Category Archives: Innovations

Some More Specifics About Small Town Entrepreneurial Environments (STEEs)

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By N. David Milder

Introduction

Back in October of 2017, DANTH, Inc posted my white paper “Toward an Effective Economic Development Strategy for Smaller Communities (under 35,000)”(1).  A central concept in that strategic approach was the STEEs (Small Town Entrepreneurial Environments). I then stated that: “Though I strongly suspect that such environments exist today somewhere in the USA, to date, I have not encountered one.”  I then proceeded to outline what I then thought the major components of s viable and effective STEE might be. Since then, I have done additional research and visited and worked in a number of smaller communities and learned a good deal more about possible STEE components. The objective of this article is to detail those recent findings.

Viewing STEEs as Informal Business Incubators.

For a number of years now, I have been arguing that small town downtowns could be informal business incubators. My recent work made me realize that STEEs function much like informal business incubators. They are informal in the sense that all the elements of a business incubator are not in one building operated by an organization tasked to do incubation. Instead, they are dispersed within a downtown in different locations, and each may have a separate management organization. An interesting blog post by Jim Metcalf on the SCORE blog argues that incubator functions may be  spread beyond the downtown and be found in the whole small town (2).

Formal business incubators have long been a fairly widely adopted economic development tool. I would argue that they will always have a vital  role to play for firms that have substantial growth aspirations, that yearn to be big in terms of revenues, profits and employees, that want to be the next Apple, Facebook or Amazon. However, that usually means that the formal incubator will nurture a relatively small percentage of the businesses in a smaller community. For example,  the well regarded Wyoming Technology Business Center operates incubators in the cities of Laramie,Sheridan and Casper and:

TABLE 1

  • In Laramie ,the incubator has 8 clients and there are 657 residents who are self-employed, but have unincorporated businesses in the city (see Table 1).
  • In Sheridan, the incubator also has 8 client sand there are 340 people who are self-employed, but have unincorporated businesses in the city.
  • In Casper, the incubator has 12 clients and there are 1,567 people who are self-employed, but have unincorporated businesses in the city.

Informal incubation functions can help the micro and very small businesses that are usually fairly numerous  even in smaller towns, as is evidenced in Table1. Their operators very often have more modest aspirations, mainly focused on how to have more stable and/or higher annual personal incomes and the steps that might help them to achieve those goals.

Many of these micro business operators work from their homes.  Back in the 1990s,  these home-based operators were not deemed of interest by many economic development experts, because it was thought that their numbers were few and that they seldom if ever hired any employees. More recent research, however, suggests that their numbers are far from insignificant and, at least in some instances, can be very significant (3). As Dave Carlson, the administrator of Lancaster. WI, has noted, these micro businesses, in aggregate, can equal the number of jobs provided by his town’s largest employer. Also, recent research indicates that these home-based entrepreneurs may indeed hire some employees (4).  

My recent work in a few smaller communities in Upstate NY confirms Metcalf’s view – the towns had many incubator components, and many were frequently being performed in the town, but not in the downtown. The downtown obviously will be stronger if it’s the location where the vast majority of these functions are performed.

STEEs Do More Than Micro and Very Small Business Incubation

STEEs are very much related to the nurturing of creative endeavors within our smaller communities. However, they can also be a huge asset in the retention of a town’s current creatives and the attraction of more of them from other towns and cities. Those in large central cities within a 2.5to 3.0 hour drive are where the best prospects now live and work.

As I have demonstrated in several other articles and as noted in a recent article in the New York Times, a significant number of big city creatives are being drawn to rural local communities either as second homeowners or in complete, year round relocations (5). These relocations are being motivated primarily by quality of life considerations. While many create new jobs in their new towns, others bring their old jobs with them or create new jobs because the local broadband pipe allows them to telecommute. More affordable housing , a lower cost of living, family, great scenery, and a stronger sense of community are other Q of L lures.

Table 2, below, presents 12 STEE functions that are in bold and underlined type. The more of them that are present in a town, the stronger will be the town’s ability to attract and retain creative enterprises. The more of them that are in the downtown, the stronger it will be economically. Under each function are “tools” that can be used to perform that function. Here, the question is not how many can be used, but the strength with which they perform. Better to have one thing that really works than several of marginal utility. Yes, it’s better still to have several that really work well.

TABLE 2

Many town and downtown STEE assets are not recognized or properly appreciated by local leaders. This matrix can be used by downtown leaders to assess their STEE assets.  This should help them to then determine:

  • The elements they may want to think seriously about adding.
  • How the existing elements can be organized so that they are better known and more easily utilized.
  • How these STEE assets can be marketed to attract more creatives to move and do business in the community and the downtown.

The matrix includes such typical incubator functions as providing a work space, technical assistance for business operations (e.g., marketing, bookkeeping, human resource management, etc.), networking opportunities, and help with financing. It also includes such things as affordable housing, accessible broadband, and an existing cluster of creatives – important factors in recruiting creatives. Additional elements listed are the presence of an organization tasked to maintain and grow the STEE and someone to manage the provision of technical assistance. Downtown EDOs have typically avoided like the plague the latter two types of endeavors, but one may reasonably argue that, under the new normal, cultivating a strong, vibrant STEE will need to be a growing part of their missions.

Some Observations About Specific Types of STEE Components

While in the past few years I have come across some co-worker spaces and a few incubators that are located in in small towns, they were not the STEE components that impressed me the most. Here are some that impressed me as being far more important.

