Two (2) staff badges  

Package Cost: Member Rate: $500

If you are interested in the kiosks, you can download the application HERE. For those interested in the discount, you can apply by filling out an application HERE.

Nine hot trends that the retail real estate industry can expect in 2015

We really enjoyed Joel Groover's article in the most recent Shopping Centers Today covering nine "hot topics" he identified after surveying experts in the industry.  Commercial district managers take note! Could some of these trends make their way to your district?

1. More Mobile Tech and E-Commerce - The continued rise of Internet users worldwide coincides with the ability to capture and use data in ways that improve overall performance. The article goes as far as to note the ability to track customer movement inside malls and stores to gather information - is this move overstepping privacy though?
2. More Redevelopments of Well-Located Properties - A lot of capital investment is being leveraged against redevelopment of strategically located properties that have the investors cool as cucumbers because the demand for good real estate is so high.
3. Continued Growth of Fast-Casual Dining - Sales among fast-casual dining establishments increased 11% from 2012 to 2013 and are expected to continue.  Baja Fresh, Chipotle, Panera Bread, and Qdoba are all lumped into the lot of fast-casual as well as Shake Shack who's recent IPO sold 5 million shares. Fast-casual, as I see it is a step above fast-food, which Americans are slowly recanting from. But don't take our word for it, just take a look at what's been happening to McDonald's lately..."As sales dip, McDonald's is replacing Don Johnson as chief", NYTimes, 1/28/15. So here is our question for you...what is your mix of food offerings and is fast-casual dining part of your retail mix? If not...it probably should be. 
4. More Subleasing of Retail Space - Basically a store or brand within a store or brand. This is expected to increase in 2015. Large-format retailers are turning to creative sublease solutions amid the trend toward downsizing.
5. More Solar Arrays on Shopping Center Rooftops - Companies, mostly big box stores, are seeing solar as a way to turn underused land and rooftops into productive assets while also impressing environmentally friendly consumers.
6. Healthier Employment and Consumer Spending - The article relates lowered energy, i.e. oil prices, to savings for employers and consumers who will spend the money saved on gas.  This equates to, among other things, more hiring by employers.
7. More Same-Day Delivery - As Amazon has notably taken the charge toward same-day delivery, other retailers such as Macy's and Target have also rolled out same-day delivery for select markets of time-stricken consumers. But only 9% of consumers surveyed "cited same-day delivery as a top factor that would improve their online shopping." This means that while delivery remains important, people still want to go to stores to purchase. That's good news for downtown. 
8. New Initiatives to Recapture Coveted Spaces - Like putting a peg in a hole, retailers are adjusting their size to fit into more appropriate and more coveted spaces as they "right-size" their portfolios. Some of the retailers taking space include Nordstrom Rack, Sprouts, Trader Joe's, and Whole Foods. Looks like luxury bargains and specialty food are taking advantage of these opportunities.
9. More Retailer Spin off Concepts - Spin off concepts ideally allow established retailers to capture interest of new demographic groups and enter normally inaccessible markets. For example Space Ninety8, an Urban Outfitters concept store, opened in normally chain unfriendly Williamsburg, Brooklyn. COS by H&M spins off higher luxury while F21 Red is lower priced than it's spin off parent, Forever 21. Could some of these spin offs find their way to your district?

Credit: This post was developed in part an article in SCT (“Nine Hot Topics For 2015,” Jan. 2015). 

Where Trains Don't Go: Bike Commuting from Brooklyn

As New York (especially Brooklyn) rents continue to rise, people are beginning to explore new neighborhoods with the help of their bikes. By utilizing cycles, people can live in parts of Brooklyn, Queens or even Manhattan that may not be adequately served by public transportation, and still have a convenient commute to work and easy access to local amenities. This past Sunday the NYT Real Estate section focused in on the topic of bike commuting and apartment hunting in NYC. Brooklyn neighborhoods such as Wallabout, Clinton Hill, Greenpoint, and Red Hook were mentioned as great, more affordable places to live that are relatively easy to access via a bicycle. In fact, as the article mentions, some real estate companies in the city have noticed biking’s increased popularity and have begun mentioning nearby Citi Bike stations as part of a properties amenities. Local commercial districts benefit from this trend as well - by increasing the area from which businesses draw customers. 

Manhattan Bridge bike path Image: transalt.org

Biking has a host of benefits – environmental to fiscal – and can even help lessen commute times for some people. For example, I live in Crown Heights, Brooklyn and used to work in the East Village. The commute door to door on the C and F trains was roughly 45 minutes assuming everything was running on schedule. However, the bike route along Flushing, over the Manhattan Bridge and up the Allen Street bike median was a quick 30 minutes and mostly in protected bike lanes. Last summer biking everyday to the East Village helped me save money, get in shape, and most importantly (for me) get outside. As a full time graduate student, with a full time job I wasn’t often able to enjoy summer’s warm weather, but the bike commute ensured I’d see the sun for at least an hour a day.

