Since even before the onset of the Great Recession at the end of 2007, a new normal for downtowns has been emerging. Downtown retailing, office use, entertainment niches, housing development, population growth, transportation use, etc. have all experienced significant changes. From my discussions with downtown leaders and merchants, municipal economic development officials and developers, my reading of many articles, my participation in online discussions and my assessments of a number of revealing recent RFPs, I have concluded that the vast majority of downtown leaders and their organizations are not adjusting to these rapidly occurring changes. Too often they demonstrate that they are scarcely aware of them, let alone adjusting their operations to deal with them. Some of these changes represent potential growth opportunities, while others pose strong existential threats.
Downtown Retail’s New Normal
In this posting I will focus on retail. Over the past five years the demand for retail space has changed dramatically. For example:
- There’s been a paradigm change in consumer behavior with the emergence of the “deliberate consumer” who spends less and with greater deliberation, considers needs more than wants, and who uses credit far less often.
- The Internet is now involved in over 45% of all retail sales — if retailers are not in on the search, they are unlikely to be in on the sale
- An integrated multichannel approach to retail is increasingly necessary– brick and mortar, internet, b2b sales, trunk shows, concierge services, etc. — for merchants large and small.
- The impacts of the internet and the recession have been strongest on GAFO merchants, with the big box stores and small merchants among them hit the hardest. Small downtown merchants who sell GAFO type merchandise are at a growing disadvantage if they do not have an effective presence on the Internet to complement their brick and mortar stores, yet most lack the required resources and skills to create and maintain such a presence. Without an effective e-commerce capability, these small merchants are likely to fail and produce more vacancies that are hard to fill.
- In many medium and large downtowns, small independent merchants are disappearing at alarming rates because of unaffordable high rents, decreased consumer demand and strong e-commerce competition.
- Nationally, the amount of retail space decreased by 259 million SF between 2001 and 2011 and is expected to drop by another 210 million SF by 2016. (1). The number of real estate experts who recognize that the nation has far too much retail space has grown substantially.
- The suburbs are saturated; growth opportunities are shifting to dense urban areas and possibly some ex-urban areas.
- Today, only about one-third of the 1,300+ malls in the U.S. are high-growth, investment-grade properties; another one third are in deep trouble and prone to either closing or being re-purposed. (5) The successful malls are increasingly taking on the look and functions of successful downtowns and adding many non-retail functions.
- Big box and category killer stores – e.g., Best Buy, Staples, Circuit City, etc. – have been hit hard by both the recession and strong e-commerce competitors.
- Generally, retail chains are looking for fewer and smaller locations. Internet sales mean that many now require less on site storage space for inventory (4). Many use the resulting cost savings to pay for improvements in their own e-commerce capabilities, while others are developing the smaller formats to ease entry into tight urban contexts.
- But, the smaller formats eventually may also go into suburban and ex-urban locations, once the chains master them. This may mean that Walmart, Target, Best Buy, et al may be trying to enter more, not fewer communities.
- Banks are no longer gobbling up prime downtown retail sites with their branches as a result of e-banking, especially the growth in mobile.
- Many downtowns continue to report significant vacancies and that, when filled, the likely new tenants are personal and professional service operations, not retailers.
- Downtown food related operations (e.g. groceries and restaurants) and personal services have been the most successful sectors from 2007 through 2012.
Current Response Patterns
Here are some of the response patterns I have observed:
- There is a strong propensity to believe that, once the ill effects of the Great Recession are overcome, there will be a return to the way things were prior to 2007. Few are aware of the structural changes in the demand for retail space and many of those who are have not really grasped their full implications.
- There seems to be little recognition that for the foreseeable future it will be much harder for most downtowns to attract retail chains than in the pre-2007 years and that if they want to have any significant retail, they increasingly will need to:
- Accurately know which retail chains they can realistically expect to attract
- Go beyond traditional retail marketing and promotions and get deeply into economic gardening type operations aimed at developing and growing small merchants.
- No one is talking about whether, in the new retail environment, a small “big box” store, like a 15,000 SF Walmart, could be a good thing for their downtown. But, I bet that within the next five years this will be an issue for a surprising number of communities.
