Contact: N. David Milder, Editor The ADRR — The American Downtown Revitalization Review 718-805-9507 [email protected]
THE CREATION OF THE AMERICAN DOWNTOWN REVITALIZATION REVIEW (THE ADRR)
There currently is no real professional journal for the downtown revitalization field. For many years, that has been strongly lamented by many of the field’s best thinkers. To remedy that situation, a band of accomplished downtown revitalization professionals are creating The ADRR. It will be a free online publication, appearing four times each year. The target date for the debut issue is now set for the June 1-15, 2020 timeframe, with the second issue aimed for the Sept 7-14, 2020 timeframe.
This ADRR is intended to be a lean and mean operation, based totally on the availability of free online resources and the time, energy and elan contributed by its authors, advisory and editorial board members, and its editor.
How to Subscribe to The ADRR
Those interested can now visit The ADRR’s website, www.theadrr.com , where, on the home page, they can sign up to become subscribers. This enrollment places the subscriber on a MailChimp mailing list so that they can receive New Issue Alerts (see below).
How Issues of The ADRR Will Be Distributed.
New Issue Alerts, containing the Tables of Contents of issues and links to their downloadable pdfs of articles are sent to subscribers via a MailChimp email blast and posted to the ADRR’s website. Each issue’s pdf files initially will be stored in a folder in ND Milder’s Dropbox account from which they can be downloaded. Subscribers can download only those articles they want to read and whenever they want to read them. The ADRR also can be found via Google searches.
The Content We Are Aiming For. Only manuscripts about major downtown needs, issues and trends will be considered for publication. They will be thought pieces and not just reports about a downtown’s programs and policies that its leaders want to brag about. Articles must have broad salience and their recommendations broad applicability within the field. The “voice” of The ADRR will be anti-puff, and very factual, evidence driven, though not dully academic. Discussions of problems and failures will be considered as relevant as success stories if, as so often is the case, something substantial can be learned from them. The ADRR will not avoid controversial issues.
Also, the focus of The ADRR will not be overwhelmingly on our largest most urban downtowns, but also provide a lot of content and relevant assistance to those in our small and medium sized communities, be they in suburban or rural areas.
Who Will Write the Articles?
Hopefully, they will be from people in a broad range of occupations – downtown managers and leaders, municipal officials, academics, developers, landlords, businesspeople, consultants, etc. — who have significant downtown related knowledge and experience.
Curated Articles and Wildflowers. Initially, the ADRR will solicit articles to prime the content pump. Once The ADRR is up and running some articles will continue to be solicited on topics deemed a high priority by the editorial board members. Each board member can select a topic to curate an article on and seek the author(s) to write them. However, there still will be a continual traditional general call for submissions (wildflowers) focused on subjects selected by their authors. All submissions, curated or wildflower, must demonstrate sufficient merit to warrant publication in The ADRR. All submitted articles will be reviewed by board members. We hope to see many submissions!
Article Length and Author Responsibilities.
There will be short reads and long reads. Articles of 1,500 to 5,000 words will be considered. Multi-part articles of exceptional merit and salience will also be considered. What counts is their quality, not their length. Authors must have their articles thoroughly proofread prior to submission. Poorly proofed manuscripts will be rejected. Guidelines for submissions may be found on The ADRR website.
Published four times per year, with a minimum of 5 articles in each issue. Given that this is an online publication, from a production perspective, the number and length of the articles is not a particular problem. However, from an editorial and content management perspective, the number of articles and their lengths can quickly become burdensome.
How It Will Be Organized.
The ADRR will be published by an informal group for its first year, with no person or group having ownership.
Editor. During the ADRR’s first year, N. David Milder has volunteered to serve as its editor.
The Advisory/Editorial Board :
Jerome Barth, Fifth Avenue Association
Michael J Berne, MJB Consulting
Laurel Brown, UpIncoming Ventures
Katherine Correll, Downtown Colorado, Inc.
Dave Feehan, Civitas Consulting
Bob Goldsmith, Downtown NJ, and Greenbaum Rowe
Stephen Goldsmith, Center for the Living City
Nicholas Kalogeresis, The Lakota Group
Kris Larson, Hollywood Property Owners Alliance.
Paul R. Levy, Center City District, Philadelphia
Beth Anne Macdonald, Commercial District Services
Andrew M. Manshel, author
N. David Milder, DANTH, Inc
John Shapiro, Pratt Institute
Norman Walzer, Northern Illinois University
Articles in our first issue that will be published in June 2020
Michael Berne, MJB Consulting, Working Title, ” Bringing Downtown Retail Back After COVID-19”
Roberta Brandes Gratz, “Malls of Culture.”
Andrew M. Manshel, “Is ED Really a Problem?”
N. David Milder, DANTH, Inc., “Developing a New Approach to Downtown Market Research Projects – Part 1.”
Aaron M. Renn, Heartland Intelligence, “Bus vs. Light Rail.”
Michael Stumpf, Place Dynamics, “Using Cellphone Data to Identify Downtown User Sheds”.
The Spotlight: “Keeping Our Small Merchants Open Through the COVID-19 Crisis”
Katherine Correll, Downtown Colorado, Inc.
David Feehan, Civitas Consulting
Isaac Kremer, Metuchen Downtown Alliance
Errin Welty, Wisconsin Economic Development Corporation.
Many of our most successful large cities are also ailing and
fragile in very essential ways, whether or not their leaders and stakeholders are
open to acknowledging that reality.
Yes, by many economic measures, lots of our major cities
such as NYC, San Francisco, Seattle and Washington, DC,, and especially their
CBDs, are more successful than ever. The value of their real estate continues
to soar. As do their employment levels and their ability to attract large
numbers of the creative/knowledge workers that are so essential to economic
growth and success. Affluent people are eager to live in and near their
flourishing downtowns. Pedestrian flows are strong. Tourist are flocking to
their arts, entertainment and cultural venues as well as their hotels,
restaurants and shops. Their streets are active at least 18 hours a day.
Yet, in 2017, Richard Florida published a book with a very
revealing title: ” The New Urban Crisis: How Our Cities Are Increasing Inequality,
Deepening Segregation, and Failing the Middle Class—and What We Can Do about It.” Increasingly, the core areas of our major
cities have become places where only the very wealthy can live and play. The
middle class can still work there, but even those with $1 million to spend on
housing too often cannot find desirable units.
Affordable housing is a major issue in these cities. Dinners for two in
their restaurants can easily cost hundreds of dollars. While movie tickets may
cost about $9 to $13, admission at their museums can run about $25, and tickets
to prime arts event venues can run over $125 in the primary market, and over a thousand
in the secondary market. Their downtowns are no longer everyone’s neighborhood,
but devoted to very wealthy locals and affluent tourists. If NYC is any
indicator, half of the most expensive new residential units are unsold, and the
other half of the units are occupied by part-time residents, and usually vacant.1 For
most city residents, their city’s downtown is no longer really theirs.
Added to the financial and spatial equity issues are the very significant return of problems of public disorder, such as homeless vagrancy and aggressive panhandling. The situation in downtown San Francisco has grown quite out of hand, with many sidewalks being blocked and pedestrians forced to run a narrow gauntlet of aggressive panhandlers, reclining/sitting vagrants, litter and human feces.2 Similar, if less egregious situations can be found in several other large West Coast cities. Closer to home, one BID manager in Manhattan recently told me that dealing with problems of disorder was now his organization’s highest priority and that this also is the case with many other BIDs in the borough. Center City in Philadelphia is also making a renewed effort to deal with the problems of disorder.3 Those of us who were around to see how the problems of disorder strangled downtowns during the 1970s and 1980s are very concerned about these flare ups of the problems of disorder. Will their resurgence strengthen? Have the tools we used to successfully cope with them in the recent past now lost their efficacy? Do local politicians and public at large have the required political will to do what must be done?
Also, the very success of our downtowns is
causing several other problems. One that goes unnoticed until it isn’t, is that
our pedestrian densities often have reached such high levels that they have
significant adverse impacts on the pleasure of walking, i.e., they diminish an
area’s walkability. Measures to relieve auto congestion have in some places,
e.g., Midtown Manhattan, provided some pedestrian decompression by converting
traffic lanes to pedestrian use. The potentially disruptive impacts of small
vehicles – e-scooters, e-bikes, delivery robots, etc. — and AVs are on a rapidly closing-in
horizon. For all their wealth, many downtown retail corridors in these
superstar downtowns have surprisingly high vacancy rates reaching sometimes
Creative Job Growth and Affordable Housing.
For some time now, economic development professionals have known that affordable housing is a serious and growing problem, especially those active in our large and successful cities – see table above.
Nationally, the relationship between the strong growth of high paying
high tech employment and the seriousness of the affordable housing problem was
also well-known. Large increases in highly paid creative workers leads to
rising housing prices. The new housing products sparked by that increased demand
will be largely upscale market rate. The emergence of the affordability issue
suggests that one way or another the demand of upscale creatives is pushing up
the costs of housing in what were middle income units.
The situation in San Francisco has already reached such severity that $1 million might buy you a home constructed from a former cargo shipping crate. An attempt even was made to smother office growth in the city in order to shift more resources to housing development. Several high tech firms have committed billions to solving this problem: Google will invest $1billion, as will Facebook, and Apple recently said it would commit $2.5 billion to the issue.4 I doubt they would be making these investments if the problem was not very serious.
Seattle shows what can happen to the housing market when there is a very large infusion of creative jobs by just one firm. By 2017 Amazon had eight million square feet of office space, occupying 19% of Seattle’s office space, and tens of thousands of office workers. While other major national high tech firms were also adding employees, an article by Mike Rosenberg and Ángel González in the Settle Times proclaimed: “Thanks to Amazon, Seattle is now America’s biggest company town.”5 It’s huge presence and growing workforce had fostered the following conditions:
By 2017, apartment rents were 63 percent higher
than in 2010, and Seattle became the
fastest-growing city in the country.
Home costs rose faster in Seattle than anywhere
in the nation, doubling in five years, and pushing the middle class to
surrounding, less expensive towns.
Seattle had the nation’s third-highest
concentration of mega-commuters — people traveling at least 90 minutes each way
to work. Their numbers grew 72 percent
in five years.
Buses were more packed than ever, and lines running
along the Amazon campus often were standing-room-only during rush hour. Metro
drivers at times have to leave commuters waiting outside an Amazon office
because their buses were full. Local officials even added buses to accommodate
the crush of Amazon interns that arrived during the summer.6
Even the mere announcement of a big development project that will bring
thousands of new creative workers into an area can raise prices by attracting real
estate speculators and convincing homeowners to keep their homes off of the
market so they can benefit more fully from the rising values of their homes.