Allen Street Protected bike lane Image: steetblog.org

Biking opens different parts of the city to you and makes traveling much more enjoyable than sitting on a subway or in a car. You are able to explore parts of the city you wouldn’t otherwise visit and notice the little things that make each neighborhood unique, such as shops with unique window displays and signs, buildings painted unusual colors, and murals painted along the city’s small streets. And, as an avid biker, I will say that easy and plentiful bike parking is often enough to entice me into visiting a store or area. If parking is hard to find or far away from my destination (bar, restaurant, etc.), I am more likely to scrap my plans and keep looking for a new location. Bike corrals in business districts and well placed racks on busy streets can make all the difference in the world when I'm out running errands.

Franklin Street bike corral Image: brooklynspoke.com

Something that rings true for cyclists and that was mentioned in the NYT article is the ease at which you can move through the city. It is very easy for me to take a quick 30 minute or less bike ride from my home to Red Hook, Green Point, or even Chelsea; however, for those who rely on public transportation these trips can take upwards to an hour after walking to the stop, for connections, and traffic. These long trip times can be a deterrent to people and sometimes prevent them from visiting certain parts of the city.  

The NYT article included a map showing the change in percent of bike commuters in Brooklyn, Lower Manhattan and Southern Queens from 1990-2012.  The most significant changes happened from 2000-2012, with some areas going from 0%-14% in those 12 years. As cycling continues to grow in both popularity and convenience you can bet that various areas of the city will see new visitors and residents taking advantage of this mode of transportation. 

Melanie Truhn is a full time graduate student in Pratt Institute's City and Regional Master's Program. When she's not biking around Brooklyn she can found in Prospect Park with her pups.

Eleven Ingredients to Successful Catalytic Urban Real Estate Development

Rendering of the Shops and Lofts at 47

I have watched this project take shape for years, and so it was a real pleasure to see the groundbreaking for the Shops and Lofts at 47 finally take place. The project will feature 96 rental apartments, 14,000 sq. ft. of neighborhood retail and a 41,000 sq. ft. Walmart Neighborhood Market. And it is not an understatement to say that it was no easy feat to get this far. The fact that this project took seven years to get to groundbreaking speaks volumes, not only about the tenacity of all of the stakeholders, but also about the fragility of investment in challenging urban environments. From the local CDC's Executive Director to the developer - everyone committed above and beyond what would have been necessary for nearly any other regular deal. This project, the first the neighborhood has seen in 50 years, is now under construction and will ultimately transform a blighted corner of Chicago's historic Bronzeville community and contribute to commercial revitalization efforts. 

I am familiar with the project because in 2007 I was Director of LISC's national commercial technical assistance program. That year I went to the International Council of Shopping Center's (ICSC) Las Vegas Dealmaking for the first time to tag along as QCDC Executive Director Bernita Johnson-Gabriel and then Director of Programs at LISC Chicago, Joel Bookman, toured the floor and met with Frank Petroziello and Adam Troy of Mahogany Ventures, the project's developers. 

In the years following that introduction, I have kept in touch with Petroziello at ICSC events and marveled as he and his team, together with Johnson-Gabriel and the folks at LISC, kept the project alive. 

Lessons Learned
As an outside but interested observer who has watched this project slowly unfold, here is some insight on the critical ingredients that made this project work. 

