Category Archives: downtown retailing

AFFORDABLE DOWNTOWN RETAIL RENTS

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Introduction. As we slowly emerge from the Great Recession the time has come for downtown organizations to work hard on encouraging small independent retailers to seek affordable rents and for landlords to offer them. If they do not, downtown retail will contract and street level storefronts will be occupied even more by financial and personal service operations – or remain vacant for long periods of time.

True, in many downtowns retail rents have declined during the Great Recession, often substantially. In one I recently visited, for example, asking retail rents have dropped from $45/SF to $30/SF and in some instances even $25/SF. But, as we creep out of recessionary conditions, it is critical that in most downtowns retail rents do not regain their unaffordable levels.

In the new normal, small downtown retailers will be facing increased pressures to keep their operations lean and mean because capturing sales from today’s deliberate consumers is far more difficult than from the abnormally free-spending shoppers of the 1990s and 2000s. One budget line item they can focus on is the cost of the spaces they lease for their stores. This is a major long-term business expense and it is important that these retailers do not pay more than they can afford. It is also a business cost where “newbie” retailers dominate those going astray, though badly inept or unscrupulous merchants also tend to pay a lot more than what savvy merchants would deem affordable.

Looking at the other side of the coin, it is also in the interest of landlords to offer rents competent retailers can afford. In the new normal, far fewer stores will be opened by national chains and, among those, a smaller percentage than in the past will be placed in downtowns. Landlords, as a result, will need many local independent retailers to fill their storefronts. This will also be true to a significant degree for those who have built new mixed use buildings with expensively constructed ground floor storefronts. Additionally, as their rents reach ranges considered unaffordable by savvy merchants, the more likely they are to attract incompetent or sleazy businesses and also more likely to have storefronts stand vacant for long periods of time.

Defining Affordable Retail Rents. A useful formulation for determining an affordable retail rent is roughly 15% of the shop’s annual sales. DANTH’s merchant surveys and personal interviews with merchants over many, many years as well as the work of other firms, such as Urbanomics, found that downtown merchants generally felt that they could afford total rent costs that were 8% to 12% of their annual sales. However, more recently merchants say they are OK with 15%. While there is certainly some error factor present here, 15% is probably plus or minus just a few percentage points off the correct number. The major thrust of the analysis presented below is not affected by this error factor.

In a typical medium-sized downtown, independent retailers with annual sales of $500,000 to $1 million are relatively rare. Most independent downtown retailers would be quite happy with sales in the $300,000 range and joyous with sales around $450,000. Though in large downtowns the sales happiness range can be higher, the 15% rule applies everywhere, so I’ll stick with the retailers in medium-sized downtowns to simplify my argument.

The table above depicts information about:

  • How much rent is affordable to retailers with $250,000, $300,000, $350,000, $400,000 and $450,000 in annual sales. You can do the calculations for higher annual sales
  • How many square feet of space this “rent money” can buy at various prices per square foot.

The table also shows how with increased rents more and more of a downtown’s most successful merchants cannot afford to occupy the amount of space they might even minimally need for their operations. Look at how quickly even “small” spaces in the 1,500 SF to 2,000 SF range become unaffordable. At $40/SF not even a retailer with sales of $450,000 can afford a 2,000 SF; at $50/SF even a 1,500 SF storefront becomes out of reach. Of course, for the $300,000 shopkeeper, that happened at lower rents: a 1,500 SF shop is unaffordable at rents of $31/SF and 2,000 SF at $22.50.

Affordable rents should be tied in with balloon leases, where rents increase at an agreed upon rate as the retailer’s sales grow. Some savvy downtown landlords are already using balloon leases.

To The Groaners. To the downtown managers and Main Street managers who groan that is impossible to deal with landlords:

  • Dealing with downtown landlords and doing it effectively is part of your job. If you are not doing it, start doing it. If you do not know how, learn how. If after all that you still can’t deal effectively with landlords, get another job.
  • Every occupation has jerks; but they also often have a lot of reasonable, effective and even innovative people. This applies to landlords, too.
  • Find the landlords you can work with to implement an affordable rents program, then use them as a model to recruit others
  • One thing is certain: if you do not try, nothing will happen.