For example, Amazon’s impact on the housing market in and around Arlington, VA,
it’s remaining HQ2 town, was swift, starting with the announcement of the deal.
year after the deal, with no construction completed and much not even started, Redfin
reported home prices in Arlington were up nearly 18% year-over-year. That far
outpaced the 2.7% price change in the D.C. metro area.7
Will New Expensive Housing for the New Creative Workers Help Make Housing More Affordable for Middle and Lower Income Households? One possible counter argument that has been offered by some colleagues is that the expensive new housing triggered by the new creative job holders will increase overall supply and thus help lower housing costs throughout the city. That has the prima facie validity of reflecting very basic economic principles, and there are some recent economic studies that at first blush seem to support that argument. However, I think that when you look more closely at their analyses and conclusions, their ability to really support this top down path to housing affordability becomes far less certain.
Evan Mast, in an interesting recent study using migration data found
Migrants “to new central city multifamily
buildings come from neighborhoods with slightly lower incomes, and migrants
into these neighborhoods come from areas with still lower incomes, and so
“Using a simulation model, (he found) that 100
new market-rate units ultimately create 70 vacancies in middle-income
neighborhoods. New construction opens the housing market in low-income areas by
reducing demand. A simulation model suggests that building 100 new market-rate
units sparks a chain of moves that eventually leads 70 people to move out of
neighborhoods from the bottom half of the income distribution, and 39 people to
move out of neighborhoods from the bottom fifth. This effect should occur
within five years of the new units’ completion.
These openings should lower prices, but the
effect may be small in the least expensive areas where prices are close to the
marginal cost of providing housing” (Italics added).8
Looking at Mast’s findings from the perspective of cities with severe
housing affordability problems, the issue of the marginal cost of providing
housing raises questions. In these cities the problem is precisely that the
marginal cost of providing housing is beyond what middle income households can
afford, not just the lowest income households. Moreover, the new units are not just
market rate, but relatively high market rate. Consequently, one might reasonably ask if these cities were
looked at separately, would “the effect” also be found weaker further up on the
income scale? My reasoning suggests the answer is very probably yes.
In another very interesting recent study, Liyi Liu, Doug McManus, and
Elias Yannopoulos at Freddie Mac looked at filtering, “the process by which properties, as they age,
depreciate in quality and hence price and thus tend to be purchased by
lower-income households. This is the primary mechanism by which competitive
markets supply low-income housing.”9 They found
“(T)here is a wide range of filtering rates both
across and within metropolitan statistical areas (MSAs) for owner-occupied properties.
Notably, in some markets, properties ‘filter up’ to higher-income households”
“After 40 years, average real incomes increased
by 12% for Washington, DC (implying an average annual increase of 0.28%) and by
14.5% for Los Angeles (implying an average annual increase of 0.34%). Thus,
properties in these markets were filtering up to higher- income households as
homes aged. It is not surprising that these markets are ones with affordable
housing challenges (italics added). In contrast, Detroit and Chicago show
rapid downward filtering rates. For Detroit, the income index level drops 34.5%
over 40 years (implying a rate of filtering of -1.1% per year). In Chicago the
income index level drops by 23.7% over 40 years (implying a rate of filtering
of -0.67% per year).” 10
These findings suggest the dynamics of residential real estate in
markets with affordable housing challenges diverge from what basic economic
theory might suggest. The size of the upper income housing deficit then is an important
determinant of the degree to which new upscale housing just goes to upscale
residents or does add to units filtering down to less affluent households. If
the deficit is large, then there are more units filtering up, not down. If the
deficit is small, and more easily met by new construction, additional units can
filter down. Reducing large deficits require comparably large amounts of appropriate
new housing, and until that is achieved, unit filtration will be upward in
direction. It is reasonable to conclude that the entry of
25,000 new high income workers into an area probably will significantly increase
the upscale housing deficit. It is sort of like a garter snake trying to
swallow a bullfrog – it can be digwested, but the snake is literally stretched to
the breaking point and very exposed to its predators. What happened in Seattle
and Arlington provides some evidence to support that conclusion. In Arlington.
just Amazon’s announcement significantly raised housing prices and reduced the
number of units for sale.
Another more general relevant national trend is the fact that while
the number of middle-income households has shrunk over the past decade, the
number of more affluent households has increased (the number of low income
households also increased).
To my mind, the above suggests that in our cities where affordability
is a serious problem, a very large amount of new upscale housing is needed for
them to reduce price pressures in less expensive areas and reduce the upward
filtration of units. Moreover, the constant recruitment/creation of new highly
paid creative workers only adds to the amount of new upscale housing that must
be built in order to foster general housing affordability. Large upscale
housing deficits, by reversing the normal downward filtration of units, creates a significant demand for the construction
of so-called “affordable” units. That demand is real and felt, and politically
can take on a life if its own. Local citizens may not want to wait, at best,
five years for affordability to trickle down from the top, or even much longer
when the upscale housing deficit is large and not quickly being reduced.
Billionaire Row type housing projects that are at the top of the price
ladder with units that are either largely unsold or usually unoccupied do not
help reduce the upscale housing deficit. They are not targeted to be purchased
by the creative/knowledge workers. To the contrary, they make it more difficult
by absorbing desirable development sites and diverting investment funds and
entrepreneurial talents from the construction of the more needed “normal”
The situation in Seattle suggests there is some merit to my analysis. After
Amazon shifted its office growth to Bellevue, 15,000 new jobs, the growth of
housing costs in the city plateaued, though costs did not decline. Successful
downtowns and their nearby neighborhoods may need to be sure that they, like
the snake eating the bullfrog, have fully digested any large influx of highly
paid workers so they can move on again to ingest more creative/knowledge
Furthermore, this is perhaps the regional creative job growth path
that other ailing successful cities should follow until their upscale housing
deficits are sufficiently reduced.
Also, while the top down, trickle down approach may sound good to
economic theorists, from a politician’s point of view it’s probably useless. It
has no immediate concrete visibility. It’s more like mumbo jumbo economics for a
whole lot of their voters. It takes too much time to produce real, observable affordable
housing units on a sufficient scale.
A few weeks ago, an article appeared in the Congress for
the New Urbanism’s ( CNU) online journal Public
Square titled “Why downtown retail is coming back ” (1). While the article had some valid and
encouraging points, overall it blurred over a very complex situation in which
retail in different types of downtowns
have different prospects for retail rejuvenation and growth. Most importantly,
there was no discussion of the enormous process of creative destruction that
the retail industry is experiencing, one that promises to continue for many
years to come, and that will strongly structure any rebound. Until we get a
better handle on what the new retail industry will look like we cannot get a
good notion about what the demand for retail locations and spaces will be.
Along that line of thought, the article also ignored the facts that any
comeback must be limited when the demand for retail space by national chains
has had a precipitous decline and 45% of the nation’s household GAFO (general
merchandise, apparel, furniture
and home furnishings, other miscellaneous retail) expenditures
are now being captured by online retailers.
The Public Square article makes much about increased retailer interest in “inner cities,” but this trend is anything but new. Major retailers have long been interested in and placed their stores in some types of dense urban locations. For example, by 1985, a ULI study was reporting a resurgence in downtown retailing propelled by growing CBD employment, an increasing appreciation of urban lifestyles, and a dramatic decline in the number of easy suburban retail project opportunities (2). They even have been going into highly ethnic downtowns since the late 1990s and early 2000s as evidenced by their presence in the outer borough downtowns of Jamaica Center, Fordham Road and Downtown Brooklyn in NYC. The article also failed to note that a whole lot of the major retail that is going into our inner cities is not going into their downtowns, but into large self-contained, car-oriented shopping centers that compete with the downtowns.
This raises two critical questions regarding the inner cities that
are very hard to now answer:
When the overall future demand for
retail space is very likely to be far lower than in the past, will inner city
locations really be getting substantially more retail stores located in them?
How many of those new inner city
retail stores will be locating in the inner city downtowns?
As for the retail chains, we know from past experience, their expressed interest
in locations often is not a good indicator
of where their stores will open.
The article also failed to note that most of our downtowns are in
small communities that always had few if any national chains– and that is unlikely
to change in the future. Nor did it discuss the prospects of the small
independent retailers these small downtowns must rely on.
Yes, it can be argued that new stores are opening, and downtown
retailing will not disappear. However,
since it is undergoing very significant changes in magnitude and operational
characteristics, it is still far too early to make any real sense of claims
that it is coming back.
UNDERSTANDING THE CREATIVE DESTRUCTION OF THE RETAIL
INDUSTRY UNLEASED BY THE GREAT RECESSION
we have been witnessing in the retail industry is not the oft mentioned retail
apocalypse, but a classic example, at the level of a whole industry, of what
Joseph Schumpeter called the process of
creative destruction — the “process of industrial mutation that
incessantly revolutionizes the economic structure from within, incessantly
destroying the old one, incessantly creating a new one.” While the media,
in its reporting on the retail apocalypse, has focused its attention on the
destruction, far less attention has been paid to the creation of a new,
vibrant and stronger retail industry, but one that may well require far fewer
and smaller brick and mortar retail spaces. That would mean far fewer and
smaller retail tenants for our downtowns.
Industry’s Latent Problems. Prior to the Great Recession, the retail industry was largely
ignorant of the truly bad shape it was in:
As Elizabeth Warren’s book, The Two Income Trap, showed several years before the Great Recession, many middle income households were being financially squeezed by stagnant income growth and quickly rising costs for housing, healthcare, childcare, transportation, and education. Their retail spending was often sustained by home-based loans and/or racking up large credit card debt. The Great Recession turned these households into today’s deliberate consumers who are more cautious about their spending, much more value oriented, and demanding of bargain prices. Gone are the middle income shoppers who “traded up” prior to the Great Recession.
In 2009, a team at McKinsey predicted that by 2011, the internet would be involved – i.e., play some role – in 45% of all retail purchases made in the USA (3). The vast majority of the retail chains seemed ignorant of that already well established trend and did not have very robust online presences, much less viable omnichannel marketing strategies. The shock and hurt the Great Recession threw at so many retail chains, the resulting consumer search for value, low prices and convenience, and the emergence of the “to the internet born” millennials, all led to a growing participation in internet shopping.