Libraries. In more and more small towns, the public library has become – or is becoming – an anchor component for its STEE.Libraries are changing big time. As one blog has described it, many libraries are now  “in the process of transitioning from a content collection-only facility to a content creation-inspired makerspace” (6). Not only do they provide spaces where “makers,” a term that is often broadly defined, can meet, learn from each other, and network, but they also provide a wide range of equipment the makers can use in the library. A few are even assembling an inventory of maker “kits” that are loaned out to makers for their use off site. Some librarians are arguing that libraries need to become “creative spaces.”

The Phillips Free Library in Homer, NY (pop 6,200) is a good example. It has two writers clubs, a film making club and a significant Makerspace, filled with a lot of equipment (see Table 3).

TABLE 3

Arts Coops. In many of these small towns there are a fair number of artists and artisans. Few are likely to get all their incomes from their artistic endeavors, so many will need additional employment. As one artist in Small Town X told me, and several of his artist friends then concurred: “Small Town X is a great place for artists – except for those who want to earn a living.”

Most lack business related skills and want help in marketing and getting exposure. Unfortunately, it is often difficult to get these small town artists and artisans the technical assistance they need and often want because the assistance  simply does not exist and/or the artists’ great need for independence, that they share with other small businesspeople, makes them resistant consumers.

In these small towns, getting say 20 artists and artisans the technical assistance they need may be a daunting and resource burning task.For that reason, coops are an appealing concept. When they are functional, they substantially diminish the needs of the participating artists for technical assistance. The coop can handle a lot of an artist/artisan’s marketing and bookkeeping needs, while creating a social network among the coop members.  

However, coops are often unstable and short-lived. In recent months I have found one that closed, another that was reorganized and a third that appears to have some long-term stability. Even the venerable Torpedo Factory in Alexandria, VA, had a recent organizational and financial crisis. Someone, who was involved there on the management side, noted that managing artists was like trying to herd cats. Coop leaders very likely to face a similar challenge.

The questions that comes to my mind are:

  • Can the management of a coop be improved more easily, efficiently and effectively than improving the business-related skills of their 15 to 30 artist/artisan members? Getting them to individually attend an eight-to-ten month course comprised of four 10-hour workshops and up to six two-hour interim sessions, as a highly regarded program in Montana does, requires a significant amount of commitment from the artists/artisans.
  • The Montana program is indeed interesting and useful, as well as a model for similar efforts in other states. In Montana, it has improved the entrepreneurial skills of 400+ artists over 5 years, resulting in impressive increased net sales of 397% with a 44% increase in out-of-state sales, on average, since participating in the program. Nevertheless, I still find myself asking: could the development of a program aimed at making coops more successful be a cheaper and more productive way of meeting the technical assistance needs of artists and artisans (7)?    

I do not know of anyone who has addressed the question of how to make arts coops more stable and successful. Someone perhaps should take a stab at it.

 Vendor Marts. I have long been familiar with antiques malls, but somehow vendor malls, their kin, had not been on my radar until I recently came across one in a smaller community in Upstate NY.  However, I had seen one in a downtown in NJ a few years ago that was being pitched as a retail incubator in the owners attempt to win support from the downtown’s EDO and city officials.

Indeed, my recently aroused interest in vender malls is precisely because of their incubation and STEE  capabilities:

  • They provide small, maybe about 150 SF,  and comparatively affordable spaces, maybe about $2,700/yr,  for aspiring retailers, artists and artisans.
  • The vendors must “mind the store” and be behind the cash register for at least a few days a month, so they can get some retail experience. For many artists and artisans, whose primary concern is creating, not selling, this can be a very attractive feature.
  • Vendors that do well then can “graduate” and lease a regular storefront elsewhere in the downtown or town. The vendor mall I recently visited in Upstate NY had just had such a graduate.

Any competent downtown EDO should be able to set up a vendor mart in an empty storefront. It could increase the incubation capabilities of the vendor mart by helping the vendors learn about available technical assistance providers and then helping the vendors to connect with the TA providers. Of course, if the downtown already has a vendor mall, it could similarly increase their incubation capabilities.  

Project Generated Local Investment Groups. A few years ago, in the twin cities of Scottsbluff and Gering in Nebraska, I came across informal investment groups that were formed within the local business community. One such group, for example, has helped the development of a new hotel in downtown Gering. I recently heard of similar type group being formedt o help fund the significant expansion of a local craft brewery in a smaller community also located in Upstate NY. The town may well have lost the craft brewery had not the local investment group emerged and taken action.

These groups usually are formed in response to a public need that has been identified by local officials or by well-known private sector needs.   

Opportunity Zones (OZs). Recent congressional action has significantly increased the capital investment incentives that can be offered in OZs.  While many in the economic development community are waiting to see how those incentives are used and the positive impacts they produce, there now is a hopeful optimism that those incentives can be powerful.

I have come across a number of downtowns that are entirely or partially covered by OZs, but do not tout them very much. Perhaps their new incentives are just too new for local leaders to figure out how they can be used. It also may be that the incentives go to Qualified Opportunity Zone Funds:

“A Qualified Opportunity Zone Fund is any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another qualified opportunity fund) that holds at least 90 percent of its assets in qualified opportunity zone property (8).”

