June column for Builder & Developer magazine now online

My column for the June 2014 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "The Changing Face of Retail Forces Developers to Adapt," I wanted to revisit mixed-use communities (especially residential/retail) and how developers are having to adapt to the changes in the way that retailers serve their customers. An excerpt:

Today, many retailers are reducing their footprints, boosting their online presence and merchandising fewer products in their stores to avoid “showrooming,” in which customers compare products in person but buy them online. As a result, the future of the mixed-use project is also in flux, with the winners and losers likely to be determined based mostly on how well developers match retail stores with local and visitor demographics...

In the short run, businesses which can’t be replaced by online shopping – such as health clubs, yoga studios, doctor’s offices and restaurants – can take up some the slack, but in the long run the very idea of the traditional retail store is being challenged.

Not surprisingly, these changes are also impacting the types of smaller, mixed-use projects encouraged by cities, but often leave absorption of the retail space to the whims of the market as well as the marketing expertise of the local broker. So far, there seem to be two ways to goose retail demand: appeal to specific demographics or create an in-person experience unavailable online...

To read the entire column, click here.

To read the entire June 2014 issue in digital format, click here.

Retail and the Evolution of Mixed-Use Developments

In 1999, when Los Angeles developer Rick Caruso razed an under-used, 25-acre parcel housing an orchard and nursery near the historic Farmer’s Market in Los Angeles, he replaced it with The Grove:  An “Urban Resort” of nearly 600,000 thousand feet of retail and entertainment space that now gets more visitors than Disneyland.  In the process, Caruso Affiliated unveiled a type of high-quality, experiential shopping experience that made him a billionaire even as retail sales moved increasingly online.

Whether intentional or not, Caruso’s focus on the upper end of the retail spectrum has allowed his company to prosper at a time when the economics behind commercial land uses is in flux.  Today, many retailers are reducing their footprints, boosting their online presence and merchandising fewer products in their stores to avoid “showrooming,” in which customers compare products in person but buy them online.  As a result, the future of the mixed-use project is also in flux, with the winners and losers likely to be determined based mostly on how well developers match retail stores with local and visitor demographics.

Since four of every five jobs in the country are in cities, large retailers like Wal-Mart and Target have already been adopting their suburban model to infill locations in which two-story buildings, multi-story parking garages and even escalators for shopping carts are becoming commonplace.  For existing shopping malls such as South Coast Plaza in Costa Mesa, CA, remaining competitive is also about offering experiential amenities including a VIP lounge, a meditation room and even a “gentlemen’s room” where visitors can watch sports while enjoying some wine or beer.

However, for other existing malls with less favorable demographics and middle-market anchor tenants such as Sears or Kohl’s, the loss of smaller retail stores including RadioShack, Abercrombie & Fitch or Eagle Outfitters has forced operators to get increasingly creative.  In the short run, businesses which can’t be replaced by online shopping – such as health clubs, yoga studios, doctor’s offices and restaurants – can take up some the slack, but in the long run the very idea of the traditional retail store is being challenged.

Not surprisingly, these changes are also impacting the types of smaller, mixed-use projects encouraged by cities, but often leave absorption of the retail space to the whims of the market as well as the marketing expertise of the local broker. So far, there seem to be two ways to goose retail demand:  appeal to specific demographics or create an in-person experience unavailable online.

In areas with large Hispanic populations, developer José de Jesús Legaspi has refashioned nearly ten failing malls into multi-generational cultural centers in which grocery stores can co-exist with medical offices.  While grandparents can socialize for hours in public spaces, many of the storefronts are actually business incubators helping to build “the Mercado” (or central market) one at a time.  In the process, traffic at each of his malls has reportedly grown to between four and six million per year.

At Caruso Affiliated’s Americana at Brand residential and retail center in Glendale, CA, by including free community meeting space and government-related offices in the mix, those visitors attending a book club meeting or paying a traffic ticket are much more likely to stay for a bite to eat or shop for a last-minute gift.  In essence, Caruso’s mission isn’t so much to build town centers as it is to “build the center of town.”