Far too many of the retail chains were very badly managed and, of course, their leaders never owned up to that fact. Forever 21’s recent going into Chapter 11 is a classic example of this, see https://www.nytimes.com/2019/09/29/business/forever-21-bankruptcy.html . Unfortunately, too many observers of the industry did not either. The problems proved to be myriad. Worst of all were ill conceived growth strategies based simply on opening more stores. Abetting that problem was a surprising ineptitude in decision-making about where to open new stores, how large they should be, and how close they should be to a chain’s other stores. Too often locational decisions were made not by rigorous analysis, but by following where other retailers were locating, especially their favored co-tenants. The old axiom that retail chains are like sheep — they like to herd — was all too true. The net result was that the chains had too many stores that were also probably too large, and too often in less than desirable locations. Many chains were also burdened by carrying too much debt, especially when they were bought out by financial firms seeking to maximize how much money that could extract from the retail operations. These new managers were not merchants, but MBAs trained in financial manipulations. The large debt burdens caused many bankruptcies. In search of profits, corporate managers cut the size and quality of their in-store sales forces, thus substantially diminishing customer service. Then, too, many chains lost contact with their customers by failing to provide the entertaining ambience, convenience, customer service, sizing and merchandise they wanted. Some chains even failed to notice that their customer base was aging out or moving on.
Chain managers began to look more at the value
of the real estate they owned or leased than increasing the profits from retail
sales. Hudson Bay, for example, closed the Lord & Taylor mother store on
Fifth Avenue in Manhattan not because it was losing money, but because of how
much money selling it could generate. This trend continues.
Across the nation, in the years before 2009,
especially in many of our most successful downtowns, be they in big cities or
affluent suburban or tourist communities, many properties with retail spaces in
them were bought for very high bubble-like prices. That meant that retail rents
would have to increase substantially. Moreover, the financing of these deals
often meant that the retail spaces contractually had to be rented to credit
worthy retail chains. When the Great Recession severely struck the retail
industry, these properties and their ability to attract retail tenants were
placed in a very precarious position. The purchase of the “Devil’s Building” at
666 Fifth Avenue in Manhattan was a prime example, but there were so many
one can be hopeful that today’s retail chains and those of tomorrow will be far
better managed than those of the past few decades, their past performance
warrants some skepticism about their future behavior. Prudence also suggests
that we can expect them to continue to make many serious errors, especially when
subjected to the very strong pressures created in a process of creative
Substantially Weakened Demand for Brick and Mortar Retail Locations and Spaces. The Great
Recession brought these problems to a boil and resulted in many well-known
retail chains going out of business, while many others are still fighting to
Countless thousands of chain stores have
closed since 2009 – for example, 7,000+ in 2017 and 7,000+ again in the first half of 2019.
GAFO retailers were hardest hit, especially
department stores and specialty apparel chains.
The surviving chains are looking for fewer new
locations, are being far more selective about locations when they do so, and
their new stores are about 25% smaller than those the chains opened in the
There are about 1,350 enclosed malls in the
U.S., but experts believe that only 200 to 400 are needed (4). Most class “B” and “C” malls are doomed to
closure and reuse.
Also, many malls and open air shopping
centers, to stay popular and solvent, are converting retail spaces to other
uses such as entertainment, personal services, food and drink. Some malls are
even adding housing and hotels. According to Costar, between Q1 of 2010 and Q1
of 2019, malls added about 13.9 million SF of entertainment space while open
air centers added about 52.8 million SF of entertainment space (5). Most likely
these additions were done by repurposing prior retail spaces.
There is little reason to believe that similar
trends are not also occurring in a large proportion of our downtowns. For
example, over the past decade, I’ve seen large amounts of former retail space
being leased to pamper niche – hair and
nail salons, spas, gyms, martial arts studios, yoga and Pilates studios, etc. –
and health care operations in downtowns across NY and NJ.
There has also been “vacancy rate creep.” Back
in the 1980s, a rate above 5% signaled cause for some concern and 10% a
problem. Today, a 10% vacancy rate seems to have become accepted as the new OK normal.
A recent 2019 report by Morgan Stanley found
that while “…e-commerce penetration reached 11% of total retail sales at the
end of 2018” that “e-commerce penetration in the GAFO segment” was
now over 45% (6). GAFO retailers are often the ones downtown leaders most want
capture rate achieved by online merchants plainly indicates that there will be
substantially less need for GAFO brick and mortar spaces. Will rebounding
downtowns, especially those in our inner cities, really be winning the lion’s
share of this reduced demand?
Small Merchant Problem. According to Statista: “There were 19,495 incorporated places registered
in the United States in 2018. About 84%, 16,411 of them, had a population under
10,000.” In contrast, only 10 cities had a population of one million or
more and only 310, or about 1.5%, had a population over 100,000 (7). For the
vast majority of these incorporated places, small independent merchants will be
their most likely retail tenants and tenant prospects. Many of these downtowns
have never had a retail chain, while others were able to attract some non-GAFO
chains and, more recently, dollar stores.
can be seen in the table above, the very small merchants, those with 0 to 9
employees had the lowest decline in numbers, -7%, between 2007 and 2012, a strong indication
that they were among the least hurt by the Great Recession, though there was
considerable variation by state. Among them was a huge number of nonemployer
firms. Many of them may have stayed open because the owner also had another
job. Among the small merchants, those with 10 to 19 employees probably account for
many of these small towns’ strongest
retailers. They suffered a significantly
higher decline, -15%, a sign they were hurt more by the Great Recession. They
may have been more vulnerable because they were more likely to have had
vicissitudes these small merchants have faced were quite different than those
faced by the national chains. For one thing, since most of them were not
offering GAFO merchandise, they were less apt to be hurt by the growth of
internet sales. In the years prior to the Great Recession, any small GAFO retailers were likely to have felt
the brunt of competition from big box stores such as Walmart and Home Depot.
Instead, most small town retail businesses were mainly focused on local,
neighborhood type needs such as food and beverages, health and beauty products,
and arts related products. However, in many smaller and less affluent
downtowns, dollar stores appeared and won substantial market share – even from
town primary trade areas are likely to be small geographically and sparsely
populated. If they have under 15,000 people that is too small to support most
independent small GAFO retailers – unless they adopt an omnichannel strategy that also produces
revenue flows from online sales and offsite sales in distant market areas.
major challenge for these very small
merchants is the level of local consumer spending, since it directly impacts
the cash flow they are so dependent on. Those in communities where household incomes are hardest hit
will feel the pain most. Those in communities where income and population
growth are stagnant will likewise probably work hard just to tread water. Retailers in small communities with strong household
incomes are more likely to prosper.
major challenges for these small merchants are their skill sets and abilities
to start and maintain a successful business.
By definition, half can be expected to have below average skill sets. According
to BLS data from 2016, about 56.1% of retail startups fail within their first
five years. That means that the smaller downtowns towns dependent on small
merchants can likely expect significant churn with the resulting need to either
recruit or develop new retailers. A possible confounding problem is that
nationally the number of startup firms seems to be diminishing, having fallen
by 19% between 2007 and the first half of 2019 (8). How much this holds true
for small retailers is not now apparent, but if the number of small retail
startups has diminished, that could have important implications for many
Green Shoots of the New Retail. On the other hand, there are many signs that brick and mortar
retail will not be completely disappearing, though how many locations and
how much physical space will be required are not now known. Here are some
of the positive signs:
Most Americans still prefer to shop in brick
and mortar stores — 64% according to a
2016 Pew Research Center national survey; 78% also said it’s important to be
able to try a product out in person (9). Several other surveys have over the
years had similar findings. The problem has been that the types of stores
retailers have offered shoppers have not been what many of them wanted! That is
beginning to change. There has been a big increase in retail chain concerns
about better instore experiences and more convenient transactions (purchasing
Some chains have continued to do well through
these apocalyptic times – off-pricers such as TJ Maxx; dollar stores; grocery store chains such as
Wegmans, Kroger and Aldi, and beauty product stores such as Sephora and Ulta.
Many “old” retailers seem to be learning new
tricks. For example: Best Buy and Target have made notable comebacks; Walmart
has created an impressive internet operation; Kohl’s is experimenting with
smaller stores, bringing in Amazon returns,
and putting Aldi groceries inside its stores, and Chico’s has reportedly found new online
More retailers are realizing the importance of
customer relationships and how convenience and instore experience can help
While chain stores have been closing, they
also have been opening, if at a lower rate. Old Navy, for example, plans to
double its store count and penetrate smaller communities.
Internet birthed retailers are opening brick
and mortar stores. They need them to be profitable! It remains to be seen how
many stores they will open. Many of them reduce their space needs and costs by
not keeping merchandise inventories onsite. Many of them like affluent downtown
and neighborhood shopping district locations.
Most importantly, retailers are now avidly
adopting omnichannel marketing strategies that see both brick and mortar stores
and their internet assets as related
ways of connecting to their customers — and often on the same transaction. For
example, it is becoming increasingly popular for shoppers to make a purchase on
a retailers website and then pick it up at the retailer’s nearby physical
store. Retailers are finding that physical stores can stimulate visits to their
websites and conversely that websites can stimulate visits and sales in their
brick and mortar stores.
Retailers are increasingly finding that besides
making sales, physical stores can play many other valuable roles related to
interfacing with shoppers, e.g., being places to pick up purchases,
experience/try out merchandise or
receive pampering amounts of customer service. Their annual sales consequently
may be a poor indication of their true value to the retail chain – or to the
landlords of their leased retail spaces.
Experimentation with smaller stores has been
going on for many years now. Walmart famously tried to do so in some rural
areas, and retreated. Now, a number of other chains are trying out smaller
stores that allow them to enter dense urban markets where their larger formats
cannot fit and/or would create traffic and/or political problems. Target has
been the most visible. The argument can be made that this is an extremely
important experiment for downtown retail growth. If the chains can learn
how to do the smaller formats successfully more will fit not only into dense urban
downtowns, but also into suburban and some rural downtowns. The key to their success
may be how they use the internet and AI
or AR to augment the smaller selections of merchandise they can offer in the
As I have noted in an article in the IEDC’s
Economic Development Journal, there is a definite trend in some rural and
suburban communities for new residents, drawn by the area’s quality of life
assets, to open new retail shops (10). In several instances, these shops and
eateries have become some of the best in the downtown. Quite often, those QofL
retailers have been facilitated by the market shares yielded by the department
stores and specialty retail chains that closed in failing nearby malls. It
should be remembered however, that many of these closing retail operations had
well below average market shares – that’s why they failed – and what they gave
up was also prone to being captured to varying degrees by the remaining retail
chains and online merchants.