1. Expert guidance. Early on in the process, LISC funded development consultant Chinwe Onyeagoro to support Johnson-Gabriel in her first foray to ICSC. LISC and others credits this early investment in expert guidance as being one of the most critical early investments made in the project. 
2. A committed development partner. Finding a partner was not easy. Johnson-Gabriel and Onyeagoro attended ICSC Dealmaking in Las Vegas in their early efforts to find a development partner. ICSC Dealmaking is not for the unprepared. Onyeagoro played a critical role in preparing Johnson-Gabriel to walk the floor. And while most developers shied away from the idea of developing in an untested market, one developer engaged in a conversation that eventually turned into a productive partnership. That was all they needed. 
3. Develop and use neighborhood-based market data. Johnson-Gabriel and Onyeagoro went to ICSC armed with a market analysis by LISC’s MetroEdge research unit. The data showed that nearly half of Bronzeville residents had incomes above the city’s median, yet a majority shopped elsewhere for lack of decent local stores. This information didn't get everyone to reconsider, but it did help open the door to meetings and conversations. It was a good "ice-breaker" that helped set the tone of the conversation and establish Johnson-Gabriel and Onyeagoro's credibility.  
4. Consistent leadership. I can't say this enough, staff turnover kills projects. In many communities, high turnover undermines consistent, productive steps in the right direction. When there is staff turnover, details need to be relearned, relationships need to be rebuilt, and many projects, particular those in challenging urban environments, can't withstand these interruptions. The fact that Johnson-Gabriel remained tenacious and focused was, I'm sure, a tremendous asset to this project. 
5. Early "booster" shots. QCDC was one of LISC Chicago's New Communities Program participants (NCP). The NCP program provided seed grants and large scale program investments, and also included the critical early funding for market analysis, as well as things like "street to sidewalk" cleanup patrols and programs that brought art students to design street furniture and banners. These modest improvements were all part of what helped "set the stage" for a more 'retail-ready' community. 
6. Don't get put off by "no". When Johnson-Gabriel attended ICSC for the first time, most developers weren't interested. Most made it clear that the challenge of urban real estate development was not worth the risk. But the team kept up with their meetings, eventually connecting with Ohio-based partnership called Mahogany Ventures. The rest, as they say, is history.
7. Find an anchor tenant. In my conversations with the developer in 2009, it was clear that financing could not advance until an anchor tenant could be found. But courting an anchor tenant, particularly during the recession, took awhile. 
8. Political will. Many retailers got cold feed during the recession, but when Mayor Rahm Emanuel vowed in his 2010 campaign to eliminate all the city’s food deserts, that helped open the door to discussions with Walmart Neighborhood Center and ultimately a signed lease commitment. 
9. Make a plan, and then follow it. The geographic, laser-like focus on this intersection was no accident. Early on in the process, LISC funded community-led "Quality of Life" plans. In the case of Cottage Grove, the plan listed the 47th Street intersection as the prime opportunity site. Piecing together the parcels was no easy task, but the mission and vision to transform this intersection was clearly delineated in the community plan, which in turn helped reinforce the decision to deploy the staff resources necessary to keep the project going.
10. Cultivate city partnerships. The project could not have proceeded without a city land acquisition at 47^th and Cottage. The City eventually bought 23 vacant lots to create the assemblage.
11. Stay creative. While finding an anchor tenant was critical to securing financing, the fact that the Chicago Housing Authority agreed to lease long-term 28 of the apartments was yet another factor in making the project a reality. 

Catalytic real estate development in challenging urban communities is the hardest kind to get off the ground. With no other comparable projects, developers are often extremely reluctant to take these kinds of projects on. That's because they are keenly aware of the fact that securing financing will be challenging if not impossible. That is why partnerships are so critical, from community partners like QCDC, to non-profit funders, to City support, to developers with expertise and stick-to-itiveness, every partner is critical to the process of turning dreams in reality.  

Downtown Police Stations - a catalyst for revitalization

I was so pleased to see this recent piece on Middletown, CT where I first cut my teeth in downtown revitalization in the late 1990's. At the time, plans for a downtown police station with ground floor retail were on the drawing board, and William Warner, Middletown's Director of Planning, was working hard turning that vision into a reality. Many years later the station is being heralded as a "catalyst for our growth" by Quentin Phipps, Executive Director of the Middletown Downtown Business Improvement District. ["Downtown police stations seen as catalyst in 2 cities", NorwichBulletin.com, 10/13]. Other cities in Connecticut are now looking to replicate this success. Norwich, CT is now asking taxpayers to finance a bond of $33.4 million to construct a similar police station.

Middletown, CT downtown Police Station
Source: Google Streetview

But the police station was not the only investment made in downtown. At the time, the City successfully applied to become one of Connecticut's first state Main Street programs. Lots of additional small investments have also made a difference. Since then the City has formed a Business Improvement District, welcomed a 12-screen movie theater and a 100-room inn to town. These investments - a mixture of public and private partnerships - are now being considered a model for other towns. I couldn't agree more!

From High Streets to Main Streets...reinvention required

A typical "high street" in England...

In England, "High Streets" are the equivalent of "Main Streets", and their problems are not so different from our own. Many are marred by significant vacancies, and the recent global economic downturn, coupled with fundamental changes in how people shop, has not helped. In a recent article in the U.K's Independent, Phil Wrigley, a prominent fashion retail executive called for the "reinvention" of high streets. He goes on to say that "retailing will never be the same again, but there is much to be gained from facing up to this fundamental, and irreversible, truth. In doing so, we might just create the space in which we can re-cast and revitalise our town centre communities."

Wrigley advocates for shrinking the commercial and retail square footage along high street, and turning these spaces into residential units. There is something to be said for this argument. In many urban areas, commercial zoning has not been updated in decades, and still operates under the assumption that downtown is the regional shopping hub of yesteryear. New commercial square footage, much of it in the form of enclosed malls and shopping centers, has replaced the need for all the commecial square footage that used to be necessary downtown. Yet many downtowns have failed to shrink their commercial districts in a thoughtful way. Instead, the dwindling number of stores are seperated by vacant storefronts - hurting the downtown's overall image and making it more difficult to attract new businesses. This is the "death spiral" that Phil Wrigley speaks. He suggests that a vacancy rate of 20-30% is the tipping point for vacancies that make it difficult for any community to recover from.

