Downtown Tourism: Boon or Bane?

By N. David Milder


As my years spent in the downtown revitalization field increased, I gradually realized that I unconsciously had been working with the view that bigger and better defined a successful downtown. With time, I also realized –perhaps in an embarrassingly late fashion — that making a downtown better was much more important than making it bigger. Indeed, for many communities, a bigger downtown would essentially change the whole character of the town.

As I came to realize that better was more important than bigger, I also began to think more critically about tourism. Downtowns large and small are often lured into economic growth strategies with large tourist attraction components. NYC’s mayors and economic development agencies, for example,  for decades have targeted tourist growth and lauded how many millions are attracted annually, how much money they spend, and how many jobs they generate. Smaller communities, especially those in rural areas, often see tourism as a major way to overcome the small populations and low consumer spending power in their market areas. It is often seen as a way to strengthen a Main Street’s retail shops. Well regarded organizations that work to support Main Street and downtown revitalization often suggest increasing tourism as a viable component of an economic growth strategy – as do many economic development consultants. Unfortunately, tourism can be a two edged strategic sword, a boon or a bane – or even a boon and  a bane. In my experience, too may downtown andMain Street leaders leap at a tourist growth strategy without properly thinking through its possible drawbacks as well as its advantages

Some Boons and Banes

The Character of the Community. Over the past year, several articles have appeared that indicate that I am far from the only one who is concerned about what is, for me, the worst  possible drawback about tourism: that too many tourists can change the character of a downtown and/or the community in which it is located. For example, the November 18, 2018 edition of the Washington Post had an article headlined:

“DETOURING. Top world destinations are overrun. Take our suggestions for roads not taken.”

Earlier in the year, the German newspaper Der Spiegel noted that European tourism officials were reporting frequent problems of “overtourism,”where too many tourists and/or unacceptable tourist behavior threaten to severely diminish the very attractions that lure the tourists.  In response, local officials:

“…want to redirect the streams of tourists, as officials in Rome are trying to do, or even to limit them, as Dubrovnik is doing. Barcelona is no longer approving new hotels, Paris has strictly regulated Airbnb and other apartment?rental platforms….(1)

Nicole Gelinas, in a very thoughtful article in the City Journal, has argued that:

“While much of this change ( increased global travel) is positive in economic terms, the ongoing invasion of global cities by people who stay for a few days or a few weeks can fundamentally transform the character of places whose unique charms are what attracted tourists in the first place.” (2)

Gelinas goes on to argue that in the West’s central cities, tourist pedestrian behavior has changed their character:

“Central­ city sidewalks designed decades or centuries ago can’t handle today’s foot traffic, particularly when people don’t walk like the local commuters and residents of decades ago did.Today’s pedestrians walk slowly, several abreast, stop frequently to take photos or look at maps on their ever­ available phones, and wheel bulky luggage behind them, ensuring that fast walkers can’t pass. Tourists to a large extent have become the central cities.” (3)

Unhappily, Yogi Berra’s quip that “nobody goes there anymore, it’s too crowded” is increasingly applicable to many of our most attractive city centers, public spaces  and arts venues. Can you really appreciate the Mona Lisa at the Louvre if you are standing 50 feet away in a dense crowd (while few are looking at the marvelous Raphael’s and Titians nearby?) Or appreciate an exhibition at NYC’s MoMA in rooms packed like a sardine can, but with people and no olive oil? Most visitors to both museums are tourists – 75% at MoMA, 70% at the Louvre.

Many NYC residents stay away from Times Square because it is too crowded, filled overwhelmingly with tourists and passé attractions – we no longer feel it is one of “our” places. It is this ability of overtourism to make local residents feel dispossessed that is most troubling.

Sadly, too,  problems being caused by tourism are not confined to large central cities. In smaller towns, it is tourism’s insidious ability to make local residents feel dispossessed that is perhaps even more troubling, because a strong sense of community is what so many residents cherish about living in them.  I have run into small town residents who feel that way in a number of communities such as Montauk, NY, Chatham, MA, and Lambertville, NJ.  Montauk used to be known as the Hampton’s blue collar community, a great, affordable place that middle income folks could go for terrific fishing, attractive beaches,  and some good, if funky, eateries. Today, it is the pricey summer recreational town for affluent hipsters. The whole tone of the town has changed.  

In a very useful article, Tomoko Tsundoda and Samuel Mendlinger looked at the economic and social impacts of tourism on the small and very attractive town of Peterborough, NH( 4). They showed that there long has been an awareness of  a number  of wide ranging impacts, both good and bad, that tourism can have. On the positive side are:

  • Increased jobs
  • More  business opportunities
  • More interesting shops and entertainments
  • Heightened demand for local housing and commercial properties
  • More tax revenues

On the negative side are:

  • Loss of the community’s character
  • Higher retail and restaurant prices
  • Higher housing prices
  • Businesses favoring tourist patrons over local resident patrons
  • Low-paying or unsustainable new jobs
  • Increased traffic and poorer air quality
  • More quality of life crimes

One of their most concerning findings was that wealthy families and working families may view the benefits of tourism quite differently.

Much can be said about each of the above impacts, but that would take a far longer article than this one. My key point here is that downtown leaders who are thinking about avidly pursing a tourist growth strategy should carefully assess these potential impacts on their communities.

Tourism as a Strategy to Improve a Downtown’s Retail

I do want to do a bit of a deep dive here because in recent years I have so often heard this argument offered by downtown leaders  to explain why a tourist growth strategy should be developed.

I would say that,  in my experience, almost invariably when clients and client prospects have suggested pursing tourist growth, their primary reason for doing so is to improve the downtown’s retail.  To put the potential benefits in some perspective, it is useful to look at how much of tourist spending goes to retail, see the table above. It shows that, for example, tourists in NY spent about $64 billion in 2016, but only about 9.9% of this hefty amount went for retail. Expenditures for recreation and entertainment were slightly larger 10.0%,while expenditures for food and beverages was much higher, 23.7%. All of these expenditures can help the types of merchants that downtown can attract – if there are those types of shops already present or if the tourist spending potential is large enough to spark their development. In many instances, these types of operations do not exist, and the tourist spending potential is not sufficient to stimulate their creation. Retail in MS accounts for a seemingly impressive 26% of tourist expenditures, but this is partially due mathematically to the extremely low expenditures for recreation and entertainment. In NC, on the other hand, tourist spending for retail rivals, in absolute dollars, those expenditures in NY, and surpasses it on a percentage basis, 20.2% to 9.9%. In NC, the percentages of tourist spending that go for both recreation-entertainment and food and beverages are relatively low, but the level of absolute dollars spent does suggest that retail merchants in that state are rather good at capturing tourist dollars.

The above table shows the percentages of tourist spending that went for food services, retail and recreation in 11 multi-county regions in PA in 2016.Retail  accounted for a lower percentage of tourist spending than food services or recreation. The highest percentage for retail expenditures among the 11 regions was 18% and the lowest was 12%.