AT SOME DIFFERENT TYPES OF DOWNTOWNS
to present a full typology of downtowns would require an arduous and
complicated effort that would likely
divert attention from the main subject of this article. Additionally, just
looking at a few examples will amply serve the purpose of demonstrating different
Downtowns and Commercial Districts. One well-known retail expert was quoted in the Public Square
article as arguing that : “Retailers have saturated the suburbs and the next
underserved market is the inner cities. And they are also thinking that it will
be a trend and growth market.” I found that use of the term inner city somewhat
confounding since I have heard it used overwhelmingly to refer to the core poor
parts of a large city that are usually heavily populated by “minority” groups,
while I think the expert was really using it as a broader synonym for “dense
urban areas”. Within dense urban areas
several different types of retail districts can be found if categorized just by number of stores and shopper affluence –
there is not just one type of inner city retail, district. Here again, to
maintain some brevity, I will focus on a select few. I will look at Manhattan and other NYC retail districts simply
because of the ease of finding relevant
data because of my past research on them.
The Crème de la Crème. This is undeniable: in our major cities, for countless decades there have been major CBD retail corridors that have attracted hordes of trophy retailers– e.g., Fifth Avenue and Madison Avenue in NYC, Newberry and Boylston Streets in Boston; North Michigan Avenue in Chicago ; Rodeo Drive in Beverly Hills, and Walnut Street in Philadelphia. The retail chains show how much they value such locations by not only being there, but by how much they pay to be there. For example, retail rents on the prime part of Fifth Avenue in Manhattan run about $2,871 PSF and about $960 PSF on Madison Avenue – see table above. The retailers often are there as much for the marketing opportunities provided by a “flagship store” as for the actual sales they make. That said, those sales can be huge. Back in 2009, the Apple store on Fifth Avenue reportedly had sales of $350 million, or about $35,000 PSF! Nearby Tiffany reportedly did about $18,000 PSF. (I’ve tried unsuccessfully to confirm these stats. I do not doubt that the sales PSF are very high, but they being that high, I am not sure.)
table above is from a report by Cushman & Wakefield on 11 of Manhattan’s
major retail submarkets. Unsurprisingly, Manhattan has tons of retail because
it has a large, affluent population, hordes of people working there and loads
of tourists, especially from abroad, who spend lots of money in retail shops.
The lowest retail asking rent is in the
table is $243 PSF and the average is
$860. It is reasonable to assume that most of the retailers paying such rents
were doing so because they expected commensurate sales revenues and profits. This
shows another basic and perhaps mundane point about our retail chains –they
have long entered urban commercial districts and been prepared to pay very high
rents when they saw a lot of affluent people living, working, playing and
spending in them. The question about retail interest in dense urban
areas has really been about their willingness to enter less affluent inner city
However, even these affluent submarket areas can have their problems. The Cushman & Wakefield data also show that across these 11 strong submarkets, about 21% of the commercial space is “available”, i.e. vacant or up for lease. In turn, that level of availability suggests that in these strong urban submarkets, something is not quite right. It very probably has little to do with their addressable consumer markets. Most of those consumers have benefited from income inequality, not been hurt by it. More likely are problems associated with the involved real estate properties and their tenants. Some proof of this is that when asked rents have been lowered, the availability rates also went down. There also is a real possibility that there is just too much retail space on the market, even in these posh market areas. It will be very interesting, for example, to see what happens in the 34th Street district after all the new retail space built by Related and Brookfield in and near Hudson Yards is fully activated. Also, greater retail chain entry into urban districts will depend on a lot more than just their desire to do so. It will also depend on local landlords and, as Walmart and Target have learned, the approval of city politicians. Surely, NYC is not the only big city facing such issues. Many of these major city downtowns, for example, have seen the closing or down-sizing of their department stores.
Long Successful Densely Populated Urban Districts. Here in the Borough of Queens, there are two shopping areas that demonstrate that retail chains also have long known about, located in, and succeeded in dense non CBD urban market areas with high expenditure potentials. They are also interesting because they have quite different operational characteristics and customer bases that exemplify what is happening in many of our non-crème de la crème urban commercial districts. Austin Street is a narrow two-lane street that runs parallel to the six- lane Queens Boulevard one block to its north. For about 100 years it has been the shopping area for Forest Hills Gardens and Forest Hills. Since about 1980, it has attracted upper middle income shoppers from an even wider area as such retailers as Gap, Gap for Kids, Banana Republic, Ann Taylor, Benneton, Loft, Nine West, Barnes & Noble, Victoria’s Secret, Aldo and Eddie Bauer decided to locate there– see photos above. Over the years, it has had its ups and downs usually in sync with the general economy. Recently, the B&N closed and one of Target’s “small stores” took its place, and Banana Republic and Ann Taylor have converted to “outlet/ factory” formats. In recent years, more national chains have closed than opened, with retail spaces being replaced mainly by eateries such as Shake Shack, Bare Burger, and high quality Asian restaurants, and personal services such as non-appointment doctors offices and barber shops.
are few large commercial spaces on this traditional street, the largest being
the one Target occupies that has about 25,000 SF. Attempts to redevelop
this area to create much larger retail spaces would almost certainly create
a political storm and likely be defeated. If retail chains are to increase
their numbers on Austin Street it will likely be by those able to use value
oriented formats that do not require large spaces, such as the current Ann
Taylor and Banana Republic factory stores. There is no existing space for
another retailer of Target’s size, or a small Whole Foods or a small
the storefronts constitute a traditional solid line of commercial activity on
both sides of the street for about 0.6 miles. It has a nice scale. It is
walkable, though its relatively narrow sidewalks can quickly seem crowded on
weekends. It can be accessed via four subway lines, the LIRR and several bus
lines, with most shoppers walking or busing there. Parking there is tight both
on-street and off, and not cheap. Some
of its independent retailers have been there for decades. It has some attractive eateries and bars. The
whole package is very much like a successful, walkable suburban downtown and it
attracts some of the borough’s more affluent shoppers who appreciate a non-mall
experience. The core neighborhoods Austin Street serves – Forest Hills
Gardens, Forest Hills and Kew Gardens – were early planned suburbs of Manhattan
and today they maintain many suburban characteristics.
The Austin Street district’s zip code area has 68,733 residents, 61% of whom are white only. The average household income is $101,342, and the median is $76,467. About 38% of the households have annual incomes over $100,000 and they will likely account for a very disproportionate amount of local retail spending. Over 59% of its adult population have a BA degree or higher and 59% are engaged business, management, science and arts occupations. In other words, within walking distance of the retailers on Austin Street are a large bolus of creative people and lots of households with significant spending power.
Just about one mile to the west of the Austin Street district, at 63rd Drive, starts another commercial district that runs about 0.7 miles west along Queens Boulevard. See the above map. It straddles two neighborhoods, Rego Park and Elmhurst and its major retailing is a fragmented and dispersed set of shopping centers. Elmhurst is the most linguistically diverse neighborhood in the US. The character of this shopping district and its tenants are quite different from Austin street. It has the Queens Center, an enclosed mall that opened around 1980 and for several decades was one of the top grossing retail centers in the USA on a $/SF basis. It also has some power centers with tenants such as a full-size Target, Best Buy, Costco, Burlington, Marshall’s, Century 21, TJ Maxx, Aldi, and Trader Joe’s. This district is not pedestrian friendly, and its mass transit assets are a couple of second rate local subway stops. But, it’s very car oriented, abutting the very heavily trafficked Long island Expressway (LIE) and Queens Boulevard and it has loads of parking garage space. Regardless of what NYC’s planners and idealists may believe or want, most Queens residents who have cars use them frequently to go shopping at places that are beyond walking distance. This shopping district’s location allows it to tap the many shoppers with cars who live in Queens.
Queens Center Mall offerings are those of a middle market mall. For example, it
has Macy’s, JCPenny, Michael Kors, Gap, Victoria’s
Secret and an Apple store. It is in a zip code that has a population of 96,353
– making it equal to a fairly large city — with median and mean household
incomes of $49,098 and $65,321 respectively. About 20% of the households have
annual incomes over $100,000. This shopping district is located in a solidly
middle income residential area and its big box value retailers are aptly
positioned both in their locations and their offerings to tap that market. However,
its car orientation and location next to two highly trafficked roadways means
it also can draw many shoppers from well beyond its zip code.
district does not operate in any way that resembles what a well-designed and
well run downtown should be. If this is the model for today’s retail chains to
penetrate our urban areas, then there may well be strong reasons to question
the value of their entry. Over the past decade, for example, some big box operations have
entered Jamaica Center – Marshalls and Home Depot – but observers report that
their shoppers, who mostly arrive by auto,
do not spend much time walking around and shopping in other downtown
stores. it is hard to see how the insertion of power centers or even a mall as magnetic
as the inward-looking Queens Center, would do much to help other nearby downtown
retailers or make the district to appear more vibrant. For example, part of the
reason The Gallery in Center City Philadelphia failed is that it was not very
permeable to pedestrians on Market Street. Fashion District Philadelphia, the heavily
renovated mall that replaced it,
reportedly is far more permeable for pedestrians.
Underserved Inner City Districts. Now let’s look at the inner city downtown and neighborhood districts where large numbers of lower income, non-white populations shop. Over the years, I have done a lot of work in places such as Jamaica Center in Queens; Fordham Road, Norwood and Hunts Point in The Bronx; Downtown Brooklyn; and West New York and Elizabeth in NJ. Since the early 1980s, I’ve heard about these districts being underserved by retailers and on many occasions I, too, made that argument. There is absolutely nothing new in that argument. What I usually found was that:
Local leaders, landlords and a tranche of middle income trade area residents were dissatisfied with the retail offerings as well as the district’s appearance and fear of crime.
Yet, there were numerous shops, fairly normal vacancy rates, and the sidewalks filled with pedestrians during the daytime . After visiting a few of them, one former president of Bloomingdale’s called them “beehives of activity.”
Over time, the dissatisfaction increased as the retail shops stopped serving middle income shoppers and focused more on lower income, “ethnic,” and teenage shoppers.
In seeming validation of Michael E. Porter’s famous argument in “The Competitive Advantage of the Inner City,” that dense low income populations in aggregate offered strong market potentials, the inner city retailers who focused on lower income shoppers very often reported strong sales PSF that rivaled those reported for some of Manhattan’s posh shopping corridors (11). Indeed, some were doing so well that they created their own chains that opened stores in inner city downtowns and large commercial centers across the NY-NJ-CT metropolitan region and even in PA.