Many REITs and other commercial real estate investment funds are making OZ investments. For smaller towns to attract these big time investors, they will have to market the opportunities offered in the OZs  and compete for the available investment dollars.

Might it be better to have the local residents and businesspeople who participate in the informal investment groups form their own QualifiedOpportunity Zone Fund?  

Some Final Comments

Since I published the white paper I have been repeatedly impressed by what I have found in the smaller towns I have visited and read about. (See especially: “Our Towns: A 100,000-Mile Journey Into the Heart ofAmerica” by Deborah Fallows and James Fallows). I certainly recognized that they have significant challenges, but I also found a large number of capable and inventive people and capable organizations. Together, they are often building communities rich in their quality of life, if so far not in household incomes and corporate profits. There are often substantial human, organizational and economic resources in these communities that go unnoticed by outsiders and locals alike. Rather than disappearing, I expect that within the next 10 years or so our smaller communities, especially those within a three-hour drive of a major city, will become “hot” and attract many new residents and jobs. And that’s the view of a dyed in the wool New Yorker, who may like to visit smaller towns, but would never live fulltime in one – unless he has to.  

Endnotes

1) See: https://www.dropbox.com/s/tnwdomfzwrkv5i1/White-Paper-Toward-an-Effective-Economic-Development-Strategy-for-Smaller-Communities-1.pdf?dl=0

2) Jim Metcalf. “Small Towns as Business Incubators.” SCORE Blog, March 29, 2018. https://www.score.org/blog/small-towns-business-incubators

3) “According to the 2012 GlobalEntrepreneurship Monitor (GEM) Report, 69 percent of all businesses are started from home and 59 percent are still operating from their homes three years later. Additionally, ‘only one-fourth of the entrepreneurs surveyed stated they had no employees working for their businesses. Given the high prevalence of entrepreneurs operating at home (two-thirds of Total Entrepreneurial Activity),this finding suggests that many actually had employees in their home-based businesses.’” Melissa Davidson. “FOCUSING ON HOME-BASED BUSINESSES: The Forgotten Sector. IEDC EconomicDevelopment Journal,  Volume 17 / Number 1/ Winter 2018, pp.11-18, p 11.

4) Ibid.

5). N, David Milder,  “Quality-of-Life Based Retail Recruitment: CommunitiesWith Populations Under 35,000,” IEDC Economic Development Journal,  Volume 16 / Number 3 / Summer 2017. Seealso:  Brooke Lea Foster. “Forget theSuburbs, It’s Country or Bust  “ New York Times, Dec. 14, 2018    https://www.nytimes.com/2018/12/14/realestate/forget-the-suburbs-its-country-or-bust.html

6) There’s even a librarian guide to makerspaces. See: https://oedb.org/ilibrarian/a-librarians-guide-to-makerspaces/

7) For the Montana program see: https://art.mt.gov/map. “Artists in the program (2009-2014) report increased net sales of 397% with a44% increase in out-of-state sales on average since participating in the program, proving that the program works. The Montana Artrepreneur Program has earned national acclaim and has impacted nearly 400 artists across Montana.” “FY2019Activities

8) See:  https://www.wellsfargo.com/the-private-bank/insights/planning/wpu-qualified-opportunity-zones/

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

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By N. David Milder

Introduction

A spate of recent articles has appeared that talk about our nation’s retail apocalypse. There is even a new Wikipedia entry for it: https://en.wikipedia.org/wiki/Retail_apocalypse . On the other hand, some important players, such as Brookfield Property Partners, Elliott Associates, and Third Point (see: http://tinyurl.com/y9cgoa2u) have made significant contrarian investments in retail real estate development companies such as GGP and retailers such as Restoration Hardware. Moreover, while there have been many reports about numerous store closings, the number of store openings, though admittedly far fewer, are not insignificant. Additionally, the post-Great Recession years have seen major retailers such as Target, Best Buy, Marshalls, and Walmart enter dense urban ethnic areas in numbers previously unseen. That said, the growth of e-commerce has had, as widely noted, a strong disruptive impact on the retail industry. As has the behavior of Deliberate Consumers. Since the fate of the retail industry will likely have strong impacts on many downtowns, a year-end assessment of that industry seems like a fitting task for the Downtown Curmudgeon to undertake to see if we are in the midst of an apocalypse or a paradigm change. It may well be that we are in the midst of both since paradigm changes usually mean massive changes in old structures.

 Consumer Demand for Retail Goods and Shopping Behaviors

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

Deliberate Consumers (DCs) In 2017, DCs are still alive, well, cautious about spending and value conscious. They now expect and search for bargains, an expectation that retailers have unhappily fostered and continue to reinforce. For example, a recent NREI newsletter reports that:  “Almost half of apparel sold online during the (Thanksgiving 2017) holiday season were marked down an average of 46 percent, according to research firm Edited (See:  http://tinyurl.com/ybvzn22g ) Though, DCs have more jobs and more confidence in the economy than they had in 2010 and probably a little more money in their pockets, they are not making retail purchases the way they did pre-2008. Consequently, where they are present, their cautious behaviors continue to create serious problems for brick and mortar GAFO retailers, unless they are targeting and catering to the DCs, e.g., the off-price operations. If your downtown’s trade area is dominated by middle-income households, then your retailers must deal with lots of DCs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Rise of E-Commerce