My observations over many years suggests that towns with strong tourist sales all have strong retail offerings: outlet centers (e.g., Manchester, VT), major urban retail streets like Fifth Ave, Rodeo Drive, Michigan Ave, or ritzy tourist havens where lots of rich people have 2nd, 3rd or 4th homes (e.g.,East Hampton, Bal Harbor, Palm Beach).

Unique offerings in the other towns can indeed sell, but I hear more about how they can sell than I see merchants actually doing it.

In the towns most downtown leaders would want to emulate,  quality merchandise is offered to tourists in attractive and often charming shops.  Unfortunately, there are also towns that are tourist nightmares. I shall refrain from mentioning any of them, but they are usually busy, gaudy, and filled with a lot of shlock merchandise. As with obscenities, you know them when you see them.   

Suggested Take Aways

The above leads me to make the following observations:

  • Most downtowns should not expect tourism to be the savior of their retailing. Retail expenditures will probably typically account for only 10% to 20% of local tourist spending. Tourism can provide local retailers with the equivalent of the  whipped cream and cherry on top of a sundae, but not the two scoops of its ice cream.
  • Attractive local hotels and restaurants are likely to capture most local  tourist expenditure dollars.  Is a tourism growth effort worth it if those types of enterprises are by far the primary beneficiaries?   
  • Crappy retail shops selling crappy merchandise will usually not capture many tourist dollars.But the real danger is that, if there is a lot of such shops, they just will attract a lot of crappy tourists. This can create town – tourist problems.
  • The major retail needs in many smaller communities are grocery stores, pharmacies, a hardware store, etc., the types of neighborhood retail that tourist expenditures are unlikely to support. If tourist focused retail is dominant, and these needs are not met, then some hairy town –retailer/tourist problems can emerge.
  • To attract lots of tourists, your town needs to be well-located and accessible. If you do not have significant levels of auto traffic now, or strong nearby scenic magnets, assume that you probably cannot quickly build a base of local tourist attractions that will significantly increase the flow of tourist customers.
  • To succeed you probably need enough local attractions to keep tourists in your downtown for four times the length of time it took them to travel there.  Your downtown needs some real there, there.      
  • If there are significant tourist flows nearby and your downtown is not capturing significant traffic from them, correcting that should be the first order of business of any tourism development program.
  • Tourism that endangers the community’s character is never worth it. Why kill the goose that’s laying golden eggs?
  • Yet, tourism certainly can be beneficial for a downtown. Programs to attract more tourists should be thoughtfully designed, with an eye on possible emerging problems, not just a look at potential financial gains for local businesses and residents.


1. Der Spiegel staff. “Paradise Lost: How Tourists Are Destroying the Places They Love.”  Spiegel Online. . Posted: 08/21/2018 01:20 PM

2. Nicole Gelinas. “Planet Travel. Globalization has created a tourist boom in world cities—but masses of tourists create new challenges.” City Journal. August 31, 2018.


4.Tomoko Tsundoda and Samuel Mendlinger, “Economic and Social Impact of Tourism on a Small Town: Peterborough New Hampshire.”  J. Service Science & Management, 2009, 2: 61-70
Published Online June 2009 in SciRes (

Reconsidering Some Points Raised in My White Paper: “Toward an Effective Economic Development Strategy for Smaller Communities (under 35,000)”

The Challenges

In October of 2017, I posted the above referenced White Paper that outlined my thoughts about how the construction of economic development strategies for smaller communities, especially those in rural areas, should be approached (1). Since then, two data-related findings have come to my attention that have caused me to review some of the arguments I presented in that paper:

  • I argued in the White Paper, reflecting conventional wisdom among economic development experts, that the lack of jobs was seen as an important constraint on the ability of small rural communities to prosper and retain their populations, especially their Millennials. My recommendations were to try to improve the ability of residents to earn more money and to recruit new residents who would not need new jobs because they were retired and financially comfortable, could bring their jobs with them, or could create their own jobs. However, today, many rural counties, and probably the small towns within them, are sharing in the relatively low unemployment rates, under 5%, that are to be found across the nation. Do small towns in these counties then still need to enhance the earning power of their residents? Does my White Paper’s analysis on this point still stand or need revision?
  • A major thrust of my argument in the White Paper was that smaller communities should not focus their economic development efforts on chasing after employers who might bring lots new jobs to the communities because they are hard to recruit and relatively few of their residents would get the jobs (most would go to outsiders). Instead, I strongly suggested that primary strategic focus should instead be placed on their resident “contingent entrepreneurs” who are in relatively insecure employment situations and might constitute 30% to 40% of their workforces. The strategic approach I suggested was in essence an attempt to retain and expand these micro businesses. However, the findings of a Bureau of Labor Statistics (BLS) report released in June of 2018 suggest that my estimate of “contingent entrepreneurs” was far too high. Again, does my White Paper’s analysis on this point still stand or need revision?

County Unemployment Rates: A Look at Wisconsin,  New York, and South Dakota

Low county unemployment rates came to my attention as I was going over some data about a rural small town in WI. Looking at five distinct years of unemployment data for its county (Grant County, see table),  except for the time around the Great Recession in 2010, its unemployment rate was  4.3%  or lower, and its rate in April of 2018 was just 2.4%. That was even lower than its 2.9% rate back in 2000. Economists have generally accepted unemployment rates around 5% as normal (2). According to that benchmark, Grant County’s unemployment rates have usually been normal or even lower than normal.

This question then arose: is Grant County an outlier or are rural counties in WI generally experiencing relatively low unemployment rates?

Using a list of WI’s rural and urban counties, I looked at their unemployment rates in April of 2018 (see above table). Yes, the average 3.6% rate among the 46 rural counties is higher than the 3.3% average for all 72 counties and the average 2.7% rate for the 26 urban counties, but the really important point is that the rate for the rural counties was just 3.6%. Moreover, the median unemployment rate for the rural counties was 3.25%, which means that 50% of these counties had rates lower than 3.25%.

Then the question for me became: Is the situation in Wisconsin an outlier? Given time and resource constraints, I decided to look at the counties in New York and South Dakota, two states quite different in character from WI and from each other. NY has an economy dominated by a huge metropolitan area around NYC. Its upstate manufacturing and agricultural industries (e.g., milk) were facing problems long before the advent of the Great Recession. The state also has many sizeable cities besides NYC such as Buffalo, Rochester, Syracuse, Albany, Schenectady, Utica, Troy and Binghamton. Many are doing poorly. For instance, Syracuse has the 13th highest poverty rate among cities in the US.  South Dakota is more sparsely populated, less industrialized and more rural that NY or WI.

The average unemployment rate for NY’s 27 rural counties, 5.9%, is higher than the average for all of the state’s counties, 4.6%, and for its urban counties, 3.6%. It also is 63% higher than the rate for WI’s rural counties. However, it is just 0.9% above the 5% benchmark for normalcy. The unemployment rate for SD’s rural counties was 4.2%, below the 5% benchmark and not that much above the 3.9% rate of the state’s urban districts.

The results from these three states suggest that the lack of jobs is not currently a major economic problem for rural areas in many states.