To landlords and developers who groan that they need high incomes from their new and expensively constructed retail spaces to pay off their loans:

  • You are big boys, you like to brag that you are big boys, so act like big boys
  • You either goofed in your calculations or you really did not understand that in most downtown mixed use projects outside of places like Manhattan and downtown Chicago, etc., the residential and office rents, probably for some time, will have to subsidize the retail spaces. This is especially true of unproven, revitalizing downtown locations
  • Given the current economic conditions your options are really either affordable rents that will diminish your losses or long-term vacancies and continued lack of retail rental revenues

To landlords who believe they should get market rate rents as defined by the highest asking rents they’ve heard about in the district:

  • Your unaffordable rents are likely to produce vacancies, because so few accomplished retailers would be interested, or perpetual churn, because you are likely to attract inept or schlocky merchants who are prone to failing or disappearing
  • This will affect the resale value of your property and this is not a great time for any commercial property
  • Have you really calculated the difference between the income that an affordable rent will yield and the zero dollars you will likely reap from the months your stores stay vacant because you want higher rents?
N. David Milder

Teenage Retail Market Update

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This is a follow up to my 3/10/09 and 4/24/09 posts on this subject.

Same store sales in November 2009 reported by retailers specializing in clothing and accessories for teenagers showed a 7.8% yr2yr decline, making it the worst performing retail sector.

Even Hot Topic, a former high flier, had a double digit drop, while Abercrombie & Fitch had its 19th straight month of reduced sales revenues.


The Bureau of Labor Statistics puts the current teenage unemployment rate at 26%. With fewer jobs and mommy and daddy being more careful with their dollars, teenagers have a lot less money to spend.

See the article by Stephanie Rosenbaum, “Recession? Teenagers Get It and Are Cutting Back” on NYTIMES.com, December 26, 2009.

Repositiong For The Future During The Great Recession: The Bayonne Town Center

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This posting was updated on 12/10/09.
 

Bayonne, NJ is the kind of place that folks form deep attachments to. Even when they move away or find another workplace, those warm feelings remain.

Last week I had lunch in Bayonne with an old friend and colleague, the city’s planner. It had been almost a year since I was last in the Bayonne Town Center and I was eager to see how it had held up during the Great Recession. After walking around the district for about an hour and a half, taking photos and shopping in some of the new stores, I was impressed by what I saw. Here was a perfect example of a downtown that, while experiencing higher than usual vacancies, was repositioning for the future by working to attract and create strong new assets.

Back home, I quickly sent Mary Divock, the district manager, an email message saying:

“…during the Great Recession the Town Center managed to make some really strong retail additions that will be even more important as the economy improves. I have attached snaps of the stores I feel are good additions. Most other downtowns I’ve visited recently cannot say the same. You should be proud.”

Here are some of the things I found:

  • A new and popular green grocer
  • ShopRite, located very close to the district, has doubled its size to 70,000 SF. I am hopeful that the district will be expanded to include the ShopRite and other nearby establishments. See: Article
  • A new shop featuring silver products had opened
  • So had a hearing aid shop
  • Another firm featuring medical equipment had moved from a side street to Broadway
  • GameStop and Petland had opened. According to a report in the Leisure eNewsletter, between 2007 and 2008, nationally, annual household expenditures for pets, toys, hobbies, etc. increased by almost 26%
  • Plans for a nursing home, across from the Bayonne Medical Center, with Class-A retail space on the ground floor had obtained city approvals
  • Plans for adding 14 residential units and renovating the store facades on an existing building were proceeding and there are expectations that some other buildings may follow suit
  • There were more than normal vacancies, but really not that much more and certainly their perceived impact was more than offset by all the new shops. As the economy improves the vacancies will ebb, but the new shops will only get stronger.

After my visit I learned that with the bottoming out of the economy merchants were again applying to participate in the BTC’s Jump Start Facade Improvement Program.

Here are some relevant photos:

Backdoor Retailing

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My October 29, 2009 posting on the new normal for downtown retailing prompted a number of requests for additional information about “backdoor retailing.” I am very happy to comply since, for some time now, that has been a topic I have wanted to write about, but just never got to.

Advantages and Disadvantages

Downtown merchants with backdoor operations have two customer streams and revenue sources. First are the walk-in shoppers they draw from the downtown’s pool of visitors. Every downtown business can draw from this visitor pool. Firms with backdoor operations also:

  • Sell to local businesses, organizations and even municipal agencies. These transactions and relationships fit in well with downtown sustainability strategies.
  • Sell to consumers, but out of their stores, and independent of walk-in traffic.

My observations suggest that firms with significant backdoor operations are usually stronger and stay in business longer than other firms in their downtowns. Moreover, these merchants are not inclined to passively sit on their duffs and just wait for shoppers to come to them, but they are more inclined than other merchants to be savvy about social marketing, both face – a -face and online (the subject of a future article).

This is not to say that they are untouched by economic downturns, as restaurants in NYC with large corporate catering businesses have recently demonstrated. In addition, the reduced dependency on downtown customer foot traffic potentially makes these firms less tied to their downtown locations as their backdoor operations grow. However, favorable downtown quality- of- life conditions can reduce the proability that they will actually relocate.