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

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

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

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

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

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

Retailer Demand for Space

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

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

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

Troubling still is the research by F&D Reports that suggests 33 retail chains with a total of 34,450 stores are now “vulnerable,” their futures distinctly uncertain. Among them are Ascena (whose store brands include Dress Barn, Maurice’s, Lane Bryant, Catherine’s, Ann Taylor and Loft), GNC, Toys R Us and Claire’s. (See:  http://tinyurl.com/yd6nw2gb)

Some observers argue that, currently,  the root problem of these troubled chains is not Internet competition or careful consumer spending, but that they “are overloaded with debt—often from leveraged buyouts led by private equity firms.” ( See: https://www.bloomberg.com/graphics/2017-retail-debt/ ).  Much of this debt was incurred at a time when the Federal Reserve was keeping interest rates close to zero, but those rates are expected to rise soon as those loans are due and when they will also have to compete with a lot of other borrowers looking to refinance their loans. This major threat seems to result more from incompetent business practices, than from e-commerce impacts.

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

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

Simon Properties, the nation’s largest owner/operator of retail malls, has just created a new program to facilitate e-retailers being able to affordably open pop-up presences in its 300 malls (see http://tinyurl.com/y8qalsuc ). Simon obviously sees e-retailers as the source of future successful retail tenants and is trying to ease their transition to brick and mortar operations. Simon is not alone in this. Savvy retail landlords across the nation are also focusing on these retail tenant prospects and all expect their numbers to grow.

Successful Malls.  Here is another key point that counters visions of a retail apocalypse: about 20% of the shopping malls are doing very well and they generate nearly three-fourths of mall revenues. They are “…located in affluent, highly populated markets that are tourist or economic hubs; and they’re owned by major mall operators who have the cash to make them even stronger.” (See:  https://www.cnbc.com/2017/01/26/why-these-malls-are-thriving-while-others-die.html.) Malls still can be very profitable if they are in the right location and well-managed. 

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

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

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

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

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

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

“New York City’s economy continued to grow in the third quarter, although the pace slowed after an employment surge during the second quarter. A critical driver of retail activity, steady New York City tourism contributed to this growth as a record 60.3 million tourists visited the city last year, with 50.0 million visitors to the Times Square area alone.” (See: http://tinyurl.com/y92kw3qb)

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

In recent years, the city’s media have produced numerous stories about the growing vacancy rates in neighborhood commercial districts and the wholesale disappearance of small independent merchants. Vacancies even sparked an editorial in The New York Times (see: https://nyti.ms/2hNwVuP ). The independents usually closed when their leases came up for renewal in a district that was on the upswing and they could not afford the huge asked for increases that could reach as high as 625% ( see: http://tinyurl.com/ycfzc4x2). Landlords asking for such increases from small merchants obviously wanted them out so they could attract national chains with much deeper pockets. Problems arose when the location and space demands of national GAFO chains declined substantially and their recruitment became far more difficult.

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

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

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

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

Too Much Retail Space?  Of course, if a downtown has more retail space than the market can absorb, there will be plenty of vacancies. According to data from CoStar, total retail space in the U.S. totals about 13.0 billion square feet. That estimate includes both the total GLA in shopping centers and the GLA in other types of retail spaces, e.g., those in downtowns and neighborhood districts. (Source: CoStar Group, Inc. cited in  http://cwglobalretailguide.com/unitedstates/). With a current US population of 326.3 million, that translates into 39.8 SF of retail space per capita. Back in 2009, ICSC estimated that there was 14.2 billion SF of total retail space and 46.6 SF of retail space per capita. Some communities may have even more per capita retail space. For example, back in 2010, DANTH, Inc. estimated that Peoria, AZ had 58.7 SF of retail space per capita (see http://tinyurl.com/y8gsvaes, page 7).

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

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

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

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

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

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

Today, those physical stores are:

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

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

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

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

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

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

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

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

A recent article by Bloomberg noted that: “more chains are filing for bankruptcy and rated distressed than during the financial crisis.” Often these bankruptcies involve long-lived, well-known chains that were taken private, using a lot of debt, by private equity firms. (See: https://www.bloomberg.com/graphics/2017-retail-debt/ ).  

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

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

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

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

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

Looking Ahead

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

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

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

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

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

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

Let’s Get Real About: Self-Driving Cars. Social and Political Engineering Will Also Be Required

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By N. David Milder

Revised September 7, 2017.

Introduction

These days there is a lot of hype, puff, and unrealistic expectations associated with the coming transition to self-driving cars in our nation. For example, in September of 2016, Lyft’s president and co-founder, John Zimmer, made the astonishing claim that the coming “driverless car revolution” will “all-but end” car ownership in our cities by 2025 (1). Zimmer had not even a glimmer of the massive scale and complexity of the “car revolution” he was both advocating for and predicting its success. It is one thing to have driverless cars that work, another for them to be manufactured, bought and used by the public on a massive scale.

Unrealistic expectations about driverless cars are often also infusing more everyday discussions. For example, a few weeks ago, I participated in a LinkedIn discussion thread that was initiated by a post about how dense residential development in a neighborhood had created a big on-street parking problem. I was somewhat taken aback when someone, who seemed to be a planner, suggested driverless cars could solve the problem. Are driverless cars really that well developed that they can be recommended as viable corrections for today’s problems? Or even tomorrow’s? Can they be implemented now or even soon enough to be relevant to current project, program or policy decisions? Or do we wait to solve many important problems until the transition to driverless cars is completed?