Trade area analyses of these downtown and large neighborhood shopping districts consistently showed that the number of solidly middle income households were either sizeable or even in the majority, and certainly accounted for most of the retail spending power. For example, the 1987 report I co-authored with Bill Shore on Jamaica Center found that the households in its trade area had a 10% higher average income than those in NYC as a whole (12). In 2002, DANTH looked at the trade area of the Jerome Avenue BID in The Bronx and found the median household income in 2019 dollars was about $76,234 and 22.8% of the households had incomes in 2019 dollars above $109,889. What Porter appears to have missed is the fact that while many and probably most of our inner city commercial districts may be drawing from areas that are indeed heavily “ethnic,” with many lower income people, they also can have large numbers of solidly middle income and even upper middle income households that have most of the spending power.
Nonetheless, the retailers in these inner city districts were targeting the trade areas’ lower income residents and less affluent district visitors. In many instances, the low income segment was targeted by the retailers because they lived in or near the downtown and were its most frequent users. The market research of too many of these retailers was limited to observing the types of people they saw walking by their shop or possible location. More importantly, the retailers very often were making very sizeable profits – Porter did see this possibility –and saw no reason to take the risk of trying to attract their market area’s more affluent shoppers.
NYC has several outer borough downtowns. Jamaica Center is one of the three in
Queens. It is old, dating back to the colonial days. In 1947, when Macy’s
opened its second branch store in NYC, it was in Jamaica Center. It was long a true, multifunctional downtown. However, by the late 1960s, it
faced a steep decline with white residential and retail flight. In the late 1990s, and especially after
Porter’s article received wide national attention, some of the more sought
after national chains started to look more closely at dense inner city downtowns,
and Jamaica Center was one of them. By 2002, for example, One Jamaica Center, a
450,000SF a mixed-use complex was opened with tenants such as Old Navy, Gap, Bally
Total Fitness, Walgreens, Subway, Dunkin’ Donuts, a 15-screen multiplex theater.
Marshalls, Home Depot,, Footlocker, Petland also have located there. Just
opened are H&M and Burlington Coat Factory. Among those that have come and
gone are Payless, Toys R Us, Kids R Us, The Athlete’s Store – retailers
troubled at the corporate level. Gap is now in another location and using a
factory store format. Jamaica also still has lots of the chains that have long
felt comfortable being in inner city commercials districts such as Fabco, CH
Martin, Conway, Danice, Rainbow, Shoppers World, Young World, GNC, Game Stop,
Jimmy Jazz, Dr Jay’s, and Vim. Target is reportedly may locate in a new mixed
use project and it will be very interesting to see if it is a small store or
one of its larger formats. The smaller Target stores I’ve seen in urban
locations are not in inner city ethnic districts — my experience may be
limited – but in very solid upper-middle-income, non-CBD commercial areas such
as Austin Street or on East Illinois near the lake in Chicago.
emergence in Jamaica Center of a cluster of well-known national retailers who
appeal to middle income shoppers looking for value in their purchases is a
process that started many years ago and continues on today. There has not been
any sudden huge gush of retail interest, but a long-term series of stops and
starts that is building a herd of retail sheep that hopefully will reach the
critical size needed to attract more
retail sheep. Notably, this meeting of middle income retail demand is being
done by retailers with value formats – even the specialty apparel retailer, Gap,
is using one. There was normal churn, but no new large influx of retailers
targeting poorer shoppers – those retailers were long there.
Center had several existing large commercial spaces that could be converted for
use by these big box value operations. Among them were old department stores,
an old newspaper building and large former furniture stores. When will the
supply of those large spaces run out? What, if anything, will be done then to create new ones?
importantly, for the first time since the early 1960s, a very substantial
number of new housing units are appearing in Jamaica Center. One might suspect
they will intensify retail chain interest. If so, that points to the strong
possibility that if other inner city downtowns are now enjoying first time or
greatly increased retail chain interest, it may be because they have improved
in important ways that made them more attractive to retailers — and less
because the retailers have suddenly seen the light and are newly interested in
inner cities. Greater interest in downtown Detroit, for example, by retail
chains that are now doing well, would not be surprising given the significant
revitalization that has occurred there in the recent past.
Lessons to learn From the Retail Growth in The Bronx. There are perhaps no better examples of poor ethnic inner city neighborhoods than those found in The Bronx, NY. It has 1.5 million residents, a population density of 32,903/SqMile, the lowest per capita income among NY’s 62 counties, and only about 10% of its population is white only. For decades, the fact that the entire borough was badly understored was widely acknowledged, and largely ignored by retailers and developers. However, in a slow, start and stop manner, retail has been growing in the borough since the opening of the powerful Bay Plaza Shopping Center in the mid 1987, with another burst in the early 2000s and considerable growth since the Great Recession. The table below lists the major shopping centers in the borough and provides some demographic information about them. Since around 2000, well over 3 million SF of new retail space has opened in The Bronx, with over 2 million SF since 2009.
Road and The Hub are the two shopping districts with the physical
characteristics most like those of a downtown. They are also in the zip codes
with the greatest population densities and the lowest and third lowest
household incomes. Both have strong subway assets and Fordham Road has an
increasingly used Metro North station next to a large bus transfer point. Both
have comparatively little off street parking and are not that close to a major
highway. However, these two downtown-like districts have attracted a relatively
small portion of the new retail. The Hub
has seen little to no real growth. The 300+ store Fordham Road district has
done better. It remains a beehive of activity well after two major department
stores closed: Alexander’s and Sears. It has attracted a significant number of
national chains: American Eagle Outlet, Best Buy, Claire’s, Footlocker, GameStop,
Gap Outlet, Macy’s Backstage, Marshall’s, Nine West Outlet, Payless, Rainbow,
Sleepy’s, Staples, Starbucks, The Children’s Place, TJ Maxx, Walgreens and
Zale’s. Many of the larger chain tenants – Marshalls, TJ Maxx, Best Buy, and Macy’s
Backstage have gone into the buildings vacated by the department stores. Here,
as in Jamaica Center, large value and outlet retailers are important. There are few if any large retail prone
spaces of say 25,000+ SF available and that is probably constraining the
district’s ability to attract more major retailers.
of the new comparison retail in the borough has gone into the other shopping
centers listed in the table. The characteristic they all share is that they are
car oriented: they sit next to major highways and have lots of off-street
They plainly are targeting shoppers who are located well beyond the
neighborhoods they are located in. For example, Target is an anchor tenant in three
of them and claims addressable trade area populations of 400,000+. The retailers entering into this paradigmatic
inner city county are showing by their stores how much they nevertheless still
favor self-contained car-oriented shopping centers over downtown-like
locations. To some degree, this may be because of the lack of appropriate
spaces in The Hub and along Fordham Road.
Bronx Terminal Market (BTM) is a 913,000 SF retail complex that opened in 2009,
despite the Great Recession, is perhaps the strongest example of the retailers
continued preference for strong highway access locations. It is owned and
operated by the Related Companies, one of the largest real estate
developers/owners in the USA. Its presence in the Bronx more than 10 years
ago certainly demonstrates that the interest of important retail developers and
retail chains in The Bronx is not new. The new Yankee Stadium also opened
in 2009. With the new stadium, political leaders and the Yankee organization
wanted the surrounding area improved. Metro-North put in a new station,
existing subway stations were improved and the BTM was built. Its tenant list
included: Babies R Us, Bed, Bath & Beyond, Best Buy, BJ’s, Burlington, GameStop,
Home Depot, Marshalls, Michael’s, Raymour & Flannigan, and Target. That’s
one powerful retail line up! Those retailers need to draw from a very wide and
densely populated trade area, one that probably goes well beyond the South
Bronx. The BTM’s location right next to I-87 allows such market penetration. Aside
from that asset, the BTM’s location is not a particularly desirable one for
retailers. It is located in a relatively
low-income zip code that has a population density that is far from the highest.
Its strong car orientation indicates
that while it certainly might draw some close by lower income shoppers, its
primary customer base will be middle income shoppers located along the I-87
Kingsbridge Broadway Corridor in Zip Code 10463 has attracted three shopping
centers that together total 530,000 SF. The first opened in 20004 and the other
two in 2014 and 2015. They too sit very near an I-87 exit. Their zip code’s
residents are solidly middle oncome and 24% of the households have annual
incomes of $100,000. This corridor is very interesting because retailers there
can tap the close-in Kingsbridge, Riverdale and Inwood neighborhoods. The three
shopping centers have definitely increased the retail choices of local
residents. The distances between these three shopping centers are certainly
walkable, but the way they are built and the setting along Broadway are not
conducive to making such walks. They are not downtown-like and have done little
to stimulate the creation of a walkable shopping district along this section of
300,000 SF Throggs Neck Shopping Center that opened in 2014 is in a similar
type of location. It is next to an exit on I-95 and the residents on its zip
code are solidly middle income, with about 23% of the households having annual
incomes of $100,000. The Targets in this and the River Plaza shopping center
both have their main sales areas underground, as does the Costco in Rego Park.
This was done to bypass the zoning aimed by city fathers at deterring the
opening of large big box stores.
New Horizons Shopping Center is a supermarket anchored center in a low-income
neighborhood. It was created through the hard work of a terrific neighborhood
organization, the Mid-Bronx Desperados (MBD), that worked with LISC. Today, it
has a Stop & Shop, Auto Zone, TJ Maxx, Footlocker, Petland, Game Stop,
Subway, IHOP and Taco Bell. This is a traditional suburban type, car oriented
shopping center, with shops located in a
sea of parking spaces. It is also very close to the Cross Bronx Expressway. It
is not an urban shopping project with a solid wall of shops on the ground floors of
buildings that abut and open to sidewalks. On the once infamous Charlotte
Street, MBD had previously built ranch style single family residential units.
Their occupants have well-tended backyards, some boats sitting in driveways and
some above-ground swimming pools. Given their MBD origins, both the housing and
the shopping center certainly reflected local aspirations and needs. Residents
in many other dense, low-income, ethnic urban areas may also aspire to more
suburban type retail projects. Because people are less affluent does not
necessarily mean they like downtown or other urban retail environments.
That may prove to be another challenge to inner city downtown retail growth.
Bay Plaza Shopping Center and Mall is an example of a large and growing
suburban mall, but one located in the middle one of the most densely populated,
highly “minority” and poor counties in the nation. It is isolated in the geographic arm
fold of two major highways, I-95 and the Hutchinson River Parkway, and only
accessible by car or, with some difficulty, bus. It plainly is targeting middle
income shoppers not only in The Bronx, but also in lower Westchester County. Opened
in 1987, it has grown to over 2 million SF, adding 780,000 SF in 2014. Its tenants
range from traditional department stores (e.g., Macy’s) and specialty retail
chains (e.g., Victoria’s Secret) to the value pricing department stores
(Marshall’s and Saks Off 5th) and retail chains (DSW). Also included
are several regional chains such as Easy Pickins and Jimmy Jazz. Importantly,
they have also attracted retailers who are big hits with teens and young
adults, such as H&M, Forever 21, and Hot Topic. The array of national
retailers in this mall far outshines what The Bronx’s closest approximation to
a downtown, Fordham Road, has to offer.