Traditional, Non-electronic, Backdoor Operations

Today, there are electronic and non-electronic variations on backdoor operations. But, the best way of conveying what these operations are like is to provide some examples of the traditional, non-electronic variety:

  • A retail tobacco shop in downtown Rutland, VT, that also was a distributor of tobacco products to merchants in Rutland and the surrounding region
  • A vitamin shop on Bergenline Avenue in West New York, NJ that both manufactured and distributed vitamins to merchants in the region
  • Paint stores in Englewood, NJ and West New York, NJ that have very large building contractor clienteles
  • A women’s clothing shop that took its wares to model and sell at local women’s clubs, PTAs, etc. (Unfortunately, while I remember reading about this on the web, I can’t find the citation in my files.)
  • Sporting goods shops here in Kew Gardens, NY and elsewhere that sell equipment to sports teams, leagues and schools
  • The plethora of restaurants in most downtowns doing off site catering
  • The Carvel in Bayonne, NJ – and I image elsewhere — that sell desserts to local schools, social clubs, etc.
  • A bakery in Woodbury, NJ, that supplied many local eateries with donuts, danishes, etc.
  • A well-known fish market in Maplewood, NJ that supplies over 40 restaurants
  • Nevada Meat Market that supplied many restaurants in Manhattan
  • A fruit and vegetable shop in Kew Gardens, NY that supplied local restaurants

Many downtown service operations also have backdoor components:

  • A dry cleaner in Kew Gardens does uniforms and work clothes for businesses throughout NYC
  • An upholstery shop in Washington, NJ that does work for well-known furniture stores in Northern New Jersey
  • Some hair salons and barber shops that serve non-ambulatory clients in their homes, nursing homes and hospitals

This list of examples of back door operations, though limited in length, is sufficient to show the broad gauge of their potential– and that such operations are certainly not confined to food products.

Online Backdoor Operations

The internet has brought a new dimension to backdoor operations. Merchants that have online storefronts with shopping carts and actual sales are engaging in electronic backdoor operations. The individual shoppers need not ever come to their stores. They are not walking in from the street. They may live in different states or even other nations and never have visited the merchant’s downtown.

On a more modest scale eBay allows downtown merchants to sell online a few items or groups of items without having to create and maintain a storefront of their own.

According to reports in the media and from downtown managers, a properly functioning web store can definitely strengthen some downtown merchants. I have seen a women’s apparel shop thrive because of their online store and I know of a collectables shop that survived through tough times because of its eBay sales.

But some perspective is needed here. Foremost, online sales make up only about 4% of retail sales. Also, most of our downtowns fall in the small and medium-size category and the overwhelming majority of their shops have modest annual sales revenues and very small staffs. Many of them may be able to create and maintain an inexpensive, uncomplicated website that provides simple information about the shop, its location and the types goods and services it sells. That might help drive some more customers into their shops. However, most cannot mount, operate and maintain a web store. Keeping the online inventory current and product shipment too often become killer tasks for small merchants. Some can do better by selling in a controlled manner on eBay. Most are probably best off not attempting electronic backdoor operations because they lack the computer skills, staff and money needed to succeed.

Cultivating More Backdoor Operations – Planting The Seed And Networking Local Businesses

While most merchants will not develop backdoor operations, my sense is that most downtowns have the potential for doubling or tripling their number. Over the years, my informal discussions with merchants suggest that more of the innovative types would try to develop backdoor operations if they simply had thought about them. This suggests that seeding the idea in the minds of the right merchants and then perhaps hooking them up with district merchants who already have successful backdoor operations might be a fairly simple and low cost way of starting to make it happen. Face to face meetings are probably a sure way to go. A low key workshop also would probably produce results – if the right merchants attend.

Also, a good starting point for many merchants is to explore what they could sell to the other businesses and organizations located in or near to their downtown. Downtown organizations can provide real help here by developing a “matchmaker” role. For example, the Long Island City Business Development Corporation’s staff has developed a role of matching the needs for goods and services of their district’s industrial firms with local suppliers.

The Takeaway

Increasing the number of strong stores is always an important objective of a sensible downtown organization. Growing the number of firms with backdoor operations can help make that happen. It should be an essential cog of your organization’s business retention program.

N. David Milder

The New Normal for Downtown Retailing: I. Introduction

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Across the board key Federal officials, renowned economists, and powerful business leaders agree that our Great Recession finally has bottomed out. The latest GDP data support this view. For downtown leaders this is a very appropriate time to ask: “What’s next?” Are we returning to the same challenges and opportunities downtowns faced prior to the recession? Or to conditions similar to those of the earlier parts of the decade? Or are we facing a “new normal”, with its own array of fresh challenges and opportunities that we must learn about and deal with?