When it comes to experiences, since not everyone can duplicate the special events, dancing fountains or streetcars at Caruso’s larger projects, technology will certainly seek to level the playing field for smaller operators.   A perfect fit for a mixed-use community would be those retailers who seamlessly merge off- and online services so that it’s easy to order an item and either pick it up in person (which has worked very well for both Wal-Mart and Best Buy) or have it delivered the same day (which is being tested in select markets by Amazon and Google Shopping Express).

To encourage repeat visitors and maximize per-visit sales, some chains are experimenting with apps that will recognize a smart phone, identify a shopper’s past history and immediately send them an active coupon for a favorite item.  Other stores allow customers to keep current on the latest promotions by downloading apps to multiple devices.  Even better, should a measure allowing all states the power to tax most internet sales pass, a more level playing field for traditional retailers could give them just the boost they need to remain competitive.

Retail tenants starting to fight or flee

It seems as if the current economic recession is now firing up the 'fight or flee' response in some retailers' hypothalami: when landlords refuse to negotiate leases, store owners are teaming up, filing for bankruptcy protection or simply gathering up their belongings and fleeing in the middle of the night. It's happening in downtown Los Angeles, in San Diego and elsewhere.

Firstly, a post at HousingCrisis.com on this new trend summarizes stories from Mish, Calculated Risk and, finally, what's happening in the apartment market from Multi-Family Executive.

Secondly, while conducting research for an upcoming economics conference in San Diego on April 14th, I came across this story in the San Diego Union-Tribune on what's going on in that city's waterfront Seaport Village:

Merchants at the eclectic Seaport Village shopping complex are seeing something they've rarely seen amid the T-shirt shops and jewelry stores: empty storefronts and liquidation signs.

There's the shop near the waterfront that once housed The Cabbage Tree. Its owners recently took the “midnight run” – emptying the gift store in the wee hours and disappearing, leaving landlord Terramar Retail Centers to try to collect on the lease obligation.

Across the sidewalk, there's the “Closed for Inventory” sign hanging in the window of Whitt/Krauss Objects of Fine Art. The art gallery filed for Chapter 7 bankruptcy in January, owing creditors for everything from a $5,640 catering bill to about $250,000 in projected 2009 rent and maintenance fees.

And a few steps away, the Big Dogs sportswear shop is holding a liquidation sale as the Santa Barbara chain prepares to close all of its 71 stores.

It's the perplexing problem afflicting many shopping malls, strip malls and retail complexes across the United States: Owners of commercial properties are trying to preserve cash flow to maintain their mortgage obligations and make a profit. Retail tenants, hard-hit by the recession, are asking for rent reductions and in some cases are shuttering their businesses and leaving empty storefronts...

Many analysts predict that retail bankruptcies and shopping center vacancies will accelerate sharply this year if the economy continues to deteriorate and consumers remain on the spending sideline. And as stores close, landlords will have trouble repaying loans.

While no one knows the ultimate price tag, as much as $1 trillion worth of U.S. commercial property could undergo foreclosure if the economy and the credit markets don't improve, according to Stanley Tate, president of Miami-based Tate Enterprises and an adviser to the Federal Reserve.

The real estate developer said landlords and tenants need to be negotiating now to work out new lease terms or other financial breaks that will allow stores to survive, and allow landlords to maintain some cash flow on properties that might otherwise be vacant.

“It's going to get worse, not better, for at least another year, and the smart landlord will do their best to work with tenants to see what they can do to keep them in business,” said Tate, who a few months ago gave all his tenants in several commercial properties a 15 percent decrease in rent.

In some cases, tenants who had weak businesses to begin with or have products particularly hard-hit by the recession can't be salvaged, Tate said. And some landlords, particularly those who bought or developed properties in the boom years, have little wiggle room to renegotiate lease terms because of their own debt, he said...

