January 24, 2020

Woman: You can't say Americans are not more violent than other people.

Fred: No.

Woman: All those people killed in shootings in America?

Fred: Oh, shootings, yes. But that doesn't mean Americans are more violent than other people. We're just better shots.

-Barcelona (1994)

A new year and a new decade: a good time to talk about the future of retail development. Don’t you know what it will look like? “Not like today” is an easy answer. After that . . .

For decades we’ve built too much retail in the US. We have more retail square feet per person than any other country (23.5 sf each, to be precise. Number 2? Canada at 16.8*).  The Doubters, aka ICSC, answer back “But Americans spend 35% more money than our nearest rivals! We aren’t over-builders. We’re just better spenders.”

* Interesting tidbit: Walmart occupies 14% of all retail space in the US.

That may be true, but as retail sales inexorably move from in-store to online, the existential question about all this retail space only gets more urgent: What Next? 

One line of thought – neatly summed up here by the clever folks at McKinsey--  is that in order to survive, soft goods / fashion retail has to move from large format stores into a higher number of smaller “neighborhood” stores, possibly without inventory and definitely focused on “experiences.” Let’s call this the Bonobos - Warby Parker - Nordstrom Local school of thought.

FastCompany took a slightly different angle this month.  To them the future of retail development looks like the past: a return to walkable mixed-use neighborhoods with small shops – both local and national— below offices and apartments and hotels. The exact mix of stores may not matter. It’s the experience of shopping that fills the need. We’ll call this the Santana Row - Grove neighborhood retail approach.

Let’s assume they’re both right, because on the whole I think the data supports their claim(s). If so there are three fascinating conclusions to draw.

The first is that today property owners have no way of knowing the true value of retail space (all the lenders just fainted right there). I’ve had this conversation twice in the last month with two exceptionally forward-thinking people. If they and other adherents of the Nordstrom Local school are right then the value of non-food retail space is not derived from actual in-store sales but from multichannel sales potential driven in part by that store. And we as landlords simply don’t have that sales data. The only ones who do are the financial institutions and the national tenants, and they aren’t sharing.

The second conclusion is that mixed-use retail should not be owned separately from the rest of the project. It is worth too much to the tenants on top. Its Economic Value may not be knowable, but its Vibe Value is, and controlling that is critical. A great deal of our consulting business is built upon this very premise. We often act as the fee “owner” of the retail, to ensure that it looks rights and runs well to the benefit of the overall project. The retail out front, however small, can make or break everything else. 

The last conclusion is the most controversial of all, but perhaps one you have come t0 as well: the vast majority of retail buildings built in the last sixty years are totally obsolete. Too many square feet in too many single-story standalone buildings that are too big and too wide and too deep, wedged behind too many parking spaces, in towns that aren’t adding too many people, by choice or by circumstance.

What are we going to do with all that dead or dying space? Knock it down and build new neighborhood retail? The challenge for new neighborhood retail is that, as a country, we generally don’t have neighborhoods. About 70% of the US population is suburban. After defeating the Nazis our grandfathers didn’t build neighborhoods, they built cul-de-sacs.

Cul de sac population densities don’t allow for cute walkable retail streets. What is walkable? Ten residents per acre is defined by many planners as the lowest limit of urbanity. Without a dense urban fabric — FYI ten people per acre is 180,000 in a 3-mile ring— you have to take a page from the Santana Row - Grove School and build giant places for people from miles around to drive to. In order to walk. Only in America.

But the giant projects are prohibitively expensive to build and anyway they take about a hundred years to complete. Suburban office rents often don’t justify new construction, no matter how cool it is. And not to be a trendy intown elitist (although I am) but many suburban municipalities won’t allow apartments: their constituents moved out there to get away from renters in the first place. Some very good and very experienced town center developers have retreated to the sidelines as of late for these very reasons.

We think one answer is reverse-engineering older suburban centers, but that takes a lot of buy-in. Reduce parking, add apartments (gasp!), demolish some perfectly fine buildings, build new ones without significant pre-leasing and focus on events. . . it isn’t easy. Another answer is intown / infill development, but there are only so many khachapuri-eating hipsters to go around. Creating fantastic retail as a means to increase office value is our sweet spot at Revel, but you can’t do that everywhere.

Whatever the answer is, know that we’re in for an interesting decade. I can’t wait to see what we’re saying about it all in 2030, and I hope you’re a better shot than me.

What We’re Working On. We just finished consulting for a client with a (formerly) anchored strip center in the Atlanta suburbs. The plan we collectively devised is to replace much of the parking with new medium-density office and retail buildings, and to focus on lots and lots of community events. We’ll keep you updated as it progresses.

Where We’ll Be. Orlando, Charlotte, Los Angeles and Nashville (for ICSC Open Air) in the next few weeks. Those that know me well know that my home life has only two seasons: softball (both daughters play) and not-softball. Tryouts are this weekend, and so the Banks girls and dad and mom will be full bore fastpitch until July 4th. If all else fails you can probably find me at Chastain Park for the next five months.

Thanks to everyone for the kind words, and for sending these notes along to others who might enjoy them. In just a few short months the list has grown to almost 2,000 subscribers. Not too shabby!

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As always, thanks for reading. Feel free to drop us a line if there is ever something fun we can work on together. 

Cheers,

 G