Now, I am not a Luddite. I fully expect that if I am still around in 2037, or maybe 2047, some variant of driverless cars will dominate our urban transportation scene. Still, I have rather uncertain expectations about how that transportation scene will evolve over the intervening years. However, three things are undeniable right now:

  • There’s a lot of advocacy going on and that means marketing and PR puff up the wazoo. Discussion about self-driving cars is certainly good for both the public and policy-makers, but its value declines with puffery and inaccurate statements. Let the discussion be passionate and visionary, but also reasoned and factual.
  • The change over to driverless cars will be a huge techno-socio-economic phenomenon, so large that its intended and unintended consequences – both positive and negative – are really hard to foresee with great reliability. Yes, discerning potential consequences is possible, but that is quite different from knowing with great confidence what the consequences will be. Prudence consequently directs that we should expect the unexpected.
  • There are three – not just one – interrelated revolutions unfolding around our use of automobiles:
    1. “Electrification: a shift from internal combustion engine (ICE) vehicles to electric vehicles (EVs).” (2) Electrification will probably account for most of any reductions in CO2.
    2. “Automation: a shift from human-piloted vehicles to automated vehicles (AVs) that drive themselves” (3). Automation will probably account for most safety improvements.
    3. “Ride-sharing: a shift from privately owned, often single-occupant vehicles to fleets of shared cars, vans, and small and large buses.” (4) Ride-sharing is the revolution that is needed to really reduce the number of cars in our city areas and to reap the benefits of greater walkability and less space used for the storage of vehicles. Moreover, ride-sharing probably means the use of vans with 12 to 18 passengers, not simply the ride hailing services of Uber or Lyft.

At this point in time, the aspect of the “car revolution” that I feel most certain about is that it will involve a fairly long and very complicated transition period – perhaps 20 to 30 years – that has the potentials for being both very beneficial and very harmfully disruptive. That is what I will focus on in the discussion that follows.

The Emergence of the Automobile as Our Dominant Transportation Mode Took Decades to Happen.

The past is neither determinant nor predictive, but we still can learn much from it. Looking at the transition to gasoline powered vehicles is a case in point.

Horses were the early autos’ prime initial competition as a transportation mode. They were not a very large or strong force to contend with. In 1900, there were about 13 million horses in the US. That equine population grew to a peak of about 25 million in 1920, partly due to increased demand generated by the armies in WWI (5). The vast majority of the horses, however, were used for non-transportation purposes, mainly in agriculture. Their numbers declined significantly after 1920 as the war-generated demand disappeared and the use of tractors on farms soared.

As Dave Feehan has pointed out to me, one of the major reasons that the public went for cars was public health: horse manure and dead carcasses had reached levels endangering public health on city streets. (6) The emissions, especially CO2, of our gasoline engine auto fleet also pose a strong public health risk, but the electrification of the fleet’s engines could help resolve that issue and that would not require a complete transition to the most automated driverless cars.

Still, depending on how you look at it, going from horses to autos took either about 20 years, if you just look at the cars, or well over 50 years if you also take into consideration the road system needed to make car use flourish. Here are some major milestones:

  • As far back s the 1880s, Europeans were developing horseless carriages.
  • In 1901, Mercedes produced the first really modern automobile, designed by Wilhelm Maybach.
  • In 1908, Ford introduces its Model T and General Motors is formed.
  • In 1913-1914, Ford introduces the revolutionary moving assembly line.
  • 1915, Ford built its one millionth car and had 25 assembly plants (7).
  • By 1929, 80% of auto production was accounted for by the Big Three – Ford, GM, and Chrysler (8).
  • The Dwight D. Eisenhower National System of Interstate and Defense Highways System were initiated by the Federal Aid Highway Act of 1956.
  • The US population was 76 million in 1900, 106 million in 1920 and 152 million in 1950.

There Are Strong Reasons to Believe That the Transition to Self-Driving Vehicles Will Be Neither Short Nor Easy.

While driven cars only had probably fewer than 10 million horses to replace, driverless vehicles must replace hundreds of millions of existing units. For example, in 2015, about 263 million passenger cars, motorcycles, trucks, buses, and other vehicles were registered in the USA. (9). The highest rate of annual vehicle sales reported monthly over the past two decades was 22.1 million units/yr in October of 2001. At that rate, it would take 11.9 years for the driverless cars to completely replace the non-autonomous inventory (10). A more recent annual vehicle sales rate is about 17.9 million. That would convert into 14.7 years for the inventory turnover to be completed. Of course, the implicit assumptions behind these calculations are that everyone will want the driverless cars and manufacturers will be all tooled up to produce desirable products. Negatives on either of those points would mean a much longer transition period.

There’s Now Over One Trillion Dollars Invested in People Driven Cars

There not only are lots and lots of cars on the road today, they are also worth one hell of a lot of money. Not all cars are associated with a loan, but the total value of car loans in 2016 was $1.2 trillion, with the average amount financed about $28,000 (11). Many of the vehicles not associated with car loans will also be worth thousands of dollars each, so the $1.2 trillion loan total is a minimum of the total dollar value of the USA vehicle inventory.

QUESTION: If Americans change over to driverless cars, then how will they get back some of the dollars their non-autonomous cars were worth? How would they react if they couldn’t do it because the resale market is being been killed off? Talk about the potential for brutal politics.