What, then, are the major economic problems in these counties? One is nominal population growth. As a recent study from the Pew Research Center stated: “…rural counties have made only minimal (population) gains since 2000 as the number of people leaving for urban or suburban areas has outpaced the number moving in.” Also, its survey found that  rural residents were less likely to want to move to a new community and more likely to live near a family member.(3).

Another can be seen by looking, again at Grant County. Although Pew found its population had grown about 1% between 2000 and 2016, a recent study by the National Low Income Housing Coalition reported that an hourly wage of about $13.25 is required in that county to afford renting a 2-bedroom apartment at a Fair Market Rate, while the estimated average hourly wage of renters is only about $9.68 (4). That means that 26.9% of the Fair Market Rent is unaffordable for the average renters. In turn, that underscores another important point that is part of the conventional wisdom among economic development experts: rural areas need more than just jobs, they need well-paying jobs, one that provide at least living wages. A factor that adds to the issue’s complexity is that that living wages are not defined just by market forces, but also by the characteristics of the households involved. The table below shows what a living wage would be for various types of households in Grant County (5). What also pops out from that table is just how much more income households with children require.


This table is From the Out of Reach 2018 report

It seems that rural residents are willing to cope with a high degree of financial stress to stay in a rural area and close to their families. For some, that stress or perhaps the fear of that stress, reaches the point where they decide to leave.

My White Paper addressed the adequately paying jobs issue in a number of ways. It saw the creation of Small Town Entrepreneurial Environments (STEEs) as a way to:

  • Help contingent entrepreneurs to find more and better paying work opportunities or assignments in local and larger market areas and to then help prepare these workers to win and successfully complete them.
  • Stimulate and enable local retailers to implement an omni-channel marketing strategy that can penetrate larger market areas.
  • Stimulate entrepreneurs with no employees to not only increase their revenues, but also expand and hire workers.
  • Help local residents identify remote work opportunities and, if they need it, to steer them to the types of training those job opportunities required.
  • Create an attractive entrepreneurial environment that could attract more capable contingent entrepreneurs and small business operators who prefer living in small towns with high quality of life characteristics, but now reside in urban or suburban locations.

STEEs can still usefully perform these needed functions even when local county unemployment rates are relatively low, both historically or compared to urban counties. Though more people may be employed, many of those with jobs may need and want help to find better paying employment.

The strategy of recruiting firms that will bring lots of jobs to small rural towns does not mean either that a) substantial numbers of those jobs will go to local residents or b) that those jobs will be well-paying, as many small towns have learned from the Walmart and Amazon distribution centers that opened in them. Indeed, many of the firms that seek rural locations do so because they are looking for lower labor costs.

So far, nationally, our resurgent economy has substantially reduced unemployment, but to date it has not significantly increased the incomes of many of our households, especially those with wage earners in non-supervisory positions or in rural areas. Until that does happen, STEEs can be of considerable value.

It seems to me, then, that relatively low to normal unemployment rates in rural counties do not diminish the relevancy or the need for the kind of strategic approach I outlined in my White Paper.

Also, in many states, such as WI, their rural economies are tied to both agriculture and manufacturing. Manufacturing, which tends to be cyclical, has been doing well in recent years. An eventual cyclical downturn or increased robotization may again increase rural unemployment, again worsening rural economic conditions.

The Number of Contingent Entrepreneurs and Their Importance.

At the heart of the strategic approach I argued for in my White Paper were the residents of smaller towns who were, in the BLS’s vocabulary, engaged in contingent and alternative employment arrangements and whom I labeled contingent entrepreneurs. The bullet points below present the reasons why I thought they were so strategically important:

  • “In these small towns, increasing portions of their workforces are contingent/non-employer business operators. This is part of a larger national trend: the growth of contingent workers, who now account for 30%- 40% of our national workforce. How will they be helped by the attraction of a large employer to their town? Or would the money spent on attracting the large employer have larger local impacts if it were spent instead on them?”
  • “There are a number of definitions of contingent workers and estimates of their number consequently vary between 30% and 40% of our nation’s workforce. One definition is: ‘Contingent workers are defined as freelancers, independent contractors, consultants, or other outsourced and non- permanent workers who are hired on a per-project basis’. Whether nonemployer businesses are included is not clear for some definitions, while they seem to be either explicitly included in other definitions or implied in still others. In any case, they are perhaps best thought of as entrepreneurs operating micro-businesses – and perhaps we should be calling them contingent entrepreneurs because it is a more fitting name.”
  • “I would argue that, strategically, these contingent entrepreneurs are extremely important in our smaller communities. They represent a large portion, possibly 30% to 40%, of the residential workforce. Contingent entrepreneurs usually include those in both blue and white- collar occupations. The number of resident contingent entrepreneurs will greatly outnumber the number of jobs that any big employer lured to the town is likely to provide to local residents – or even those attracted to the region.”
  • “Some contingent entrepreneurs are doing well, while others are doing poorly. If a small town’s resident contingent entrepreneurs are doing poorly, then that town’s economy will very probably also be suffering, even if a big employer has also been lured into the community. Flailing contingents are more likely to need financial assistance from public and nonprofit sources. They are also more likely to move to other climes that offer better employment opportunities. On the other hand, if the town’s contingent workforce is prospering, then the town’s residential units are likely to be occupied and improved, its shops and eateries busy and its playing fields and cinemas filled. The contingents may also grow and develop start-ups that do employ workers.”

My reporting that these contingent entrepreneurs may account for 30% to 40% of the local workforce was based on these numbers being presented in numerous reputable publications since 2010. For example:

  • In 2010, the Intuit 2020 Report stated that: “Today, roughly 25-30 percent of the U.S. workforce is contingent, and more than 80 percent of large corporations plan to substantially increase their use of a flexible workforce in coming years” (6).
  • In 2015, the U.S. Government Accountability Office (GAO), responding to Sen. Kirsten Gillibrand, looked into the contingent workforce and its size, characteristics, earnings, and benefits. It found that: ”The size of the contingent workforce can range from less than 5 percent to more than a third of the total employed labor force, depending on widely-varying definitions of contingent work” (7).
  • An article in Quartz in 2017 cited a 2014 survey done for the Freelancers Union that found that “there are 53 million people doing freelance work in the US – 34% of the national workforce” (8).

As can be seen in the above table, the recently published BLS study results indicate that those engaged in contingent and alternative employment arrangements only account for between 11.4% to 11.9% of our national workforce. The difference between 11% and 30% to 40% is obviously very significant numerically. But, is it significant analytically or from a strategic viewpoint?