Whether some way to provide rent or other financial relief is devised, it will come too late for art gallery owner Jack Krauss.

Krauss said he approached Terramar in November about reducing his rent and fees to $15,000, with an upside for the landlord if sales improved. Krauss said he was told the company would take it under consideration, but he never got a formal response.

“A rent reduction would have made a big difference; it would have given us a fighting chance,” said Krauss, 72, whose business filed for Chapter 7 bankruptcy. “I was fighting to the end, and they (Terramar) were aware of it.”

Like many tenants at Seaport Village, Krauss, who has operated the gallery for more than 25 years, signed a personal guarantee on his lease. So his only option is to reach a settlement with Terramar or file for personal Chapter 7 bankruptcy to eliminate the rent obligation.

“This took all my reserves, my savings and the money I'd put away for retirement, and I'll probably have to sell my home,” Krauss said. “I'll have to find a good doorway to live in."

Very sad indeed.

Retailers prepare for major change in 2009

Following a fairly abysmal second half of 2008 for the nation's retailers, many of which sought volume and multiple locations in order to grow sales and profits at the expense of basic metrics such as same-store sales and sales per square foot, 2009 will likely prove a watershed year for many famous retailing brands. Does this mean investors like Eddie Lampert (i.e., Sears) weren't the retailing geniuses once extolled by the business press? From a Wall Street Journal story (hat tip: Calculated Risk):

This year's retailing slide -- when stores were forced to cut prices to convince wary consumers to spend -- promises to have a lasting impact on the way the retail industry operates. Many retailers are rethinking how they do business, as others prepared for a large number of bankruptcies and store closures...

...retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year. And luxury-goods makers already are working to cut the long lead times between orders and store delivery as a way to reduce risk.

"We will have a lot fewer stores by the middle of 2009," says Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession."

More Bankruptcies: Corporate-turnaround experts and bankruptcy lawyers are predicting a wave of retailer bankruptcies early next year, after being contacted by big and small retailers either preparing to file for Chapter 11 bankruptcy protection or scrambling to avoid that fate.

Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11. AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 25.8% of 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010. In the previous two years, the firm had estimated 4% to 7% of retailers then tracked were at a high risk for filing. Retailers are particularly vulnerable to a recession because of their high fixed costs...

Recent changes in the bankruptcy code make it more difficult for retailers to emerge from bankruptcy reorganization. The changes, passed in 2005, shortened to 210 days the time retailers have to determine whether or not to assume real-estate leases, limiting the amount of time they have to complete their restructuring. Lawrence Gottlieb, a New York bankruptcy attorney at Cooley Godward Kronish LLP says that only two retailers have successfully emerged from bankruptcy proceedings since the amendments to the code were passed.

In turn, because the debtor-in-possession market for financing bankrupt companies remains squeezed, many bankrupt retailers could quickly turn into liquidations -- as was the case earlier this year with chains Linens 'N Things, Mervyn's and Steve and Barry's...

Less Selection: Several department stores, including Saks Inc. and Neiman Marcus Group Inc., already have announced that they would narrow the range of merchandise they carry and drop vendors that don't perform. The cutbacks will ripple through the apparel industry, hurting the companies that are most exposed to the wholesale channel. Companies such as Jones Apparel Group Inc., for example, generate 50% of sales from department stores...

As a result of such cutbacks, a number of smaller fashion brands that have thrived over the past decade as luxury boomed, are expected to struggle or fail. "There's no question that you are going to see bankruptcies in the designer world," says Peter Boneparth, a Kohl's Corp. director and former chief executive of Jones Apparel...

Fewer Concept Stores: Many retailers invented new brands to spur rapid growth in recent years. But many such concepts already are being abandoned or cut back. Neiman Marcus said it would postpone plans to expand its Cusp store concept. Pacific Sunwear of California Inc. closed down its d.e.mo. stores earlier this year, and AnnTaylor abandoned plans for a "modern" baby-boomer concept.