Wrigley's recommendations are an excellent strategy to prevent further demise of these districts. With more residentail housing comes more demand for retail and services...so perhaps the "death spiral" should instead be called the "opportunity for reinvention" spiral....

Commercial District News - 1/31/12

Old Downtown Pontiac, MI Sears To Become Lofts, Shopping [CBS News, 1/29]
Developers in Pontiac, MI develop a mixed-use proposal for an old Sears. The $19.8 million project is funded by a variety of public and private sector funding sources, including the State of Michigan Neighborhood Stabilization Program 2, federal New Markets and Historic Tax Credits, state historic tax credits, and brownfield tax credits.

Is high turnover for downtown Ann Arbor restaurants concerning? [AnnArbor.com, 1/29]
Is a high churn rate among restaurants in downtown Ann Arbor, MI due to current economic conditions or a long term trend by consumers away from downtown? In this article, one restauranteur attributes "the decline in traffic downtown and the struggling business at his restaurant to several things: parking rate increases, competition in the restaurant business, the delivery business, economic factors, construction projects and Borders’ closing."

From serious to silly, Corona del Mar Business Improvement District discussed at meeting [Corona del Mar Today, 1/27]
At a recent downtown event, the Improvement District solicited feedback from visitors on ideas for downtown improvements by placing a giant map with red Sharpies out for comments. Ideas included reccomendations to turn some streets one-way, landscaping in medians, bike lanes and more...

Jack Gosnell: The Urgency for Urban Retail [D Magazine, 1/30]
A commercial broker reflects on the urgency of attracting young future urban dwellers to downtowns after hearing a talk by Carol Coletta president and CEO of CEOs for Cities.

Landlord acknowledges that leasing decision can transform a neighborhood, but let's space lie fallow

An older image of Tony Malkin's building,
once occupied by Conway

Tony Malkin is the owner of a long vacant retail space along the Broadway corridor near Macy's in New York City. He's not wanting for interested retail tenants, yet the retail space, located across the street from the beautifully renovated Herald Square, sits hulking and vacant.

Malkin acknowledges the impact of his leasing decisions on the neighboring district, saying in a Wall Street Journal article that selecting the right retail tenant doesn't just change a building, it can also transform a neighborhood. Yet despite interest from tenants over the past few years, ranging from Nordstrom Rack to Best Buy to Nike, he hasn't even begun formally marketing the space. Landlords like this are frustrating, on one hand they acknowledge that their leasing decisions play a significant role in neighborhood transformation, yet they conveniently ignore the negative impact that a vacant space can have on the district. Malkin goes on to say "With the right tenant," Mr. Malkin says, "I see no reason for us not to be a logical extension off of 34th Street and Macy's." Yet because his cash flow needs are likely met by the office space above the ground floor, he's in no rush to lease his space. Not many owners are in a position to forgo millions of dollars in yearly cash flow, but clearly Malkin thinks the right tenant is worth the wait. What do you think?

Shame on Cisneros! Don’t use the term “village” if you don't mean it



 Really now. Is this a village?
Brandford Village, a gated community in Pacoima, CA.

This week, former HUD Secretary Henry Cisnero and Executive Chairman of CityView, an institutional investment firm focused on “urban real estate” (their terminology, not mine), will lead a media tour of Brandford Village, a for-sale new home community in Pacoima, CA. Here is the problem. The 62 single-family homes that comprise Brandford Village are in fact the furthest thing from “urban” or “village” humanly possible. A village is a place that both businesses and residents call home. A real village is someplace where a child can walk to a corner store and buy a pack of gum or an ice cream cone. Where Main Street (aka the commercial district) is integral to “Elm Street” (the residential district). I mean, c’mon, this “village” doesn’t even have sidewalks! And it only gets worse. It’s a GATED community. Wow.
Frankly, I’m surprised that the Honorable Henry Cisneros, whose track record supporting urban communities is unrivaled, is letting his name and organization be used to promote a development that violates so many basic principles of urbanity. So I ask only this: Cisnero’s, please...use your influence and position to instead invest in communities that truly honor the term village, the traditional mixed-use downtown and neighborhood commercial districts, often surrounded by residential housing, that dot the American landscape. There is no shortage of these communities in need of your investment.

Designing Retail Space and Getting it Oh So Wrong

Can you imagine the following scenario?