First, let me acknowledge my respect and admiration for the BLS’s surveys as I have stated publicly on several previous occasions. However, the GAO’s 2015 report made a very critical point that must be kept in mind when considering the BLS’s findings: estimates of contingent workers and those in alternative  employment arrangements differ because of differences in how those workers are defined and the data sets that are used to study them. It may be claimed that the BLS’s definitions are particularly stringent and therefore limiting. For example, one of the analyses in the GAO report estimates that 16.2% of the workforce are “standard part-time workers” and part of the contingent workforce. These workers are not included in the BLS estimates. Moreover, the BLS only looked at primary jobs, so its sample does not include second jobs, be they fulltime or part-time.  The latter would exclude, for example:

  • The arts work of many artists who need a fulltime non-arts job to support themselves and their families, but whose artistic activities constitute part-time jobs and what they want to do fulltime. Or the person who has a fulltime job as a professional planner, but part-time employment as a real estate developer. Or a fulltime university professor who also owns and manages 10 rental apartments.
  • Workers whose fulltime jobs cannot cover their household’s financial needs and who also have one or more part-time jobs to fill the gap.

Lastly, BLS excluded jobs associated with the gig economy e.g., those with Uber, Lyft, Taskrabbit, AirBNB, etc. from their survey.

In my judgement the BLS estimates should be taken  as a very solid minimum estimate of the contingent and alternative arrangements workforce, with the exact number being treated as not knowable at this point in time because of a lack of consensus about how the subject group should be defined. Moreover, I would argue that the minimal BLS numbers are sufficiently large to merit considerable strategic consideration – and that, not the “true” number of contingents, is the critical question. My White Paper needs to be amended to include these points and to somewhat deemphasize the estimates of 30% to 40%. Nevertheless, the critiques of the BLS’s definitions of contingent and alternative work arrangements that followed its recent report combined with the prior research findings produced by very reputable investigators strongly hint that their true number of these workers may well be as high as 30% or so.

The recent BLS report also sparked a debate about the so-called gig economy and the impacts of firms like Uber and Lyft. However, the argument in my White Paper was quite independent of any analysis of, or advocacy for, a gig economy. My concern was: rather than chasing corporations that supposedly will provide lots of jobs, what assets can small towns best leverage to increase the earnings power of local residents? The folks that fell into my “contingent entrepreneur” category had two attributes that might be leveraged:

  • Many of them were indeed entrepreneurs, whether or not they were incorporated or working fulltime. They incurred considerable risk and had to compete for and win opportunities to earn money on a relatively recurrent basis. If an effective entrepreneurial environment (a STEE) could be built up around them, they might become more successful financially and able to compete in larger market areas. They might also create start-ups that would hire employees. My concern was about their retention and growth: how they could be retained in their communities and how they could earn higher incomes.
  • Many of them are vulnerable, with low incomes, no benefits and unhappy with their uncertain contingent employment situations. As the table below shows – using BLS data – they prefer traditional jobs. Lower unemployment rates may mean that more of these workers have found steady, more secure fulltime jobs, though their wages may not be at desired levels. The strong information brokerage and networking functions of an  effective STEE would be likely to at least help some others to find fulltime and possibly better paying jobs. Some of those jobs might be remote ones.

The table below presents data for a town in the Midwest with  population of about 3,900 that is located in a designated rural county. Let’s see how these data can help answer two questions:

  • Are there contingent entrepreneurs to warrant a program to develop a STEE in this community’s downtown?
  • Are there enough of them to use in marketing program to recruit more contingent entrepreneurs to live and work in this community?

To help answer the first question, let’s also consider the fact, mentioned in my White Paper, that relatively large firms moving into this community are most likely to average about 50 new job opportunities and the vast majority of them will not go to local residents. The table below shows how many residents of Town X would get jobs at various capture rates. Which is more likely to serve the needs of Town X’s residents a) a program to help its contingent entrepreneurs become more successful or b) a recruitment program aimed at bringing in more employers who can provide on average 50 jobs?

Extrapolating from the BLS data, in the above table on Town X, I conservatively estimate that its contingent entrepreneurs number between 235 to 245 of its residents. Using On-the -Map  and other data from the Census Bureau, the table presents an estimate of 80 people with fulltime jobs who work at home and 74 residents who are fulltime self-employed but not incorporated. About seven of those working at home may have remote jobs.  Most of these folks are likely to quickly learn about a STEE creation program. How many would then use it now cannot be estimated. Nor can how many will benefit from it. However, activities such as social networking events at local bars or restaurants and distributing information about online freelancer job marts and remote job marts can be done with relative ease and at relatively low-cost.

The chasing companies with jobs strategy has the following advantages:

  • Possible increased tax revenues
  • Possible new jobs for residents, with their number being uncertain and may be zero.

The disadvantages are far more numerous:

  • The odds of a small town recruiting such a job-rich company are relatively low.
  • The cost of an effective program is likely to be significant and its successes, if any, will probably take a good deal of time to achieve.
  • Local residents are unlikely to either know or “feel” the recruitment program unless firms are attracted, and new jobs are offered.
  • In Town X, according to On the Map data, 29% of those who work in that town also live there. If it attracts one firm that brings 50 new jobs, about 15 town residents probably will get them. For more residents to benefit more firms with jobs must be recruited. If three firms were recruited – quite an achievement for a small town — then about 45 residents might benefit.
  • A significant probability that the jobs offered will not be well-paying.
  • The town may have to offer incentives to the new firm(s) in the form of tax reductions, cheap land or infrastructure improvements that adversely impact on municipal finances.
  • Possible traffic and environmental problems.

There is no certainty of success for either of these programs. Local leaders will have to decide and take a chance based on “the best available information. However, one might argue that communities such as Town X should first try the STEE program because it has the potential for benefiting many more residents and then, if that program fails to meet its goals, to switch to a program aimed at helping the existing employers in town to grow. If local employers are few and/or weak, then the  recruitment of outside companies that bring in some more jobs for residents may make sense.

The 80 people in Town X who work at home are enough to help develop a quality of life recruitment program aimed at skilled people who will either bring their jobs with them or create their jobs or create new companies that will have employees. There are enough to populate meeting places and events so that a STEE would have a real tangible presence. Their public endorsements of the quality of life in Town X as well as the benefits of the STEE can be strong marketing tools. Their meetings with prospects and becoming “buddies” with those newly arrived also can be very powerful recruitment tools.

There is broad consensus among economic development professionals that retention and expansion is the most cost effective meta strategy. The strategic approach outlined in my White Paper essentially applies it to the micro businesses of a small town’s contingent entrepreneurs. David Carlson, the administrator of the city of Lancaster, WI, argues that, viewed as a collective group,  they are analogous to being the town’s largest employer. He then asks: “How much time would you spend working with them to keep them a growing business?”

I think that is point, game set and match.


1) N. David Milder. “Toward an Effective Economic Development Strategy for Smaller Communities (under 35,000).”

2) See: Justin Weidner and John C. Williams. “What Is the New Normal Unemployment Rate?”  FRBSF ECONOMIC LETTER, 2011-05 February 14, 2011

3) Kim Parker, Juliana Horowitz, Anna Brown, Richard Fry, D’Vera Cohn and Ruth Igielnik. “What Unites and Divides Urban, Suburban and Rural Communities.” Pew Research Center. May 22, 2018.  pp 89, p.1 and 59.

4) National Low Income Housing Coalition. “Out of Reach 2018,” p.265.