Back in 2016, I compiled a list of 85 national chains and researched how many had locations in The Bronx (13). See the table above. While the list certainly was not exhaustive, the results are hopefully still informative. I found 75 of the identified chains had Bronx locations and together they had a total of 290 stores.
might be expected, The Bronx still has not attracted. the likes of Gucci,
Prada, Valentino, Tiffany, Duxiana, Ralph Lauren, etc. They are far, far too
ritzy and more appropriate for Rodeo Drive in Beverly Hills, Midtown Manhattan
or the Americana Shopping Center in Manhasset, NY. Nor is The Bronx attracting,
perhaps thankfully, those like Talbots, Chico’s, Ann Taylor or Banana Republic
– many of these apparel chains still are fighting for survival. Trader Joe’s
and Whole Foods still have stayed away. So have Walmart and its sibling Sam’s
Club – due more to strong political opposition in NYC to Walmart than the
chain’s lack of interest in NYC locations.
retail chains that now seem to like the inner city Bronx’s markets the most are those:
Aiming at the lower income and
ethic shoppers: e.g., Family Dollar, Dollar Tree, Dr Jays, Jimmy Jazz, Rainbow
Shops, Vim and City Jeans. Many of them have been around for decades.
With a neighborhood level store
location strategy: e.g., GNC, Walgreens, Payless, GameStop, AutoZone and CVS.
These types of retailers have been locating in ethnic inner city districts
since the mid 1980s.
Targeting middle-income shoppers in either big box, off-price, or factory
outlet formats. Includes Home Depot,
BJs, Best Buy, Target, Burlington Coat, Marshall’s, TJ Maxx, DSW, Gap Outlet,
American Eagle Outlet, Macy’s Backstage, Nine West Outlet, Aldi, Saks Off 5th. These are more likely to have arrived after
2002, but some go back to 1987.
The retailers honed in on the middle class now operate in ways
that recognize its huge number of deliberate consumers who are:
Much more value conscious.
Expect big price discounts from retailers.
What national retail chains may do is largely irrelevant for a very large
number of our downtowns that are small. They either never had any chains or
only had a few non-GAFO chains. Their trade areas often are far too sparsely
populated – e.g., probably under 15,000 people –to support small GAFO retailers.
In these small downtowns, the abilities
of local merchants will be a more critical factor than the behaviors of
national retail chains.
Most needed in these small towns are better merchants, through either
recruitment or re-training.
That our inner cities are underserved by retailers has been recognized at least
since the early 1980s. This is not a new situation, nor is the awareness of it.
National retail chains, probably since their inception, have been interested in
prime urban locations where lots of wealthy people lived and played, and they
have been prepared to pay a lot for them. Their locating today near to large new
market rate housing projects, especially if they are expensive, or in a walkable or TOD neighborhood, absolutely
comes as no surprise. What would be a surprise, is if they behaved otherwise.
5. For over 20 years, national retailers have been locating in highly ethnic inner city districts and downtowns, but the levels of their interest have been uneven over time and across places. The questions sparked by the Public Square article are: a) will retailers now locate in our inner cities at a higher rate than before, even though their demand for new retail space has significantly decreased, and b) will those stores be located in our inner city downtowns?
The retail demand of low income shoppers in these inner city districts were
long met by local retailers, who often had lucrative businesses and created
chains targeted to low-income shoppers in similar districts.
Middle income shoppers were the most underserved and complaining inner city
market segment. They were often surprisingly numerous and accounted for a large
proportion of an inner city area’s residential retail expenditure potentials.
National chains that usually targeted middle income shoppers have over the past
20 years increasingly entered inner city districts, targeting, as might be
expected, local middle income shoppers. It is their presence and not the
density of the low-income shoppers that attracts these retailers.
9. The retailers best positioned to capture
middle income shoppers these days are those that feature strong value pricing in either big box,
off-price or factory outlet formats. These are precisely the types of retailers
that are entering densely populated inner city areas.
Many of them require relatively large spaces and are accustomed to being in
very car oriented retail centers. They often are hard to fit into a downtown,
especially if it lacks large retail prone spaces and parking capacity. Consequently,
these retailers may prefer to locate in non-downtown inner city locations, and
downtowns might not benefit so much from any increased retail chain interest in
inner city locations.
The use of smaller formats theoretically could enable more of these chains to
locate in downtowns, but their viability is still being tested and their placement
in ethnic inner city districts now is still uncertain.
Most importantly, the retail industry remains in the midst of a process of
creative destruction that does not promise to end any time soon. As a result, how
much retail space will be needed in the future remains unknown, though it now
looks like it will be considerably less than it was even a few years ago. Also,
still to be clarified, are the uses the retail spaces will be put to, and how that will impact the amount of space needed,
their best locations and costs. These factors all have strong possible
implications for any downtown retail rebound.
Many other factors, besides the interest of the retail chains will determine
how a downtown’s retail will rebound. Among them are: the abilities and
behaviors of retail chains’ managers and local landlords; political, urban
design and environmental issues, the availability of appropriate retail-prone
spaces and ample parking, and, most importantly, where and how local consumers
like to shop.
There are some other interesting types of downtowns that appear to have their own
retail development scenarios these days: downtown creative districts; the lifestyle
mall suburban downtown; the urbanized suburban downtown; the rural regional
commercial center downtowns, and the small rural downtown gems. Unfortunately,
I cannot cover them in this already long article, but I want to acknowledge
in 2017, I published “Quality-of-Life Based Retail Recruitment” in the IEDC’s
Economic Development Journal (1). Among its main arguments were that:
Many of the new retail shops in our smaller and
medium-sized downtowns are being opened by new or returning residents
These new and returning residents are most strongly drawn
by the town’s quality of life.
There are a lot of talented people who prefer the
lifestyles offered in our small and rural communities, many of whom are now
residing in other locations.
Many will not need new jobs, or they can bring their
current jobs with them, or they will create their own new jobs.
They represent a substantial market segment that should
be targeted by downtown EDOs in our smaller and medium sized communities. Such
a program might be the most cost effective way to attract high quality
independent retail operators to these downtowns.
Over the past year, I have had consulting
assignments in a number of communities that are relatively rural and have
populations under 35,000: Auburn, Cortland, and Oneida in Central NY, and
Vinalhaven in ME. In the last few months, I also came across some research done
in Minnesota, Nebraska and nationally that, I am embarrassed to admit, I should
have found years ago, but that somehow eluded my earlier internet searches.
These studies were done back between 2007 and 2015. They and my consulting
assignments both provided new data and arguments that support the analysis I
presented in my QofL retail recruitment
article and expanded my understanding of many of the points I had made.
Rural Areas Have People in Creative Class
Occupations, But Fewer of Them.
a study published in 2007 of the
creative class in the nation’s rural counties by David McGranahan and Timothy
Wojan found that: “While in metropolitan counties about 30.9% of the workforce
were in creative class occupations, in rural counties it was just 19.4%” (2).
People Being Drawn to Small and Rural
Communities by Their QofL Assets Is Not a New Trend. The Buffalo
Commons survey of the Panhandle Region of Nebraska as well as research led by
Ben Winchester in northwestern Minnesota found that these rural areas had
“brain gains” as well as “brain drains,”
and that the incoming migrants were overwhelmingly attracted by a town’s
QofL assets. For example, the Buffalo Commons
survey found that migrants into the Panhandle’ counties were motivated by the
A simpler life, 53%
A less congested place to live, 50%
Being closer to relatives, 50%
Lower housing costs, 48%
Lower cost of living, 45%
higher paying job, 39%
Living in a desirable natural
environment, 37% (3)
Winchester’s study found that “There were a
number of factors that were important in the newcomer decisions to move:
To find a
less congested place to live , 77%
environment for raising children, 75%
better quality local schools, 69%
To find a
safer place to live, 69%
To lower the
cost of housing, 66%
To find a
simpler pace of life, (66%
To find more
outdoor recreational activities, 63%
To be closer
to relatives, 62%
To live in a
desirable natural environment, 60%
To lower the
cost of living, 53% (4)
Additionally, the study by
McGranahan and Wojan found that:
” The present analysis of recent rural development in rural US counties,
which focuses on natural amenities as quality of life indicators, supports the
creative class thesis”.
In the rural counties of metropolitan
areas, “ The creative class moves into less dense metropolitan counties in
search of a higher (more rural) quality of life; the building of a creative
class (then) creates an environment for job growth; and this leads to further
The In-Migrants Are Often Quite Skilled. Both the Minnesota and Nebraska studies found that these migrants “have significant education, skills,
connections, (and) spending power” (6). The Buffalo Commons survey found, for
example, 45% of them had skills in the
management, business, financial and professional fields. Many of them would be considered members of
the “creative class”.
However, findings of the McGranahan and Wojan study suggest that the
skill sets of rural and metropolitan creatives might differ in important
ways. For example: more metropolitan creatives had college degrees,
56.2% than the rural creatives, 36.8%. while
21.4% of the rural creatives were self-employed compared to 17.1% of the
metropolitan creatives (7).
Rural Innovation. A topic one might hypothesize is
strongly related to workforce skill sets is innovation. One useful definition
of innovation is: the introduction of
“new goods, services, or ways of doing business that are valued by consumers” (8).
A research report written in 2017 by Tim Wojan and Timothy Parker, of USDA’s
Economic Research Service found that:
Urban establishments in nonfarm
tradable industries were more likely than rural establishments to be
Innovation rates in urban and rural manufacturing
industries are very similar.
In the service industries, the innovation rates of
rural establishments are lower than those of the urban firms in the same
The manufacturing industries with the
highest rate of innovators in rural areas were pharmaceuticals, chemicals,
computers, plastics and textile mills.
The only tradable service-providing industries
with a high share of substantive innovators in rural areas were
telecommunications and wholesale electronic markets.
About 30% of metro establishments could
be classified as substantive innovators, while only about 20% of the nonmetro
establishments fell into this group. Importantly: “The metro-nonmetro
differences in innovation are considerable but less than commonly assumed” (9).
Artists Havens. Another
study published in 2007 by Wojan,
Lambert, and McGranahan, “The Emergence of Rural Artistic Havens: A
First Look” focused squarely on the issue of the ability of rural counties to
attract the artist subset of the creative class in 1990 and 2000. Counties
meeting some minimum employment levels and with more than 40 people in artistic
occupations were deemed to be artistic havens. Functionally, the existence of
an artistic haven occurs when “a minimum
critical mass of artists or performers” has been established so that “members
of the community benefit from substantial interaction among themselves and the
group is large enough to affect culture of the wider community” (10).