It will be impossible if they opt for participating in the pay-by-the-ride option a la Uber or Lyft. Will GM or Ford or Tesla take trade-ins? If so, how the hell will the auto manufacturers recoup those trade-in dollars besides selling the vehicles for scrap, because they are killing the resale market? This will be a huge problem for car manufacturers.

In 2014, the average household in the USA had 2.09 vehicles (12). That means that the dollar value extraction from existing vehicles will be a very salient problem for a huge portion of the potential addressable market for driverless cars. It will make building a wave of individual conversions really tough to achieve, except among those who are not current car owners.

Of course, with safer, fewer and electrified cars, there also will be many companies that will be forced out of business, e.g., body shops, gas stations.

Prying the Steering Wheels From Our Cold, Dead Hands

Then there’s what I call the “cold dead hands” problem. Americans’ love of guns is well known. So is our love of our cars. An NRA slogan made famous by the actor Charlton Heston is: “I’ll give you my gun when you pry (or take) it from my cold, dead hands.” Will Americans feel the same way about their cars and steering wheels? My bet is that many Americans would appreciate having the cars they drive made considerably safer through the addition of computerized car safety features, but they will strongly oppose giving up their steering wheels.

Certainly, today, Americans are against banning human driven cars, even if the completely automated self-driving versions were shown to be safer. For example, a survey done for Vox in 2016 found that only 30% of the population would support a legal ban on human drivers, while 54% would oppose such a ban. However, the respondent’s ages made a significant difference: for those under 30, 43% would favor a ban and 42% would oppose it. In sharp contrast, among those 65+, 58% opposed such a ban and only 22% supported the idea (13). Even if one assumes that opposition to a ban on human driven cars will “age out,” such a process will likely take quite a bit of time.

What Will the Self-Driving Car Product Really Be?

Many of the companies, e.g., Waymo (the Google offshoot) and Apple, that are developing the electronic systems that will operate our autonomous cars, have decided that the driver must be taken out of the equation if the desired high levels of safety are to be attained. Others, that also manufacture the cars, e.g., Tesla, have a vested interest in keeping a potential for humans, especially car owners, to drive their vehicles when they want to.

At this point in time, it is difficult to determine what the world of self-driving cars will look like at either the vehicle level or at the aggregate system level. At the vehicle level, units could be privately owned, have the traditional range of passenger capacity, and have an operating system that either takes complete control of the vehicle’s operations or allows a human to drive with computerized features that enormously increase vehicle and passenger safety.

On the other hand, humans could be banned from driving vehicles, legislation could incentivize the production of the van-type vehicles needed for ride sharing while discouraging the type of individual ownership we have today.

There also might be some mix of these two scenarios. I’m sure other scenarios are possible. The main points here are that:

  • The type of self-driving cars that will win out and the transportation system they will operate in are products that are yet to be defined along many important dimensions.
  • Most importantly, the definers of those products will be less and less the minds and hands of technologists in the labs of Waymo, Apple, Tesla, GM, Ford, etc., and more and more in the decisions and behaviors of consumers and their politicians.
  • To date, in my opinion, the companies working on driverless cars have shown themselves to be gizmo smart, consumer stupid and politically naïve.

The Absolutely Critical importance of Human Behaviors and Preferences: Ride-sharing.

Computer simulations have shown that very high levels of ride-sharing will be needed if the number of cars on the road is to be significantly reduced and associated societal benefits achieved. (14) Instead of one or two people traveling in a car, 12-18 might have to be carried in a mini-bus/van-like vehicle.

Uber and Lyft: Ride-Hailing, Vehicle-Sharing or Ride-Sharing Services? Before proceeding, let’s try to clarify how these auto service companies fit into the scheme of things. They certainly are trying to establish themselves as aiming to use driverless cars to provide pay-by ride services for the public. They prefer the truly driverless model of automated vehicles since it significantly reduces their need for workers and their associated labor costs. They definitely are ride-hailing firms – you can use their apps to get them to pick you up and tell them where you want to go. They can even be called vehicle –sharing services, since over the course of the day, much like traditional taxis, multiple parties of 1 or more people will ride in their vehicles with each party paying separately and each able to have different pickup points and destinations. However, they also have often been referred to as ride-sharing companies/services. That, unless they significantly change their operating model, is probably a misnomer. Ride-sharing, conventionally, has been associated with multiple parties (of one or more people) sharing the use of a vehicle. Though Uber and Lyft now provide economy services that involve carrying more than one party at the same time, those ride-sharing services do not account for significant portions of their activities or revenues. Moreover, their current vehicles’ passenger capacities are not large enough to bring about the desired reduction in the number of cars on the road and its associated other benefits. One might also ask if Uber’s and Lyft’s services will retain their current allure when their vehicles are larger, carry many passengers you do not know and may have numerous pickup and drop off stops. Sounds more like a good bus system, than a hoity-toity, high tech car service for which you pay premium prices.

Some Current Indicators of the Potential for Substantial Growth in Ride-Sharing.

I doubt that those whose steering wheels will have to be pried from their cold dead hands are good prospects for ride-sharing, though they might occasionally do so.

