Where, Oh Where Are Retailers Going?

July 1, 1996

Crate & Barrel, Saks Fifth Avenue, the Gap, and other national chains are setting up shop in some out-of-the-ordinary locations. Retailers hope these alternative sites—in gritty urban neighborhoods and tony town squares—will attract consumers who may not shop in their mall store.

With the struggling retail industry desperate to attract a shrinking pool of free-spending consumers, national chains are looking to new avenues to reach shoppers.

But the avenues that retailers are choosing no longer lead directly to a shopping mall. Instead, many retailers are opening new stores near consumers' neighborhoods.

"Retailers want to locate near where people work or where they live," says David Gustafson, of Arroyo & Coates, an investment real estate brokerage company in San Francisco. And those unconventional locations offer leasing and investment opportunities in their areas, Gustafson says.

One way of attracting consumers is to offer "streetscape" shopping. Industry analysts say it provides a welcome change from enclosed malls. Consumers can stroll outdoors and choose among restaurants and entertainment. Stores in urban neighborhoods and suburban centers also promise higher profit potential than those in a mall, since retailers draw on heavy pedestrian traffic---office workers, tourists, and residents.

Retailers are "trying to reach the customer in as many ways as they can," says Kevin Gray, senior vice president of Landauer Associates Inc., a real estate consulting firm in New York. "The open-air format is appealing to today's lifestyle."

On the downside, leasing space can be expensive, even when retailers are given property tax breaks. Traffic, lack of parking, and safety concerns can pose other challenges to an urban location. But some retailers aren't daunted by those downers.

Saks Tries Out the Town Square

Of the five new stores that Saks Fifth Avenue is opening this year, two will be in affluent town centers. Saks is opening a small store in a village square in Greenwich, Conn., and a resort shop in a town square in Charleston, S.C. The other three stores are opening in malls in Florida—Sarasota, Fort Myers, and Orlando.

"We're experimenting with a concept of putting an edited version of a Saks Fifth Avenue right in the heart of where our targeted customers are," says Wayne Hussey, senior vice president in the real estate division of SFA. If the Greenwich store does the sales volume SFA is expecting, Hussey says, the department store will open in other similar locations.

Ron Kaplan, vice president of capital markets at Federal Realty Investment Trust, Bethesda, Md., says retailers typically enjoy higher sales profits in a town center with a higher density of consumers than in a regional shopping mall. In some cases, he says, common-area charges such as heating, air-conditioning, and maintenance drive up operating costs for retailers in malls, making village squares more desirable.

For example, a retail store in the center in Greenwich, Conn., should expect to earn $600--$800 in sales per square foot, Kaplan says, but the average mall retailer does just under $200 a square foot.

To put it another way, Kaplan says, the average rent for a superregional mall, or large mall, in 1994 was $24.50 per square foot. "It's very expensive if you do $150--$200 a square foot in sales," he says. "More than 12 percent of your sales have to go to occupancy costs."

C&B Likes the Neighborhood

Stan Nitzberg, a commercial broker who represents Crate & Barrel, looks for urban neighborhoods with potential. And he's not swayed by the negative side of doing business in an urban jungle. He says sales volume has been 25 percent to 50 percent higher for the chain's "neighborhood" stores—including one near American University in the nation's capital, one in Lincoln Park in Chicago, and one in Spring Valley in Washington state—compared with its regional mall locations.

"The sales volume is phenomenal," says Nitzberg, a principal in the brokerage firm Mid-America Real Estate. "We're looking at sites in Dallas now. Wherever there is an opportunity to be in an urban residentially based area, we're going to try to build a store.

"People don't want to drive as far to shop, and it's a nice aesthetic statement, too," he says. "You're not tied up in a closed mall."

With such potential gains for retailers, Nitzberg urges other brokers to think creatively about transforming properties in urban environments.

"For things that were always thought to be industrial or used as office space," he says, "your mentality has to be it's not going to be an office site but it could be a great retail site."

THE WINNERS: Power Centers

In-town shopping isn't the only factor putting pressure on regional shopping malls. Today value-oriented power centers are popping up in suburban locations booming with new-home construction.

Power centers draw crowds. Virtually every store in a power center is a big name: Bed Bath & Beyond, Barnes & Noble, Best Buy, Baby Superstore, Office Max, Staples, Home Depot, and Wal-Mart are among such retailers.

They're known in the business as "big box retailers" given the generous size of their stores, and "category killers" for virtually eliminating the competition in their particular category of merchandise.

What's the good news for retail brokers? "The leases the category killers write tend to be very long-term leases, which is attractive for an investor," says David Gustafson, of Arroyo & Coates, a real estate investment and brokerage company in San Francisco. "The longer the lease, the more secure the income stream, the more attractive an investment."

Analysts say power centers are the only retail property in a growth mode. "Superstore retailing is changing the way America shops," says Gary Ralston, president of commercial Net Lease Realty, Orlando, Fla. "The emergence of the superstore is an overwhelming trend nationwide."

THE LOSERS: Regional Malls

Regional malls were once considered an almost no-risk proposition by real estate analysts and investors. Now mall owners are feeling the pressure.

Industry analysts say high tenant turnover, store bankruptcies, flat sales averages, and competition from a proliferation of retailers have impacted even the most successful of malls.

"A lot of the mall retailers were fat, dumb, and happy and didn't experiment with other formats," says Kevin Gray, senior vice president of Landauer Associates Inc., a real estate consulting firm in New York. John Melaniphy, a real estate consultant and president of Melaniphy and Associates in Chicago, says mall retailers in general are having trouble "making their numbers" at a time when consumer spending is down and value-oriented superstores are taking a bite out of mall business. It's going to take more time to sell malls. "There's a concern on the part of the investor that commercial real estate is overextended and that there are going to be more failures."

"Customers have lost their affection for malls in some cases," says Bruce Van Kleeck, vice president of membership services for the National Retail Federation in Washington, D.C. "Malls have a true challenge on their hands to become more creative to attract customers. Before, people went to malls for the shopping. Now they're looking for entertainment as well."

Carole Fleck is a former senior editor for REALTOR® Magazine.

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