The authors identified two kinds of artistic havens. “Existing havens”
were those identified using 1990 census data, while the “emerging havens” were identified with 2000 census data. Altogether,
only about nine percent of our rural counties then had such havens.
However, what was noteworthy in their findings was that the number of
havens had doubled over a decade. (See table above).
The table below is based on the pooled responses for the American Community Surveys for the years 2007-2011. It was constructed by USDA researchers. Their results should be viewed as describing the situation during that time period. However, the ACS’s investigation of the number of “artists” is problematical because the average standard error on its estimates of the number of artists in each non-metropolitan county is about 45%. Nevertheless, the data may still be useful if we try to make some adjustments for that strong margin of error and treat the results as ‘directional” rather than definitive. To that end, instead of looking at the number of non-metro counties having more than 40 artists, I bumped the magic number up to 60. There are 668 non- metro counties that the ACS found having more than 60 artists, or about 35% of all non-metro counties. That suggests that there was probably a very substantial increase between 2000 and 2011 from the number of artistic havens, 199, Wojan et al identified in their 2007 paper. Prudence suggests refraining from claiming an exact number, such as 489 (668-199=489), but very substantial growth seems very likely.
Wojan et al explain that
the strong relationship they found between the emergence of new artistic havens
and the presence of large numbers of 25-44 year olds with college degrees is
based on the highly educated workers being viewed as a very powerful proxy for
quality of life” (11). They go on to state that: “The implications of these
findings are that counties that have been unable to retain highly educated
workers are less likely to attract artists in sufficient numbers to constitute
an arts community”(12). That all sounds
very Floridian, but the unstated implication is that a lot of these highly
educated workers is necessary. There are several problems with that. Richard
Florida is quite adamant in his argument that it is the type of work people
perform, not their education levels,
that is the defining factor of creative class members.
More importantly, there are small towns and cities like Auburn in NY where the percentages of college graduates, 20.7% , are quite lower than the nation’s, 30.9%, yet they are attracting between 50 and 100 artists who represent less than 0.5% of their town’s population. Nevertheless, they are able to build a sense of there being a recognizable artistic community, or “haven” in their communities.
Also, McGranahan et al
reported that about 63% of rural creatives lack college degrees. Does that mean
they lack the magnetism of other
creatives? That seems highly unlikely.
If the highly educated workers are a strong proxy for QofL, then it would appear that more precisely investigating what the components of that QofL are is essential. The Buffalo Commons and the northwestern Minnesota studies give some strong indications about what some of them are. My own discussions over the years with creative types living in smaller towns and cities suggests that, while they certainly like having other creatives nearby, and appreciated the beauty of their area, also very important are such factors as being closer to family, a slower pace of life, having a stronger sense of community, affordable housing costs, having active social places such as eateries, bars, public spaces and arts and cultural venues . In other words, they appreciated central social district type venues and the activities associated with them.
Getting back to the
table, some of the data in it are presented in ranges determined by + and – 45%
of the original estimates. For example, the mean number of artists per
non-metro is between 41 and 107. When the error factor was 8% or less, just the
estimates are reported in the table. This mostly occurred with the data on
creative class occupations. As night be expected, these data show that the
non-metro counties will have far fewer creatives and they will represent a
lower proportion of those employed than in the metro counties. However, these
levels are not negligible.
While Young Adults May Be Leaving, 30-49
Year Olds May Be Returning. In both NE
and MN, in-migration appears to have resulted in a surge in the populations of
residents in the 30-49 years old age group in some rural locations (13). Of
course, their populations in the young adult cohort show a consistent loss.
This suggests that a significant amount of boomeranging may be occurring. The
youths leave for better job prospects and a more urban life style, and many
then return to small and rural towns later
in life with more skills and resources that strengthen their new communities. For example, the Buffalo Commons survey found
that 38% of the respondents and 32% of their spouses had lived in their current
community prior to returning to it. Winchester found, though with a much
smaller sample of 53, that 43% of the “new” residents has previously lived in
or near their current community.
Boomerangs Are Important. One analyst has argued that
boomerangers are not that important because they only account for 30% to 40% of
the new migrants. To the contrary, it might more convincingly be argued that
they are very important because no other prior residential location has
anywhere near those numbers. Additionally, from the perspective of developing a
business recruitment program that targets QofL prospects, there are several
obvious possible networking opportunities with potential boomerangers that are
completely absent with other prospects. Moreover, there have been several
successful “Return Home” campaigns launched in communities such as Ann Arbor,
MI, Scranton, PA, and Superior, NE from which much can be learned (14).
QofL In-Migrants Can Have Impacts Larger Than
Their Numbers Might Indicate. My assignments in the Central
NY communities was on a project led by the Lakota Group to assess the
feasibility of establishing arts/creative districts in their downtowns. In each
community, well-attended focus groups
were held for local artists, arts leaders and business people. In each
town, a strong majority of the creatives
were either not natives of the town or boomerangs. When asked, most explained
their reasons for moving to that town In terms of the QofL assets it offered.
Auburn. The situations in Auburn and Oneida are very revealing about the impacts these QofL migrants can have on the local business community. In Auburn, in recent years they have opened a number of shops that are very highly regarded by local leaders and shoppers. They are certainly viewed as much better operators than those who previously occupied their storefronts. Their current number is below 10, but their presence suggests that the downtown is now in a much more upbeat place on its revitalization arc. It can be reasonably argued that their positive impacts on the downtown far exceed what their small number might suggest. Moreover, even If they keep coming at a rate of only one or two a year, in a few years there will be a substantial bolus of them with more than ample customer magnetism and image making power. They are successful because they are bringing in strong skill sets that are even relevant if they do a career reboot, as well as significant financial resources.
It is interesting that when interviewed, these QofL migrant entrepreneurs say that the presence of a significant arts community in the Auburn was an important factor in their decisions to live and work in their new communities. Since the Finger Lakes area is filled with numerous scenic places, outdoor recreational opportunities, vineyards, charming restaurants and inns, and historic sites, Auburn’s arts assets probably helped it compete successfully with other towns in the region to attract these new merchants.
The leader of a local artists organization
estimated that there are about 75 to 100 local residents who are artists of one
form or another. That means that the city of Auburn, with a population around
26,000, today seems to be an artistic haven: it has besides its resident
artists, nine major arts and cultural
attractions that have a combined annual attendance of about 199,000 that brings
about $6,273,356 in spending power to the city that local merchants can capture
(see table above).
Auburn is now on the path of creating an arts/cultural district to help provide a support structure for its arts community and to help it have stronger marketing and promotional capabilities. According the Americans for the Arts, there are now over 300 culture districts in the US (see the map below). They are proliferating, though only a small proportion our 19,000+ villages, towns and cities have them. The number in smaller and rural communities is unknown, but they are not scarce: e.g., Peekskill, NY; Paducah, KY; Ridgeway (900 residents), Salida and Crested Butte in CO. As a point of comparison, BIDs started to appear in serious numbers in the early 1980s and today there are over 1,000 of them across the nation. The culture/arts districts have not yet had 39 years to grow in.
Oneida. Downtown Oneida is now in the initial stages of its revitalization arc. Consequently, I was happily surprised to find in its struggling downtown a small group of independent merchants who are among the most marketing and internet savvy retailers I encountered in the overall project. While the old downtown retailers were dead or dying, these merchants were internet savvy and knew they had to tap consumers well beyond the town’s borders. One operates a vendor mart that brings a considerable variety of merchandise into town and provides some business incubation functions. Together, this group of operators formed a marketing campaign that targeted the visitors to a gambling casino located about an eight minute drive from the downtown. Two of these operators are boomerangs, and the spouse of one telecommutes on his job with a Fortune 500 corporation. Though the group is now small in number, it is modeling business behaviors for other merchants in the community, be they new or old, while bringing a badly needed perspective into the town’s decision-making about economic policies and programs. They are, consequently, helping to change the business culture in Oneida along several important dimensions as well as the way the downtown business community should be seen within the whole city. Moreover, I’ll bet their presence will attract more businesspeople who are like them.
Vinalhaven. This beautiful island is located about a 75 minute ferry ride off the coast of Maine. It’s roughly the size of Manhattan. It has a year round population of about 1,400 that bulges to about 5,000 in the peak tourist summer months. Lobster fishing and tourism are it major economic engines. Home-owners who are part-time residents and relatively longer stay home rentals are the most important components of its tourism. These renters are often annual visitors. The thing that binds the year round residents, the part-time residents, the long-stay renters and the fisherman is the island’s highly venerated quality of life. They are quite overt in their awareness of this. The community is also united in its concern that any growth in tourism should be balances so as not to endanger their strongly appealing QofL.
The island’s downtown is relatively small, with
relatively few storefronts, yet it is still the community’s economic and social
hub. On a recent visit, I found that several of its merchants were QofL
migrants with impressive previous careers elsewhere in the nation. They opened
their shops on Vinalhaven to provide themselves with some income and/or to keep
busy. This often meant career reboots. Some of the more recent arrivals wanted
to live and work on Vinalhaven so much that, because the of very high costs of
flood insurance, they had to pay cash for their new business locations. On
Vinalhaven, if you subtract the QofL migrants who opened businesses there, the downtown would be deader than a doornail!
Vinalhaven is also an artists haven. A local
gallery reported that about 70 artists are associated with it who spend at
least some part of the year in Vinalhaven. These artists have displayed an
attraction to Vinalhaven’s QofL. The gallery not only provides the artist with
a marketing channel, but also serves as the artists main local social venue. Robert
Indiana was a longtime resident. His estate may be opening some kind of museum
in the downtown.
The ability of small and medium sized communities in
rural areas to attract talented new and returning residents because of their
QofL assets is not a new phenomenon, but it has not been significantly
Rural QofL assets have traditionally been mostly as natural
amenities. However, more recently, a
high quality of life” is seen as being more broadly defined . That means that newcomers
being able to perceive the presence of an
ample number of people like themselves, strong central social districts humming
with some vibrant restaurants and watering holes, and strong public spaces are
increasingly the assets smaller communities will need to pull in talented new
residents and boomerangs.
“Brain Gain” and “Brain Drain” can happen in the same towns,
with the young adults leaving and
mid-life adults, many of whom are boomerangers, moving in from larger, more
Simply stated, the underlying challenge for small and
rural communities is to have the brain gain be larger than the brain loss.