- As talk of downtown multi-use projects has started to come back, the inclusion of retail seems to be divided between those who see retail returning to its pre -2007 days and those who believe retail is now too risky to include at all. Perhaps there is a viable middle ground of fewer retail tenants who can be recruited to and succeed in such downtown projects.
- Local political leaders too often still expect new downtown mixed use projects will attract a bevy of trophy retail tenants.
- A surprising number of downtown leaders will acknowledge the need for local merchants to develop a multichannel approach with a strong e-commerce component, but not want their organizations to get too involved in assisting their merchants make this transition. This seems to be largely due to their own lack of knowledge about e-commerce , often age related, and their organizations’ financial constraints.
- On the other hand, a good number of downtown leaders do want to help get their merchants involved in e-commerce and some have programs to do so. However, too many of these programs are simply e-directories and do not provide the merchants with needed marketing and transaction functions. Few appeared to based on a knowledge of how websites, emails and the social media are used by shoppers and which market segments are most drawn to each of them.
- The complexity of developing an effective downtown program that can facilitate small merchant e-commerce capabilities is evidenced by the fact that our largest retailers are still trying to figure out how to merge their e-commerce and brick and mortar operations and how to effectively use the social media.
- The recently announced reorganization of Staples is a good example of this. Motivated by declining sales, adverse consumer trends, the growing importance of its online sales, Staples’ new strategic plan calls for: increased investment in its online and mobile capabilities, further enhancing its multi-channel strength by uniting the management of its online and brick and mortar operations, expanding the range of the merchandise it sells, and an overall 15% reduction in retail store square footage to increase their productivity. The later will entail both store closings and downsizings. (2, 3).
- Few downtown or Main Street organizations have tried to strategically face the problem of what to do with their excess and often vacancy –prone retail spaces.
- Faced with vacancies, many downtowns have welcomed, as inevitable, personal and professional service operations as tenants for vacant prime retail locations. However, the lack of enough high quality retail spaces has long been a fundamental barrier to revitalizing downtown retail sectors, so communities following this tack may be severely harming their long-term retail prospects. Admittedly, filling these vacant prime storefronts is highly desirable, but perhaps more innovative and retail-friendly responses could be developed, such as:
- Tying rentals to service operations to a high vacancy rate (say 12%) in the downtown or blockface
- Targeting the vacant prime storefronts for such uses as a retail incubator or a location for other types of start-ups
- The vast majority of the staff and financial resources that downtown organizations now allocate to improving their district’s retailing still goes for old style events and marketing programs. Few of these programs have been evaluated to determine their ability to stimulate more sales and customer traffic. Too often, however, their expense and organizational inertia leaves few dollars left for the development and testing of new and more effective marketing programs.
What Is Needed
The response patterns described above strongly suggest that if downtown leaders and their organizations continue in their “same old, same old” views and operational behaviors, painful failures and missed opportunities are highly probable. What is happening with retail is also frequently happening in the office and entertainment sectors.
Downtown leaders need to recognize that the new normal has emerged and that it is very dynamic, characterized by a frequently changing socio-economic environment. This means that their organizations’ strategies and programs must be frequently assessed and updated to assure their continued relevancy and efficacy. It also means that downtown organizations need to have strong line items in their budgets for developing and testing out on new programs, program evaluations and strategic updates. It also means dropping or down-sizing longstanding, but ineffective programs. All of these are now quite anathema in too many downtown organizations.
- Mark Heschmeyer, “Storefront Loss Equals Warehouse Gain”, CoStar Group News: National, Dec. 14, 2011
- Joe Weisenthal, “Staples Announces Major Store Closures — Will Take A Charge Of More Than $1 Billion”, Sept. 25, 2012, 8:21 AM Business Insider www.businessinsider.com/staples?store?closures?2012?9
- Lisa Eckelbecker, “A change of space: Staples again finds smaller is better”, Worcester TELEGRAM & GAZETTE, June 26, 2011
- Mark Heschmeyer, “ Virtual War Games: Brick and Mortar Retailers Battle Online Retailing,” CoStar Group News: National, November 09, 2011
- Randyl Drummer, Can This Mall Be Saved? Elements Needed for a Turnaround Include Lower Debt, Deep Pockets, CoStar Group News: National , October 10, 2012