5) Ibid. p. 265

6) “Intuit 2020 Report: Twenty Trends That Will Shape the Next Decade.” P.20. October 2010.

7) GAO. “Contingent Workforce: Size, Characteristics, Earnings, and Benefits.” GAO-15-168R Contingent Workforce. P.3

8) The survey had 5,052 adult respondents and was conducted  by Edelman Berland for the Freelancers Union.

Retail at the End of 2017: Apocalypse or Evolving Paradigm Shift

By N. David Milder


A spate of recent articles has appeared that talk about our nation’s retail apocalypse. There is even a new Wikipedia entry for it: . On the other hand, some important players, such as Brookfield Property Partners, Elliott Associates, and Third Point (see: have made significant contrarian investments in retail real estate development companies such as GGP and retailers such as Restoration Hardware. Moreover, while there have been many reports about numerous store closings, the number of store openings, though admittedly far fewer, are not insignificant. Additionally, the post-Great Recession years have seen major retailers such as Target, Best Buy, Marshalls, and Walmart enter dense urban ethnic areas in numbers previously unseen. That said, the growth of e-commerce has had, as widely noted, a strong disruptive impact on the retail industry. As has the behavior of Deliberate Consumers. Since the fate of the retail industry will likely have strong impacts on many downtowns, a year-end assessment of that industry seems like a fitting task for the Downtown Curmudgeon to undertake to see if we are in the midst of an apocalypse or a paradigm change. It may well be that we are in the midst of both since paradigm changes usually mean massive changes in old structures.

 Consumer Demand for Retail Goods and Shopping Behaviors

The Great Recession brought about large and fundamental changes in consumer behavior that rival the impacts of the Great Depression of the 1930s. It not only turned middle-income households into Deliberate Consumers, but also helped impeded the career climbs and earnings power of young Millennials, fostered far greater income inequality, and the emergence of a Permanent Underclass. Additionally, the Baby Boomers have aged, with consequent changes in their consumer behavior. Overall, consumer demand and behavior have changed significantly over the past decade and at the end of 2017, those changes are continuing to have big and lasting impacts on the retail industry.

Deliberate Consumers (DCs) In 2017, DCs are still alive, well, cautious about spending and value conscious. They now expect and search for bargains, an expectation that retailers have unhappily fostered and continue to reinforce. For example, a recent NREI newsletter reports that:  “Almost half of apparel sold online during the (Thanksgiving 2017) holiday season were marked down an average of 46 percent, according to research firm Edited (See: ) Though, DCs have more jobs and more confidence in the economy than they had in 2010 and probably a little more money in their pockets, they are not making retail purchases the way they did pre-2008. Consequently, where they are present, their cautious behaviors continue to create serious problems for brick and mortar GAFO retailers, unless they are targeting and catering to the DCs, e.g., the off-price operations. If your downtown’s trade area is dominated by middle-income households, then your retailers must deal with lots of DCs.

Affluent Shoppers. They are spending again, though with somewhat more caution about their purchases. About 30% of the luxury market sales are now discounts. Where they are present, retailers are generally doing well, especially those in malls and large successful downtowns that have lots of expensive condos, office workers, and foreign tourists. Retailers still feel confident about being successful if they can capture affluent shoppers and retail property owners like to attract retailers that attract affluent shoppers. However, suburban downtowns that had heavily recruited what were once considered trophy apparel retailers, such as Ann Taylor, Chico’s, Talbots, Nine West, etc., are seeing vacancies as these chains closed many stores.

Affluent shoppers account for 40% to 50+% of the consumer expenditures in most retail product categories, but they account for only 20% or so of the households, so there are not a lot of them to go around.

Millennials. They are now the largest age group, but they are spending far less than the Boomers at comparable ages. They value experiences more than material things. They also have far less money to spend on retail than Boomers did at comparable ages. They are burdened by recession impacted slow career climbs and heavy student loans. A large number are still living with their parents. They feel very comfortable shopping online.

Overall, the Millennials are an age group that retailers must deal with, but getting significant sales from them is very challenging.

Baby Boomers. They are no longer the largest age cohort, but certainly the one with the most money. They are aging, with more and more of them approaching retirement age. Many are empty nesters. Though they may have more money than other age cohorts, their retail purchasing has shifted as they aged and their needs and wants changed. Many retailers, such as Chico’s, have been badly hurt as their Boomer customers “aged out.” Retailers need to be smarter about how to tap this very important market segment.

Ethnic Urban Shoppers.  Areas with these shoppers, such as The Bronx and Elmhurst in NYC, attracted new retailers in recent years. However, it isn’t the large numbers of low-income shoppers that is attracting the retailers, but the smaller, yet still very significant numbers of middle-income households that have been overlooked in past decades. Moreover, the members of these ethnic urban middle-income households very often have cars and exhibit a preference for car-oriented, suburban-type retail venues.

Low –Income Households. Walmart and Amazon are now battling the dollar store chains to capture their retail expenditures. For years, the dollar stores have been opening the most stores, while many other retailers were closing them because they were focused on this low-income market segment. And, in doing so, the dollar stores were cleaning Walmart’s clock. Walmart and Amazon have both now decided to also target this market segment.

However, these households probably account for less than 20% of the nation’s retail spending.

Shopping Behaviors and Preferences. Americans are shopping less at malls. According to Cushman and Wakefield, visits to shopping malls in the US declined by an astounding 50% between 2010 and 2013. A lot of the consumer demand disgorged by the malls is undoubtedly going to e-retailers. Pew Research Center, for example, found that the proportion of Americans shopping online had increased from 22% in 2000 to 79% in 2015 (Pew Research Center, December 2016, “Online Shopping and E-Commerce”.) However, as I have mentioned in past Downtown Curmudgeon posts, my field visits suggest that e-retailers are not capturing all of the malls’ disgorged sales revenues. Many savvy downtown merchants are also capturing significant shares in smaller communities where failed mall anchors were the older department stores such as Sears, JCPenny, and Kmart.

That Pew report had a number of other extremely important findings:

  • “Overall, 64% of Americans indicate that, all things being equal, they prefer buying from physical stores to buying online.” In addition, the Pew survey found that most online shoppers did not do so because it was more convenient than going to a physical store. Together, these two findings suggest that it is what brick and mortar retailers are failing to do in their stores that makes people prefer online shopping. In turn, that implies improving in-store experiences will bring back shoppers. How to do that is the real question facing many of today’s retailers. The old ways are failings. What are the new ways that can succeed?
  • “Respondents reported that price is often a far more important consideration than whether their purchases happen online or in a brick and mortar store.” This shows the impact of the DCs.
  • “Fully 65% of Americans indicate that when they need to make purchases they typically compare the price they can get in stores with the price they can get online and choose whichever option is cheapest.” This again shows the impact of the DCs.
  • “Roughly eight-in-ten Americans (82%) say they consult online ratings and reviews when buying something for the first time.” This is also DC behavior.