Some of these new and returning residents will open downtown businesses. Though
early on their absolute numbers may be small, say just two to five, their
influence on the downtown’s revitalization can be exponentially greater. The
ability to even recruit 1 or 2 of such QofL entrepreneurs annually could have
very profound positive impacts on a downtown. Smaller and rural communities do
not have win hordes of new residents to see meaningful positive changes.
Potential boomerangers are an obvious market segment that
a recruitment program should make a high priority target.
However, anyone visiting the town, especially on a
recurring basis, should also be targeted – e.g., visitors to local hotels/motels,
restaurants, parks, museums, theaters, etc.
Smaller communities are, well, small, so you do not need
to attract hordes of creative class members — or their artist subset — to
spark significant economic development.
In my retail recruitment experience, I’ve found that there
are types of retail stores that clients need and those that they want. The need
category generally includes groceries, specialty food shops, pharmacies, etc.,
while the want category overwhelmingly includes GAFO operations — i.e., general merchandise, clothing and footwear,
home furnishings, electronics and appliances, sporting goods, book and music
stores, and office supply stores. The shops that respond to needs did relatively
well through and after the Great Recession, while the GAFO stores have been in
consistent decline or weakness since about 2009. Recent research indicates that
e-GAFO retailers are now eating the lunch of brick and mortar GAFO merchants.
An Enormous 45% Hit on B&M Retail Sales Potentials!. One of the most significant trends that has helped define the new normals for retailing and our downtowns is the increasingly significant share of the sales of the merchandise sold in GAFO stores that are being captured by online operations. Obviously, the more sales dollars the e-stores win, the less there are for brick and mortar shops (B&Ms) to capture.
A while back, in another blog posting, I presented the above
table, taken from a provocative study by
Hortacsu and Syverson, that showed e-store market penetration for a range of
retail categories in 2013 along with
estimates of the years in which they each would reach 25%, 50%, 75% and 90% market
A more recent 2019 report by Morgan Stanley suggests that
the Hortacsu and Syverson study was pretty sound. It found that while “…e-commerce
penetration reached 11% of total retail sales at the end of 2018” that “e-commerce penetration in the GAFO
segment” was now over 45%.(1) That makes
it so much harder for B&M GAFO retailers to survive, much less thrive,
unless they are executing or part of an omni-channel marketing strategy.
The Morgan Stanley report also found that “the shift to
e-commerce has hit the home-furnishings segment the hardest,” while clothing,
linens and other “soft” goods have experienced a significant “e-commerce
disintermediation” with a 22% e-commerce penetration expected in 2019. (2) It was long thought that these two retail
segments would be resistant to e-store penetration because one offers large and
heavy merchandise and the other offers merchandise that consumers would want to
touch, feel and try on. One weakness of such thinking was the failure to
recognize that so many of the soft goods we buy are like commodities and we
don’t need to touch them, feel them or try them on. For example, lots of people
have long bought shirts, trousers, shoes, dresses, swimsuits, parkas from
catalogs. They often are buying more garments like the ones they already have –
e.g., I have countless blue, button down collar shirts — or replacements for
them. Then, too, lots of home furnishings products are not furniture suites or otherwise
prohibitively large, while others have been re-imagined – e.g., Casper
Mattresses – so they can be shipped “small.”
How Are the Leakage Analysis Data Providers Dealing With This? Frankly, I do not know the answer to this, but I think the data providers owe their customers a clear explanation of how they are handling this situation. One technique they might be using for estimating consumer demand is to take the sales of retail stores by NAICS code within a certain fairly large geographic area and then divide the sales by the number of households in that study area. That defines demand solely in terms of B&M store sales, ignoring the huge Internet sales and demand. If, instead, they are using extrapolations from BLS consumer expenditure surveys to determine demand, then they must have whopping “leakages” in each of the NAICS codes analyzed unless they also are using data on e-store sales by NAICS code.
The leakages to the Internet for GAFO store merchandise now
are probably several magnitudes larger than traditionally defined leakages to
B&M shops located beyond the trade area’s boundaries.
Of course, an increasing number of downtown merchants now
have both a B&M shop and an e-store. Most of their e-store revenues often
come from distant customers and represent “e-surplus” sales. How are these
e-sales revenues included in the leakage analysis? How do leakage analysts know
which e-sales come from within the B&M store’s traditional trade area from
those that come from beyond it?
A growing number of retail sales are “click and collect” transactions
that involve ordering online via a retailer’s server that probably is located
hundreds of miles away and then picking up
the merchandise at the retailer’s local store. Are those transactions to
be deemed leaked or “unleaked” sales? The local store’s involvement may be key
to the sales transaction, though it may not logically be part of the monetary
transaction. Would the sale have occurred if the local store were not there? If
the answer is no, then somehow the role of the local shop has to be recognized
in the analysis.
Vacancies, Store Closings and Openings, Changing
A Word or Two About Vacancies. I fear that I’m very much an outlier, a contrarian, when it comes to downtown vacancies. While I don’t like vacant storefronts, my jockeys don’t always get in an uproar when I see them. Too often, they are not viewed from the proper perspective. Rule 1 for looking at vacancies should be to ask: where is the downtown on its revitalization arc? If it’s in the initial very troubled stages, then the prospects for recruiting really good retail tenants are not great, especially with today’s upheavals in the retail industry. Moreover, recruiting crappy tenants would be worse for the downtown’s revitalization effort than the empty shops. Also, at these early points in the revitalization process, an EDO’s scarce resources are probably better spent on working for improving the infrastructure and housing and reducing quality life issues such as the fear of crime, than paying for very problematic efforts to recruit good retail tenants.
Rule 2 is don’t be snooty — look at pamper niche tenant
prospects such as hair and nail salons, yoga and martial arts studios, etc.,
especially early in the revitalization process when their relatively low
revenue needs and desire for low cost spaces can put them among the downtown’s
best tenant prospects.
I take vacancies more seriously when the downtown is much
further along on its revitalization arc. In these situations, Rule 3 is the
locations of the vacancies are far more important than their number. Those that
are in strategic locations such as on or near the district’s “100% corner” or near
other strong assets will certainly need attention. A cluster of them is also
significant and probably indicates the existence of an important underlying
Rule 4 is that the downtown EDO should identify and address
such underlying problems, otherwise any “fill the vacancies” recruitment
program undertaken either by it or local commercial brokers will most likely
yield paltry results.
In the mid-arc downtowns, Rule 5 is to determine if new
downtown projects have raised landlord expectations about:
Their ability to attract national chains, even
though they are looking for fewer and smaller spaces and have become much more
finicky about their new locations.
Potential rental incomes to the point that their
spaces are too pricey for their most likely tenant prospects, small independent
If either of the above is the case, then there’s a landlord
problem, not a tenant prospect problem. This leads into Rule 6: as downtowns
revitalize, erroneous landlord estimates of viable rent increases can result in
more vacant spaces than diminished consumer retail demand or its associated
reduced retailer demand for store spaces.
In the past, I argued that a vacancy rate of about 5% was
the sweet spot for mid-arc downtowns. Some vacancies are necessary to allow for
the tenant churn that can bring in new merchant blood and help keep the
district vital. That still strikes me as an ideal goal. Many years ago, my real
estate mentors taught me that vacancy rates above 10% indicated the existence
of serious downtown problems that needed immediate identification and
remediation. Well, these days, under the New Normal, it seems that a 10%
vacancy rate is about average for retail spaces (3). Of course, I am not clear
whether that statistic refers to all the spaces in shopping centers and malls
or just to those allocated for retail tenants. Given that so many malls and
shopping centers have saved themselves by bringing in non-retail tenants, I
would say it probably is the former. One disturbing implication for downtowns
is that, these days, a 10% storefront vacancy rate may not be all that bad,
comparatively speaking. Even more unsettling for me have been the reports I’ve
seen of downtown vacancy rates in the 10% to 20% range in some of our small and
medium sized communities, Another
implication is that downtowns must look more to nonretail tenant prospects to
fill their vacancies, but ones that are able to stimulate and reinforce
pedestrian traffic on nearby sidewalks.
Because of Omni-Channel Marketing, B&M Retail is Not Going Away. One might expect that if the addressable retail markets for B&M chain stores have shrunk substantially, that lots of the stores would be closed. In fact, there have been a huge number that were closed –e.g., 7,000 just in 2017. However, new shops are also opening and an accelerating number of them are by Internet-birthed retailers (4). For example, so far in 2019, there have been 1,674 retail chain store losings, but 1,380 store openings (5).
Today, successful retailers do not see B&M store
customers as a different set from their e-store shoppers. Instead, they just
see customers who they can individually reach through several channels, e.g.,
B&M shops, websites, social media, traditional media, etc. They know that
while most consumers may still prefer shopping in B&M stores over e-stores:
Convenience is an important driver of which
shopping channel the consumer will select
Unless the B&M store provides an attractive
shopping experience, it will not attract as many customers as its management
B&M retail shops, under an omni-channel marketing
strategy can play a number of functions, besides being a place where sales
transactions occur, that can justify their existence:
SONY and Samsung, for example, have had
important store locations that are nothing more than showrooms. Many other
retailers use their shops as places where customers can experience the use of
their merchandise. You can, for example, book a nap at a Casper Mattress Sleep
More and more large retailers are offering
“click and collect” purchasing, e.g., Best Buy, Walmart, Amazon.
Some retailers are developing special store
formats, e.g., Nordstrom Local, where they can provide extremely high levels of
customer service to shoppers with a proven record of spending large sums in
Almost universally, the B&M store is seen as
the venue where the retailer can best provide experiences that will strengthen
their relationships with customers.
B&M stores also can generate website
traffic. For retail chains, a new B&M store in a market area sparks “a 37 percent
increase in overall traffic to that retailer’s website” by area residents. (7) “For
emerging brands, new store openings drive an average 45 percent increase in web
traffic following a store opening, according to ICSC research” (8). Of course, web traffic does not mean web sales
Very importantly, B&M stores outperform e-stores in
several very critical ways:
They have a much higher sales conversion rates (visitors who turn into actual buyers), averaging about 22.5% across all retail sectors, than the less that 3% for e-stores (9).
Merchandise return rates for e-stores are three to four times higher than for B&M stores, probably because e-shoppers cannot touch, feel, try on or otherwise experience the merchandise. Returns have become an enormous ball and chain on e-retailer profitability, while bad returns experiences are really ticking off e-shoppers (10).
Line: B&M retail stores are not going away, but there will be far fewer
of them, they will occupy smaller spaces, and perform many new functions that
justify their existence besides making sales transactions. How is your downtown planning
on dealing with such a scenario?