An architect is working on a shopping center and is trying to design the ground floor retail space. There are a few challenges with the site, and the architect doesn’t have a ton of experience designing retail space. The developer says, “do whatever works.” The architect does his job and completes the design, which includes a set of steps to each retail space, a response to the sloping condition of the site.

Fast forward to building completion. A day care center provider is looking at the space, but how do parents get their strollers into or out of the building? A pharmacy looks at the space, but how do their senior citizens in need of prescriptions get up the steps? And did I mention that the small parking lot doesn’t provide direct visibility to the entrance – something the pharmacy requires to improve the sense of safety for female customers? A doctor’s office looks at the space, but what about his patients with disabilities? A Dunkin Donuts looks at the space. The voltage specifications are off, and anyway, the columns are in all the wrong places. A small format grocer looks at the space, but why isn’t there a dedicated loading zone, moreover, the ceiling heights are way too low to meet the grocer's needs.

No surprise, the space lies vacant for months and months. It's hard to believe that any shopping center developer would take such a cavalier attitude with their multi-million dollar investment.

Now let’s replace “shopping center” with “mixed-use affordable housing”, and we have a TRUE story inspired by a recent conversation I had with a successful architect who shared a story about a former client.

So why am I talking about affordable housing, isn't this the Commercial District Advisor? In many communities, mixed-use affordable housing projects are an extremely effective commercial revitalization strategy. Housing creates density and demand for products and services, which in turn creates opportunities for retailers. Housing can also stabilize a district and can serve as the catalyst for private investments. Yet as the example illustrates, there is a problem, and it’s a big one.

In New York City, a recent study by the Department of Housing and Preservation found that the vacancy rate in mixed-use projects was 27%. To see how astonishing this is, let’s put this number in context. In April, the Wall Street Journal wrote “Mall vacancies hit their highest level in at least 11 years. In the top 80 U.S. markets, the average vacancy rate was 9.1%, up from 8.7%.” [“Malls Facing Surging Vacancies", April 7, 2011] So, if the WSJ considers a “surging” vacancy rate to be 9.1%, a 27% vacancy rate is  CATASTROPHIC.

WHAT IS GOING ON HERE??
The problem is complex, and is not only related to poorly designed retail space (although that is a tremendous problem). In many cases, developers have limited familiarity with retail space and actually say “do whatever works” to their architects. They also use public funds in the form of tax credits for the residential portion of the building. With building budgets tight, the pressure is on to make the residential portion of the building as efficient as possible. This sometimes results in oddly placed columns that break up the ground floor space and make it less attractive to retailers. In some cases, it is market related. Developers are creating ground floor retail space because it is the popular policy approach, yet in some areas, the market may yet be too weak to support it.

A few years ago, I took a CDC to the International Council of Shopping Center’s annual conference in Las Vegas. The CDC has created marketing material, had site plans for a mixed-use affordable housing project, and was ready to pitch the ground floor retail space, located on a future transit line, to drugstores. The response was lukewarm. In part because of some of the problems raised above. The columns were in the wrong places, the dimensions did not meet their typical format, and most importantly for the retailer, the parking lot was not visible from the front entrance. The CDC went back to the drawing board and redesigned the building to incorporate the retailers suggestions. Their first design, which reflected a significant investment of time and resources, went down the drain.

So how do we ensure that affordable housing developers make better decisions for their retail space? Here are a few tips:

• Start early: During design, consider the ideal uses and retailers for the space, investigate their site selection requirements and share those with the architect.
• Know the market: Don’t assume “if you build it, they will come”. Know your market. Are small spaces in the neighborhood being snatched up? Or is there pent up demand for larger retail spaces? This will inform how you market and divide the space.
• Talk to commercial brokers: Brokers will have insight into which spaces are moving and which aren’t. They may be able to pinpoint the retail categories that need space, informing your final design. For instance, if there is a need for restaurants, you may want to incorporate venting into the design. Doing it after the fact is often cost-prohibitive.
• Take care with architect selection: Select an architect with a track record of designing commercial spaces that have been successfully leased. They will know how to address things like ceiling heights, loading/unloading zones, signage, and the need for storage and office space, etc.
• If the market can’t support retail, don’t force it: Consider other uses for the space, including services like medical offices, day care, etc.
• Consider pre-leasing: Talk to retailers during the design process, and allow them to help customize the space for their needs if they sign a pre-lease. And better yet, a pre-leased space, or at the very least, strong stated interest from a potential tenant can making financing easier to obtain.

A little advance planning can reap significant rewards. A space that is leased quickly provides cash flow, enhances real estate value, and helps invigorate a street – a win-win for everyone!

Seven Ways Anchor Institutions Can Support Commercial Revitalization, Courtesy of ICIC

Wesleyan University was a major investor at the Inn at Middletown,
which involved the rehab of an old armory building right on Main St.