The strongest impact of the Internet may not be through e-commerce purchases, but how it has restructured the way Americans now shop. We now:

  • Research online before we shop. The Pew findings suggest that the Internet is now influencing 80+% of our first-time purchases.
  • Have more targeted visits to brick and mortar shops. We go directly to the merchandise we had previously researched online. With shoppers also being directed to retail destinations by their Internet searches, will the store’s location become less important? Far too little attention has been paid to this possibility.
  • Spend less time in retail stores, do far less in-store browsing and make fewer impulse purchases. This means that making retail shops and the downtowns “stickier” for shoppers is more important than ever. In turn, that probably translates into a need to have much stronger downtown Central Social District functions and for stores to offer more socially congenial experiences.

What physical stores need to do to compete more successfully with online competitors seems to be 1) offering competitive prices and 2) providing a socially congenial and appealing retail experience. Among many savvy retail experts and retail landlords, wrapping retail purchases in highly enjoyable experiences has become their new mantra. Successful malls are looking more and more like sucessful downtowns with major public spaces, loads of restaurants and entertainment venues, office spaces, hotels and lots of residential units.

The Rise of E-Commerce

True, more and more retail expenditures are going online. For example, according to the Census Bureau, in the first quarter of 2010, e-commerce accounted for 4.2% of the nation’s total retail sales, but by the third quarter of 2017, it had grown to 9.1%. Nonetheless, a critical point is that most retail dollars are still spent in brick and mortar stores, though online sales is where the growth is these days.

However, when we look at the table above, it is apparent that online sales have much higher capture rates for many types of retail merchandise and that online now dominates or probably has a good chance of soon dominating, many product categories. Sales for items once thought relatively difficult for online retailers to make are starting to gain traction. For example, online apparel sales were once thought hard to do because customers would want to touch and try on the merchandise. Similarly, furniture was once thought hard to sell online because it involved big and bulky items. However, both apparel and furniture have seen significant recent online sales growth in recent years and projections indicate the potential for even larger future growth.

The food and beverage sector has long been considered the toughest for e-merchants to penetrate, but the entry of Amazon, especially with its purchase of Whole Foods, has many experts reconsidering their previous positions.

Amazon’s Whole Foods and physical bookstore ventures are perhaps best understood as critical experiments in how online and physical store operations can be most efficiently and most profitably integrated. It’s not a question of whether the online or physical stores will have the most sales, but how a retailer can get the most sales by optimizing how they work together. Having an omnichannel approach to retail is now generally accepted as the right meta-strategy. How to properly and effectively implement that strategy is the real question now on the table. If no retailer succeeds, then we certainly will be in a genuine apocalypse, but if a pathfinder can succeed, others will follow, and then our retail industry will be operating under a new paradigm.

Finding the right path most likely will involve a lot of trial and error. It must be adaptable for very large and small operations. Finding it requires firms with a lot of money and patience. Amazon’s first physical bookstores are an interesting, if far from successful attempt at such an integration — and Amazon recognizes that. So far, Amazon has not attempted similar innovations at Whole Foods, though the lower prices it ushered in are definitely noticeable at check out and much appreciated.

Old Dogs Are Learning New Tricks. For many years industry commentators were concerned about the ability of major legacy retailers to develop successful online presences. Certainly, when it came to online sales, legacy retailers were only capturing small shares – about 13.1% in 2015, according to my calculations based on Census Bureau data. In recent years, however, Best Buy has made a substantial turn around and Walmart, through heavy investments in its own website as well as its purchases of major e-retailers such as Jet and Bonobos, has exhibited considerable online sales strength. Industry observers have also noted, that though Macy’s and Nordstrom’s are still facing tough headwinds on both the customer and financial fronts, their online capabilities have improved substantially.  Now, their major problems are really what is and is not happening inside their physical stores and how they will implement an effective omnichannel strategy.

Retailer Demand for Space

Store Closings. Since the onset of the Great Recession, a lot of media and analyst attention has focused, quite properly, on retail store closings. In 2017, eight years after that recession’s end, experts are estimating, based on company announcements, that there will be a very large number of stores closed by retail chains this year. The total may exceed 6,800. Among those that are hardest hit are the mall-type retail chains stores, especially those in apparel and the older department stores, e.g., Sears, Kmart, JCPennys, Bon-Ton and Macy’s. Save for Macy’s, most of the department store closings are in malls in smaller, less urban and less affluent locations such as Scotts Bluff, NE, and Rutland, VT.

Many middle-income areas have long been facing store closings because the retail market has been bifurcating into higher and lower income tiers for well over a decade. Wealthier communities – e.g., Westfield, NJ, and Wellesley, MA, have not been immune. To some degree, this was because some of the “trophy” retailers they had attracted were precisely the apparel chains that were most challenged nationally and closing lots of stores. But, it was also probably due to the changing behaviors of their trade area’s residents, who are shopping less often, seeing shopping less as recreation and more as a chore, and integrating the Internet more into their shopping routines.

Perhaps ccounter-intuitively, poor neighborhoods and small towns have been the least adversely impacted by the travails of the retail chain store closings, mostly because they seldom had any GAFO chain stores. Ironically, with the growth of online GAFO shopping, small town residents probably now have better retail choices than ever before, while their local retailers really do not compete that much with those online merchants.

Troubling still is the research by F&D Reports that suggests 33 retail chains with a total of 34,450 stores are now “vulnerable,” their futures distinctly uncertain. Among them are Ascena (whose store brands include Dress Barn, Maurice’s, Lane Bryant, Catherine’s, Ann Taylor and Loft), GNC, Toys R Us and Claire’s. (See:

Some observers argue that, currently,  the root problem of these troubled chains is not Internet competition or careful consumer spending, but that they “are overloaded with debt—often from leveraged buyouts led by private equity firms.” ( See: ).  Much of this debt was incurred at a time when the Federal Reserve was keeping interest rates close to zero, but those rates are expected to rise soon as those loans are due and when they will also have to compete with a lot of other borrowers looking to refinance their loans. This major threat seems to result more from incompetent business practices, than from e-commerce impacts.

Store Openings.  Less often discussed are the retail store openings. About 3,300 openings are expected in 2017. Dollar stores account for about half of those openings! Far fewer, but still meaningful numbers of openings are coming from off-pricers, other discounters, supermarkets, some auto parts chains (e.g., Auto Zone), some beauty retailers (e.g., Ulta and Sephora), the physical stores of online birthed retailers (e.g. Warby Parker), fast fashionistas (e.g., Zara), and high personal service boutique shops (e.g., Moda Operandi in Manhattan).

This is a key point: increasingly online birthed retailers are opening brick and mortar stores,  e.g., Amazon, Warby Parker, Bonobos, Rent the Runway, Athleta, etc. There are several reasons why they may want a brick and mortar store. For example, some evidence suggests that physical stores, in fact, may often be more profitable than a pure online retail operation and that conversion rates are higher among visitors to physical retail stores than among visitors to retail websites.