One good benchmark for the current attractiveness of ride-sharing is the use of public transit systems such as buses, subways, and commuter rail systems. In some areas private vans and formal ride-share programs are also present. The number of personal trips that involve the use of a private vehicle vastly outnumber those that utilize public transit: in 2009, for example, about 327,118,000,000 person trips were done by private vehicles compared to just 7,520,000,000 using transit. (15)

Obviously, the presence and size of public transit systems will affect use levels. However, even here in NYC, where we have the largest public transit system in the USA and the most riders, auto use remains significant. For instance, 44% of the households in both the Bronx and Brooklyn have cars, while 64% do in Queens. Even in Manhattan, where garage spaces can cost $700+/mo and in several of its zip codes over 40% of the residents walk to work, 23% of the households own cars (16). The car-owning residents in Brooklyn, the Bronx and Queens tend to be tri-modal from a transportation perspective. They walk a lot to local destinations – perhaps longer and more frequently than anywhere else in the US – and use subways, buses and even commuter rail to get to work. But they are very, very likely to use their cars to travel to any other types of destinations. Uber, Lyft and a myriad of private car services are present for trips to these other destinations, but car owners don’t use them unless their vehicles are inoperable.

Where we live, in Kew Gardens, we have two subway lines and a commuter rail station within a half-mile of our building, four subways lines within a mile, and numerous express buses to Manhattan. Nevertheless, almost everyone in our building has a car, and our garage has a very long waiting list.

The data on the current use of transit modes strongly suggests that significantly growing the ride-share customer base will be a real challenge. However, those data cannot address the possibility that if ride-share vehicles were more accessible and/or more attractive, they then would attract more users.

Opinion surveys are another indicator of ride-sharing’s current attractiveness to American consumers and they can provide some insight on this issue. Here are some recent relevant findings:

  • A 2016 survey for Vox found that 61% of its respondents reported they were unlikely to use an Uber-style self-driving car service if it becomes available in their area (17). That’s a lot of folks who don’t want to use the largest wannabe self-driving car ride-share service.
  • A survey done for the AAA in 2017 found that: ”Three-quarters of U.S. drivers would be afraid to ride in a self-driving vehicle, while 19 percent would trust the vehicle and 4 percent are unsure.” Baby Boomers were more afraid (85%) than Millennials (73%), but the latter’s percentage is still very high (18.) If people are afraid to ride in self-driving vehicles, then they surely will not be ride-sharing in them.

Ride-sharing, if it is to grow to the level needed to have substantial environmental benefits, will have to be many, many times more attractive than it is today. To my mind, what I have seen talked about is not all that much better than what we have today, except for scenarios that involve the highest level of automation and the most centrally controlled area system. That scenario probably would meet with much public opposition.

Huge Technological Issues Remain to Be Solved

The technological aspects of the transition to driverless cars probably will be the easiest to achieve. According to Bran Ferren, the co-founder of Applied Minds, the transition to driverless cars will take these “five miracles,” some of which have already been achieved:

  • “You need to be able to know exactly where you are and exactly what time it is. (Thanks GPS.)
  • You need to know where all roads are and what the rules of driving on them are. (Check, in-car navigation systems.)
  • You need near-continuous communications with other vehicles nearby. (Ferren says that current wireless technology, with modifications, could get us there.)
  • You need restricted roadways that people agree are safe to use. (We could start with HOV lanes.)
  • And you need the ability for machines to recognize people, signs, and symbols. (For this a car might need to wake up to ask its passenger a question, the answer to which it could then share with all other vehicles.)” (19)

To get a down and dirty look at what has been achieved and how rigorous the work can be, see this terrific article: Alexis C. Madrigal, “Inside Waymo’s Secret World for Training Self- Driving Cars” (20). I was struck, in particular, by Madrigal’s description of how the Waymo autonomous car could handle entering a one-lane roundabout, but it was absolutely flummoxed about entering a roundabout having two lanes. For me, that was an important tell indicating that the programming for the cars still has a lot of work to do. On the other hand, Madrigal’s article demonstrated that a lot of very impressive technological progress already had been accomplished.

Huge Non-Technological Issues, Besides Ride-Sharing, Still Need Resolution

Regulations. For me, the private companies involved in developing self-driving cars seem to be acting like politically spoiled brat teenagers when it comes to government regulation. They have already been complaining a lot and we can expect tons more in the future. Their complaints sound like expressions of creative entitlement: look at this marvel we are creating; you should be licking our… boots, not constraining what we want to do. They may be technical geniuses, but politically they act like naïfs. The whole business community suffers from over-regulation, so why on earth should the new kids on the block be an immediate exception? Do they want, on their way to developing a driverless car society, to revolutionize our regulatory system, too? Good luck with that and its potential for sidetracking the primary venture, the transition to autonomous vehicles.

Uber and Airbnb provide an invaluable lesson. Both have encountered significant amounts of regulatory conflict on the municipal level. These overwhelmingly occurred after they made a significant entry into a market area. One might argue that, similarly, the full brunt of the pressures to regulate driverless cars will not be felt until they, too, gain a significant amount of market penetration – when the public will be more aware of driverless cars and what they can and cannot do, and people will be more likely to start demanding regulation. A few multi-car, multi-injury accidents could unleash strong vocal public concerns and demands for more regulation. Tesla’s recent experience shows that the possibility of such incidents should not be ignored until the technology advances quite a bit more.

Also, we know that state and local regulatory environments vary considerably with geography. The highly urban, densely populated areas where driverless cars will supposedly have the largest positive societal impacts are also those with political cultures most favorable to government regulation.