Local communities often struggle to find resources to advance their commercial revitalization efforts. Engaging property and business owners is obviously a first step, but it can sometimes be easy to overlook other stakeholders in a community. Universities are often seen as partners in this effort, as we have written about on this blog a number of times before [click here for previous posts], but increasingly, health care and cultural institutions are also playing a role in community building. Yet by and large they remain an untapped resource for revitalization.

Anchors are a good example of “sticky capital”, their looming physical presence and investment in built facilities means they are literally anchored in the community. They may be so focused on their primary mission, that they may not even realize the benefits that accrue to them from improvements to the surrounding neighborhood. In some communities, rather than engage in community efforts, they have done just the opposite. They have instead built fences around their properties, concentrated retail and services on-site, effectively isolating themselves. In communities with high crime rates and public safety challenges, this can be seen as the easy way out. I recall a tour of the Ivy City neighborhood in northeast D.C when I worked for LISC. Ivy City is a community with its fair share of public safety challenges. Looming large over the neighborhood was Galludet Univesity, with its tall fences and closed campus. The distinct 'them vs. us' attitude was mentioned again and again by community residents who were frustrated by the lack of meaningful engagement from the university.

Last week, I had the opportunity to hear Mary Leonard, President and CEO of the Initiative for a Competitive Inner City, speak at the City of New York’s Annual Business Improvement District (BID) Conference. ICIC, founded in 1994 by Harvard Business School Professor Michael Porter, has been analyzing the impact of anchor institutions on urban economic development. They have come up with a framework for the role of anchors in community revitalization. While the most obvious contribution that an anchor can make is money, Mary Kay laid out a framework for the role of anchors that goes much further and suggests seven ways in which anchors can participate in community building. With full credit to ICIC, and peppered with my own examples culled from my own experience, I offer this framework to readers interested in a comprehensive set of options for the ways in which local anchor institutions can have a more significant impact on their commercial revitalization efforts. [For a more detailed look at the ICIC framework click here]

1. Core Products or Services – This refers to the contribution that an anchor makes based on their area of expertise. If the anchor is a university, students might be tapped to do research or service. If the anchor is a health organization, they might provide free health screening to area residents. If the anchor is a cultural institution, they can contribute enhanced programming that draws visitors to the district. Vassar College, for instance, runs a field work program that provides students with academic credit and a stipend to intern with local community organizations and government agencies. 
2. Real Estate Developer – Anchor institutions can use their real estate investments to either turn their back on the local community or to build linkages to the district. Pratt University, in Brooklyn, NY recently unveiled a 120,000-square-foot, $54 million six-story building that houses administrative offices, galleries and classrooms right on Myrtle Avenue – a district that has benefitted significantly from Pratt’s active engagement. [For more on the Myrtle Avenue story, click here]. Another good example is Wesleyan University in Middletown, CT. Wesleyan was a lead participant and investor in the building of the Inn at Middletown. The hotel, located in a restored armory on Main Street, was once a blight on the district. Today the building and its guests are a stabilizing force that helps drive retail sales in the district.
3. Purchaser – The purchasing power of anchors can be directed to local businesses and suppliers. Communities can work closely with the anchor to identify local businesses, set up local purchasing goals, and offer incentives to help them to meet these goals.
4. Employer – I was shocked when Mary Kay mentioned that 2/3 of hospital and 1/3 of university employees only need associate degrees. There are clearly untapped opportunities, particular in lower income communities, to establish connections to residents through screening, training and referral. These jobs help stabilize a neighborhood by building wealth among local residents, building buying power for local businesses in the process.
5. Workforce Developer – Anchors can work closely with other community stakeholders, particularly universities, in identifying gaps and training local residents for jobs in the future.
6. Cluster Anchor – Anchors can collaborate with other organizations to incubate new businesses that simultaneously provide needed services and also fill local retail space. Hospitals are an excellent example of this trend. You often see complimentary retail and services in the vicinity of a hospital – and a hospital can help build demand for these services by encouraging patients and staff to patronize these local businesses.
7. Community Infrastructure Builder – There are many ways in which an anchor can help build local infrastructure. For example, ICIC notes that Yale University provides a subsidy for faculty and staff to buy homes in New Haven. While a student at Wesleyan University, In Middletown, Connecticut, I worked closely with the City planning office to apply for a competitive Connecticut Main Street program grant for technical assistance from the National Main Street Center. Our successful application counted on the support of seven organizations that contributed $10,000/year for three years to fund a Main Street program, one of which was the University. This effort eventually led to the formation of a Business Improvement District.

I could hang dozens of wonderful examples onto this framework, and I'm sure our readers could too. It is an excellent starting point that pushes us to think more creatively about how to engage anchor institutions beyond asking for a blank check. These options inevitably result in deeper, more lasting relationships that simultaneously benefit the district and the anchor over time.