Simon Properties, the nation’s largest owner/operator of retail malls, has just created a new program to facilitate e-retailers being able to affordably open pop-up presences in its 300 malls (see ). Simon obviously sees e-retailers as the source of future successful retail tenants and is trying to ease their transition to brick and mortar operations. Simon is not alone in this. Savvy retail landlords across the nation are also focusing on these retail tenant prospects and all expect their numbers to grow.

Successful Malls.  Here is another key point that counters visions of a retail apocalypse: about 20% of the shopping malls are doing very well and they generate nearly three-fourths of mall revenues. They are “…located in affluent, highly populated markets that are tourist or economic hubs; and they’re owned by major mall operators who have the cash to make them even stronger.” (See: Malls still can be very profitable if they are in the right location and well-managed. 

Stronger Demand for Smaller Retail Spaces.  Retailers are not only looking for fewer spaces, but also for smaller spaces than they were 10 years ago—about 25% smaller. This reinforces the declining demand for retail space.  Online birthed retailers may reinforce this trend if, like Bonobos, they have no need for large amounts of onsite storage space for merchandise, since their customers’ physical store purchases are all shipped to their homes or workplaces from its distribution center, just like its online orders.

In the past, many downtowns have been unable to recruit high quality retailers because they lacked large enough spaces. That may not be as much of a  problem in the future when spaces of 1,500 SF to 2,500 SF are much more desirable to retailers. This means that these downtowns would have less need for mixed-use projects that has been the way many of them – e.g., Cranford, NJ – generated needed larger retail spaces.

The photo below is of a J. McLaughlin shop that opened in West Hartford, CT around 2014. It only occupies about 1,500 SF and its storefront is certainly less than 25 feet

wide. I found the shop surprisingly narrow inside. Two of the chain’s older stores that I’ve visited in the past in East Hampton, NY and Wellesley, MA are much bigger and their storefronts are much wider.

High Vacancy Rates and High Rents in Too Many Places.  To a very significant degree, the problem of high retail vacancy rates has less to do with the impacts of e-commerce or deliberate consumers and more to do with district success, landlord greed and miscalculations, and retail chain management deficiencies.

NYC is a good place to observe the vacancy problem. In Q3 of 2017, its economy, as Cushman & Wakefield noted, was doing pretty well:

“New York City’s economy continued to grow in the third quarter, although the pace slowed after an employment surge during the second quarter. A critical driver of retail activity, steady New York City tourism contributed to this growth as a record 60.3 million tourists visited the city last year, with 50.0 million visitors to the Times Square area alone.” (See:

Yet, in Manhattan’s 12 major submarket areas, the “availability rate” of retail space” – a.k.a. the vacancy rate – averaged 18%, with a low of 7% and a high of 32%. (See above table). Five of the 12 submarkets had availability rates above 20%. One cause for these vacancies is the large number of closures made by GAFO retail chains, but they cannot explain the wave of independent retailer departures.  An executive at a large Midtown Manhattan BID explained that many independent operators in his district have been driven out by unaffordable rents, and those that survived have been compelled to move from their desirable avenue locations to the less trafficked and less expensive street locations. Also, for many of the departing GAFO retailers, there were many store locations across the nation that their managements could select for closure, but they probably picked those in Manhattan because either the equation of how many sales dollars their very high rents were buying access to was no longer favorable or they could no longer afford to keep a nonperforming Manhattan store just for marketing reasons. Such calculations are perhaps enhanced when retail rents in these 12 market areas averaged $1,115 PSF and ranged from a low of $280 PSF to a high of $2,939 PSF.

In recent years, the city’s media have produced numerous stories about the growing vacancy rates in neighborhood commercial districts and the wholesale disappearance of small independent merchants. Vacancies even sparked an editorial in The New York Times (see: ). The independents usually closed when their leases came up for renewal in a district that was on the upswing and they could not afford the huge asked for increases that could reach as high as 625% ( see: Landlords asking for such increases from small merchants obviously wanted them out so they could attract national chains with much deeper pockets. Problems arose when the location and space demands of national GAFO chains declined substantially and their recruitment became far more difficult.

It is not hard to find similar stories in towns and cities of all sizes across the nation.

One frequent cause of the high rent increases is the successful revitalization or development of the commercial areas in which these storefronts are located. While district revitalization can understandably stimulate landlords to ask for increased rents, there is little evidence that many landlords can or want to calibrate their rent increases to what their current tenants can afford, even with their improved sales potentials, or that their conclusions about attracting far better paying retail chains were wise.

In some instances, abundant retail vacancies have been caused by local zoning that was incongruent with local market realities. In Arlington, VA, for example, zoning called for all new downtown residential buildings to have ground floor retail spaces. This requirement was probably motivated by an admirable desire to make or keep downtown streets pedestrian friendly. However, the development of too many mixed-use residential projects with street-level retail spaces meant that much more retail space was being developed than the market could absorb.

Elsewhere, in some downtown suburbs, developers have avidly built mixed-use residential projects with ground floor retail based on the expectation that the retail tenants would pay rents associated with newly constructed spaces. Unfortunately, creditworthy national chain tenants were slow to sign and independent merchants found the rents unaffordable. The result was unexpected long-term vacant storefronts and considerable lease concessions. While downtown revitalization advocates have long pushed for mixed-use residential/ground floor retail projects, it may be that in many downtowns that mix is no longer financially viable. Large downtown residential projects may be more cheaply and easily developed on sites within a few minutes walk of its main commercial corridor and still benefit district merchants.

Too Much Retail Space?  Of course, if a downtown has more retail space than the market can absorb, there will be plenty of vacancies. According to data from CoStar, total retail space in the U.S. totals about 13.0 billion square feet. That estimate includes both the total GLA in shopping centers and the GLA in other types of retail spaces, e.g., those in downtowns and neighborhood districts. (Source: CoStar Group, Inc. cited in With a current US population of 326.3 million, that translates into 39.8 SF of retail space per capita. Back in 2009, ICSC estimated that there was 14.2 billion SF of total retail space and 46.6 SF of retail space per capita. Some communities may have even more per capita retail space. For example, back in 2010, DANTH, Inc. estimated that Peoria, AZ had 58.7 SF of retail space per capita (see, page 7).

Since about 2010, there has been a growing acknowledgment among real estate experts that the US has far more per capita retail space than any other nation and far more than consumer sales can support. The recent downsizing of retail chain demand for new locations and the square footage of each store increases that surplus. As is happening with failing shopping centers and malls, much of today’s retail-prone spaces can be expected to be re-purposed in the coming years. In downtown after downtown, recent years have seen vacant retail spaces taken by professional and personal service operations. Many downtowns also have a significant number of “occupied vacancies” – occupied storefronts no longer generating rental incomes, but the landlords allow their tenants to stay on in the belief that it is easier to attract a new tenant to an occupied space. These spaces are usually in poor condition and in suboptimal locations.

Yet, new downtown developments continue to have significant retail components. Their rentals often mean that existing downtown retail tenants are being attracted, creating vacancies in older and harder to lease locations.