The evidence points toward a new normal. Responding effectively to this situation will require some insightful, hard-nosed analysis and then a lot of innovative and practical problem-solving. This is absolutely not the time for puffed-up marketing, fluffy analysis or laissez les bon temps roulez attitudes, but there are still viable paths for growth and redevelopment.

Though much remains to play out (e.g., gasoline costs and consumption), in coming email blasts and postings to my Downtown Curmudgeon blog and DANTH, Inc’s website, I will start to detail some of the characteristics of this new normal. Among the topics I will discuss are:

  • The biggest single new factor that downtown merchants have to face is the rise of the “deliberate consumer.” Americans are poorer and feel less affluent. Consumer credit is harder to get and to keep. Also, the housing piggy bank is kaput. Shoppers are more value conscious, more calculating and less impulsive. They are still buying — but differently.
  • Capturing consumer expenditures now requires an even higher level merchant skill set than before the Great Recession
  • Increasingly important to this skill set is a “social marketing” component that has face-a-face and online dimensions
  • Downtown merchants will struggle to define what “value” means to the consumer – it does not always have to be low price
  • Many retail chains that liked downtown locations have either folded, been severely weakened or stopped putting new stores in downtowns. As a result, more than ever, the strength of a downtown’s retailing will depend on high quality independent merchants.
  • Baby Boomers are now retiring in increasing numbers, but are poorer, more frugal and finding it harder to sell their homes. Those that do “gray” our downtown residential projects will likely provide less lift for nearby retailers than previous “empty nesters”
  • Even after we climb out of the recession, doing downtown redevelopment projects as we did over the past 10 to 15 years will be far more thorny because of legal constraints, political challenges and difficulty in finding tenants and financing
  • A significant number of downtowns will have their growth constrained not only by malls or big box retailers, but also by nearby downtowns that already have been successfully revitalized
  • Young single knowledge workers have ignored and will continue to ignore living in most small and medium-sized downtowns. Some of these downtowns, however, are attracting artists and crafts people because of their comparative low costs, good quality of life and decent access to major arts markets
  • A surprising new factor: the luxury retail market will be weakened for some time to come, with diminished middle class “trading up” and “treasure hunting” shopping, and guilt constrained luxury buying. Also, significantly fewer at the top of the income ladder have a positive assessment of their personal finances – it is at the lowest level in 20 years. Many of the suburban “lifestyle downtowns” are vulnerable to the impact of this trend
  • Affordable luxuries will come back first. Larger mass luxury purchases requiring new credit lines will lag
  • Home and hearth niches will recover slowly following the housing market, with big ticket items lagging the most. Nevertheless, HDTVs, other “cocooning” related merchandise and children’s furniture will do relatively well.
  • It is far more difficult for downtown merchants to finance new locations, inventory, facade improvements, etc. Retailing will be stronger in districts where downtown organizations can help merchants cope with these problems
  • Low-price powerful warehouse retailers continued, even during the Great Recession, to increase sales and their market share. Downtown merchants have typically been poor at playing the low-price game. Big box and supermarket chains are more serious about rolling out smaller stores with a scale more appropriate for downtowns. Although contrary to their commitment to small independent local operators, should downtown leaders consider recruiting some small format, national, low price retailers?
  • Through the recession sales continued to increase for food away from home establishments. Downtown eateries that provide comfort food, good value, friendly service and a venue for friends and family to meet will continue to do well. Their strength also shows the continued importance of convenience and quality family time for dual income households and those with children
  • Non-comparison, convenience retail has been a steady rock for the vast majority of downtowns – e.g., food markets, drug stores, etc. – and will continue to be in the foreseeable future
  • There has been a significant decline in Americans’ participation in the arts, especially attendance at legitimate theaters, concert halls, museums, art galleries, etc. The recession deepened, but did not induce the decline. The audiences for these arts venues have become significantly older. Middle and lower income and younger folks are increasingly “cocooning” and consuming arts performances at home electronically.
  • Shops and restaurants that featured locally grown or produced products tended to fair much better than others during the recession and they will have increasing strength as the economy improves and the sustainability movement gains traction
  • Though online retail sales tanked more on a percentage basis during the recession than regular retail sales, “backdoor retailing,” both electronic and brick, will increasingly define successful downtown merchants
  • Ethnic downtowns did comparatively well during the recession. They will continue to fare relatively well because of population growth, upward mobility, unique sourcing of merchandise, language and cultural affinity. Also, they provide access to dense populations for many retail chains that see ethnic markets as untapped growth opportunities
  • More and more communities want downtown commuter rail stations. These stations will be cornerstones for strong downtowns – and their retailers
  • Another and perhaps most important cornerstone will be establishing the downtown as the community’s central social district with well activated and attractive public spaces and popular eateries having pivotal roles


Your comments are welcome.

N. David Milder