"One" Approach to Commercial District Revitalization

Managing commercial districts where multiple properties are controlled by a bevy of different owners is a little bit like herding cats - difficult to say the least. Successful district management is further challenged by absentee owners that are difficult to reach and engage in the commercial revitalization effort. One alternative strategy for commercial revitalization is the 'single-owner' model. This is when a one developer begins amassing a critical mass of buildings along a commercial district. This approach allows the owner to manage the area much like a shopping center asset - taking great care with tenant mix, controlling improvements to the public realm, varying leasehold rates to attract and keep a good mix of tenants, and creating and marketing a unique district identity.

This week, the New York Times highlighted New York developer, Greg O'Connell in his efforts to apply this strategy to Mount Morris, New York [Resurrecting a Village by Buying Up Main Street], a rural town in upstate New York. In the case of Mount Morris, O’Connell is following in the well tread footsteps of urban visionaries such as Dana Crawford, who started buying property in downtown Denver in the 1960's and created Larimer Square. Or Rosyln Hill (pictured right), who is credited with turning Northeast Alberta Street, in Portland, Oregon, around starting in the 1990's.

This approach is not for the faint of heart. It requires significant vision, not to mention a healthy amount of capital for investment. Besides that, when does this approach work and why?

• An undervalued district with good bones. These visionaries often begin by surreptitiously buying undervalued assets - primarily attractive historic buildings in pedestrian-friendly commercial districts. The trick here is to buy the properties very cheaply. The only way to off set the expenses associated with renovating historic buildings is the low cost of purchase. 
• Great care crafting a distinct tenant mix. A visionary owner who takes great care attracting and retaining a unique set of businesses. In Larimer Square, Crawford started by leasing spaces to antique stores. In Portland, Hill focused on galleries and designers. This often means offering attractive rents and renting to non-credit tenants - i.e. mom-and-pops that offer distinctive goods and services.
• Requiring tenants to adhere to a set of rules and regulations. In Mount Morris, O'Connell requires his tenants to remain open one evening a week, leave their lights on at night, and change their window displays at least four times a year. In Portland, Hill did not allow her tenants to use metal bars on their windows or lock their doors during business hours. These rules are often similar, in spirit at least, to the rules that tenants must abide by in local malls, where open and closing hours are often written into leases and fines can be levied if tenants do not comply.

As appealing as this approach may be - not every property owner can pull off this kind of transformation. When owners lack vision and see their properties as cash cows, renting to the highest bidder without thought to the quality or the balance of tenants, they effectively undermine the value of their asset.
The single-owner approach is also not one that can easily be replicated in high-value urban environments. When property is expensive and overvalued, it can be difficult for a single owner to purchase the critical mass of properties necessary to make a difference in crafting tenant mix or managing district identity. It can also be difficult for developers, who may have paid dearly for these assets, to invest and improve the properties as they require. The need to produce cash flow through rent begins to trump the ability to keep rents low to encourage interesting and creative retail in the spaces.

While the single-owner approach is not for everyone, there is alot to learn from those visionary urban pioneers who are able to pull it off.

The Best Chains on Main: Deadline Extended to December 1st!

The Commercial District Advisor, in partnership with LISC MetroEdge, is still accepting nominations for the ‘Best Chains on Main,’ a nationwide competition that seeks to recognize those chain (and chain franchise) businesses that are making their urban business districts better places. Not only do they provide excellent service and maintain clean and attractive stores, storefronts and merchandise displays, the ‘Best Chains on Main’ help other businesses by attracting customers and contributing positively to the overall shopping environment. These quality businesses have a strong positive influence on how their neighborhoods are perceived, how safe people feel, and whether residents choose to spend their dollars locally. In particular, we are seeking chains that do not shy away from investing in more challenged business districts that other retailers typically avoid. These stores have a ‘chain effect’ on the neighborhoods they serve and help form the foundation of healthy and thriving commercial districts nationwide.

Help us Find and Recognize Great Businesses!
Nominated businesses will be judged on the following criteria: Exterior Appearance, Interior Appearance, Customer Service, Willingness to Locate in Low- and Moderate-Income Communities, and Donation to Local Causes. Nominations for both smaller regional chains as well as national chains are welcome. Franchise chains are also eligible. To be nominated, a store must have at least two locations.

To nominate a business, simply click here! For your nomination to be complete, you must also submit two or more pictures of the business that show it at its ‘Best.’ Photos can be sent to us at mrao@larisaortizassociates.com with the subject line, ‘Best Chains Contest Photos.’ Nominations will be accepted until Wednesday, December 1st.