The US probably has had its surplus of retail-prone space for decades. What has helped hide it, or at least divert attention from it, was that there was usually significant demand for the new spaces. New retail spaces with attractive characteristics always draw tenants away from less attractive spaces, whether there is a space glut or not. Older spaces were allowed to follow an untended downward drift in condition and value — unless they became too publically noxious and then were made part of some revitalization effort. One might argue, that many downtowns, for years to come, will need to think about how they will reuse their problematic secondary and tertiary level retail spaces. Finding Central Social District uses for them – e.g., restaurants, ice cream shops, childcare and senior centers, crafts co-ops, small business co-worker spaces, etc. – would strengthen downtown visitation and use as well as the remaining retailers.

Keep Your Eye on This: The Uses of Retail Spaces Are Changing

As space uses change, the demand for retail spaces and where retailers want them located will also change.  In times past, retail shops were all brick and mortar and operated as places where:

  • Most of a retailer’s interactions with customers occurred
  • Customers obtained most of the information they could use about potential purchases
  • The retailer’ sales transactions occurred
  • Customers took delivery of their in-store purchases
  • In recent decades, there has been a distinct trend toward depersonalizing the shopper experience. Salespersons became harder and harder to find. Retailers are trying to do away with cashiers at check-out points, pushing self-checkouts.

Today, those physical stores are:

  • Increasingly used as distribution points for online purchases
  • Increasingly used as showrooms for online purchases
  • Starting to become places to deliver intense customer service to high-value customers that have been identified online. In luxury retailing, in particular, the personal touch that leads to customer pampering is still necessary and impossible to deliver electronically. Other retailers, especially independents, are catching on.
  • Starting to try to create a convenient, congenial and entertaining experience in which the traditional retail transaction – merchandise identification, selection, sale, and delivery – can be enveloped.
  • Less important for providing information about merchandise, but very important for providing experiences with the merchandise. The retailers’ online website and social media activities are taking on more of the information dissemination functions.
  • Less important as the sales transaction locations. By meshing with the stores’ online capabilities, customers are given more options, convenience, and freedom.
  • Most importantly, searching to integrate their uses and operations with their firm’s Internet operations

These changing uses of retail space raise some interesting questions that are now probably still unanswerable:

  • How will they impact the demand for physical space? Retailers like Bonobos may need less storage space, but other retailers who are responding to online sales may need more warehouse-type space for storage, wrapping, and shipping.
  • How will electronics infiltrate further into the in-store experience through such things as beacons and artificial intelligence?
  • If the customers of retail shops are being strongly directed to them by online information, then does that mean that their geographic locations become less important? They do not have as much need to be easily “found,” but they still will need to be easy to get to.
  • In the future, will retail stores with a different mix of uses still benefit as much from being close to high pedestrian flows? Will that depend on the uses in the mix?

It’s Time to Recognize the Incompetency of Too Many Owners/Managers of Retail Chains and Retail Properties

It is obvious that the very stressful position the retail industry now finds itself in was caused not only by changed consumer behaviors and the immense impact of the Internet, but also by the flagrant ineptitude of many of the people who owned or managed important retail chains and retail properties.

Prior to the Great Recession, too many retail chains followed a simple strategy: more stores. More stores meant more revenues. More revenues meant higher stock prices and happier shareholders. There was an amazing tolerance for sales cannibalization between their stores.  Macy’s, for example, had a very high percentage of its stores that were located within 10 miles of each other. Discussions about the US having too much retail space were already underway in the mid-1990s, but it took the Great Recession for industry leaders to take that issue seriously.

Also, prior to the Great Recession, many chains did not correctly understand how much space they needed for their stores. The post-recession downsizing undertaken by so many of them confirms that assertion.

When one hears that Related Properties is considering the purchase of the entire Neiman Marcus chain that is mired in debt, just to assure that one of its stores will open in Related’s huge new Hudson Yards project in Manhattan, one must seriously wonder about the competency of the firm’s management.

A recent article by Bloomberg noted that: “more chains are filing for bankruptcy and rated distressed than during the financial crisis.” Often these bankruptcies involve long-lived, well-known chains that were taken private, using a lot of debt, by private equity firms. (See: ).  

 Of course, Sears presents a sterling example of blundering retail management. Once the nation’s largest and strongest retailer, the anchor of many shopping centers and malls and the owner of several leading merchandise brands, e.g., Kenmore and Craftsman, today it is on the verge of total collapse. It is a sign of Sears one-time strength, that it is taking more than 20 years of decline for it to die off. It took a lot of incompetent managers to continue the bleed out that long.

The Bloomberg article also noted an associated and very troubling “increase in the number of delinquent loan payments by malls and shopping centers.” A wave of new mall and shopping center shutdowns may soon be upon us as the loans are not refinanced.

When very high prices are paid for downtown office or residential buildings with retail spaces or for downtown retail structures, the new owners will most likely have to ask for commensurately high retail rents. Such rents may be completely out of whack with what quality retailers, be they chains or independents, are prepared to pay. Across the nation, in major downtowns, many recent high-priced buildings were purchased by foreigners or investors with little or no knowledge about local real estate or retail markets. Of course, there were also experienced real estate companies that bought very high-priced buildings that have proved troublesome– e.g., Kushner’s purchase of the building at the Devil’s address,  666 Fifth Avenue in NYC. One wonders if and how these buyers took future retail rental revenues into consideration prior to their purchases? It is reasonable to suspect that this type of building owner accounts for a lot of the pressure for higher retail rents as well as store vacancies in Manhattan and other places.

Then there are the developers of mixed-use projects in suburban downtowns that expected to attract GAFO retail chains. However, prior to construction too many had not even a glimmer about who those retailers might be. After construction, they found that few, if any, were interested. These same developers were also likely to expect quality independent retailers would have little problem paying unsubsidized new construction rents.

Of course, thankfully, there also have been a lot of savvy retail merchants and real estate developers.

Looking Ahead

Retail stores are not going away, but they certainly will be changing. There probably will be fewer of them. Yet, the internet will not and cannot capture all retail activity.

The retail stores of the future probably will be quite different in their uses and ambiance and probably better than today’s. What they specifically will look like remains to be defined.

Sociologists and economists have long known that bringing about massive socio-economic changes require a strong crisis that severely weakens existing social and economic structures, thus easing the path for the innovations to appear and take hold. In my opinion, that is what is happening in the retail industry today. The old retail paradigm has been greatly weakened, but the new one is emerging in fits and starts. Many pieces of the new retail paradigm are already there. Effectively fitting them together remains the challenge.

The time for downtown leaders and stakeholders to start dealing with the emerging retail paradigm is now. Otherwise, their downtowns may be significantly injured or miss opportunities for real growth as the new retail paradigm unfolds. Retailers who do not keep up with the changes will lose. Not all that try to make changes will succeed, but those that don’t try will definitely be losers.

Retail markets in the future will be defined as much electronically as they are geographically. For many, many retailers in smaller and isolated communities that means great new opportunities as well as new risks.

I’m told that the Chinese word for crisis also means both danger and opportunity. A lot of retail commentators have been focusing on the danger our retail industry is in. More attention needs to be placed on the opportunities.