A Top Notch Panel of Judges
Submissions will be judged by an expert panel of retail, real estate, design, and economic development professionals, including:

• Cynthia Stewart, Director of Community and Government Relations at the International Council of Shopping Centers (ICSC), the global trade association for the shopping center industry.
• David Bodamer, Editor-in-Chief of Retail Traffic, the nation’s leading business-to-business publication on retail real estate trends.
• Jeffrey Finkle, President and CEO of the International Economic Development Council, the world’s largest membership organization serving the economic development profession. 
• Ken Nisch, Chairman of JGA, one of the nation’s leading retail design, brand strategy, and architectural firms.
• David Feehan, President & CEO of Civitas Consultants, former President of the International Downtown Association (IDA), and editor of “Making Downtowns Work.”
• Joe Getz, Principal of JGSC Group, downtown retail consultants. 
• Jake Cowan, Business Manager at LISC MetroEdge, the nation’s pioneering urban market research firm located at the Local Initiatives Support Corporation. 

To download the press release for this competition, please click here.

Overcoming Challenges to Building Rehablitation

Larisa Ortiz is co-author of “Real Estate Redevelopment & Reuse, An Economic Development Practitioner’s Guide” [2000: out of print]. She has also authored articles and policy briefs on the topic of building rehabilitation, including “The Politics of Rehabilitation” [2004] published by the Rappaport Institute at the Harvard Kennedy School of Government.

Many commercial districts face similar challenges when considering the reuse of historic buildings in their commercial districts. Originally, I got my start in this field because of a deep concern for historic buildings and a deep desire to see historic buildings successfully incorporated into commercial district revitalization strategies.

Zoning

A recent New York Times article entitled “The Use Changes; the Look Stays” articulates the challenges of using historic buildings quite clearly – zoning laws that are often antiquated and do not allow for a mix of uses (mostly residential) on upper-floors.

In the case of Ossining, the New York Times noted that the mixed-use rehabilitation that allowed for the rehab of this beautiful bank building resulted, in part, from Village rezoning efforts that allowed for residential uses above commercial uses within downtown commercial district.

Zoning and building codes that prevent or discourage rehab projects are actually not all that uncommon. Some states have gone so far as to create a distinct set of codes that apply to building rehabs. See more on New Jersey’s Rehabilitation Subcode which is a national best practice in how zoning can help facilitate rehab, rather than impede rehab. The subcode creates a set of rehabilitation requirements distinct and separate from those for new construction. The reason why this is important is because often times, upgrading an older building to meet building code requirements for new buildings is impossible without starting from scratch. So what typically happens is that building codes are applied and changed on a case by case basis - which can add significant and unknown costs to a project - costs that cannot be defined at the outset of a project. This kind of risk is one that many developers will avoid - choosing instead to work on buildings and new construction where building codes and expectations are more clear cut. By clearly defining buildig code upgrades and expectations for older buildings, the building can be rehabbed in a way that ensures user safety, but that takes the guesswork out of how much these upgrades will cost, thereby removing some of the risk to the developer.

Another issue that frequently comes up is the need, although not always the requirement, for parking. In many communities, the marketability of residential apartments mean meeting the parking needs of prospective residents. Sometimes we forget this, but not every market allows for living without a car – so developers need to incorporate parking in one way, shape or form.

Financing: Not all Funding for Rehabilitation is Created Alike

As valuable as the Historic Tax Credit may be, the credit places a number of restrictions on rehabilitation, and sometimes makes a project financially unfeasible. In the case of a project I worked on in Boston many years ago that involved a former convent, the space as originally configured included a great deal of communal space for the nuns. A historic rehab would have to maintain the integrity of this communal space, i.e. leave it open, thus reducing the net leasable area and subsequently the level of debt service the project can carry.

In the case of the buildings profiled in the Times article, funding came through a variety of sources. Interestingly enough, none included the Historic Tax Credit. Instead, funding came from “$1.2 million from Westchester County, $480,000 from the New York State Affordable Housing Corporation, a traditional $2.6 million mortgage and the firm’s own equity.” I honestly don’t find it particularly surprising that Historic Tax Credits were not used for this project. Adding that layer of oversight might have further complicated the project for the developer – who indicated that it was in fact a more complicated project than they typically tackle.

In my experience, I have found that it is not uncommon for rehab projects to incorporate a mix of federal and state funds for affordable housing. Most common among this is the Low-Income Housing Tax Credit. The renovation of older buildings for the purposes of affordable housing is often the first step towards developing downtown market demand – and I have seen it serve as an effective catalyst for market rate development along commercial districts as well.

Overcoming the challenges associated with building rehab is not easy – and it does take a developer willing and able to tackle challenges and obstacles – but it is not without its rewards. The return of these iconic buildings to the housing and retail stock can be a wonderful stepping stone for overall commercial revitalization.