Furthermore, if Waymo, Apple, and other driverless car companies want fully automated, no steering wheel cars to be dominant, then they might only succeed if local or national regulations make that a legal requirement. These companies may actually solicit such regulation.

Possible Disruptions. Many may be hard to discern at this point in the development and adoption of driverless cars. However, here are some of the disruptions that are already being discussed:

  • Taxi, Uber and Lyft drivers losing jobs.
  • Truck and Bus industry revenue and job losses. The public is already concerned about these potential losses. For example, a 2016 survey found that “53% of respondents predict that self-driving cars will take away jobs from professional taxi and truck drivers, compared to just 29 percent of Americans who say that won’t happen” (21).
  • Lower public rail transit ridership use and devalued infrastructure investments.
  • Reduced parking structure use, incomes, and investments. The need to repurpose many existing parking facilities. The way we design real estate projects, districts and communities could be significantly altered.

The Types of Cautious Decisions That Might Be Needed Now. Until the transition to self-driving cars is much closer to completion, most of us ordinary consumers and citizens, as well as landlords and developers and policy-makers at all levels of government, will be acting in an uncertain situation. We will have to guard against making wrong decisions even more than usual, especially about how we invest our money, time and political capital

A good example of this is provided by AvalonBay Communities Inc., a big real estate developer. It “is designing a downtown residential complex for a future time when ride-sharing services and driverless cars whittle down car ownership and parking places become ‘expendable’”(22).) The project’s garage, for example, will not have the traditional inclined floor, and its level floors could be converted to other uses such as retail, a gym or a theater. Numerous electric car charging stations and ride-sharing drop-off points will be key amenities of the apartment complex (23).

See also Dave Feehan’s advice about building conventional parking structures today. (24)

Some Final Comments

Holly White made an enormous contribution to the way we revitalize our downtowns. In my opinion, the foundational idea behind his approach was that improvements will only succeed if they do not clash with the preferences and behavior patterns of potential users. That idea can also be rephrased to stand as a basic axiom for the marketing of any new product – such as self-driving cars. Whether you are creating a great new public space or developing a revolutionary new car, one thing you certainly don’t want to do is to design a product that requires potential customers to change strongly ingrained preferences or behavior patterns in order to accept the product. Such personal changes are likely to require a lot of time and resources to induce. When a product needs social engineering for acceptance it is unlikely to succeed.

What is flabbergasting to me, is that for all the attention companies such as Waymo and Apple have given to developing the many technologies required for self-driving cars to work, how little attention they have paid to preferences and behavior patterns of potential consumers. As a result, it looks as if they are developing products that will require substantial changes in the attitudes and mindsets of their potential users.

Nor had they begun to investigate the probable regulatory gauntlets they would face until rather recently. Many assumed, because they were Silicon Valley moguls, regulators would just bat their eyes, praise them to the sky and approve these amazing new gizmos. Some, like Uber, even saw themselves as Howard Roarks, and above the law.

Far too many urbanists have had their heads in the clouds about driverless cars. They eagerly accepted and then advocated for driverless cars because of all their supposed environmental, safety and urban design benefits. However, in so doing, they have failed to look at any of the many non-technological issues at the individual and political levels that might impede adoption of a range of possible driverless car features. Nor have many of them realized that some of these benefits can be realized without going to completely automated, no-steering wheel vehicles.

The above failures in what might be termed social and political engineering will contribute significantly to a probable drawn out transition period for driverless cars. It will be akin to a multi-decade long inflection point for our nation’s quality of life.

Increasingly, though, it will be the decisions of ordinary citizens, as consumers and voters, as well as our politicians – not our technological wizards nor our industrial moguls – that will determine the directions of those paths.

Given that the coming self-driving car transition will be a long and arduous process, ardent urbanists and enthusiastic technologists should guard against suggesting a system of highly automated cars as an immediate solution to our current problems, or even those arising over the next decade or so.

Endnotes

1) See: http://www.businessinsider.com/lyft-president-car-ownership-will-all-but-end-in-cities-by-2025-2016-9

2) David Roberts. “Unless we share them, self-driving vehicles will just make traffic worse. A carbon-free, autonomous car is still a car; it still takes up space.” Vox, July 24, 2017. Hereafter referred to as Roberts. https://www.vox.com/energy-and-environment/2017/5/18/15604744/self-driving-cars-cities

3) Ibid.

4) Ibid.

5) See: Equine Heritage Institute. “Horse Facts.” http://www.equineheritageinstitute.org/learning-center/horse-facts/

6) David Feehan in an email.

7) See: http://www.history.com/this-day-in-history/ford-builds-its-1-millionth-car

8) See: http://www.history.com/topics/automobiles/print

9)See: https://www.statista.com/statistics/183505/number-of-vehicles-in-the-united-states-since-1990/

10) Bureau of Economic Analysis, Total Vehicle Sales [TOTALSA], retrieved from FRED, https://fred.stlouisfed.org).

11) See: https://qz.com/913093/car-loans-in-the-us-have-hit-record-levels-and-delinquencies-are-rising-fast-too/

12) See: https://www.statista.com/statistics/551403/number-of-vehicles-per-household-in-the-united-states/

13) Timothy B. Lee. “We polled Americans about self-driving cars. Here’s what they told us.” VOX, August 29, 2016. https://www.vox.com/2016/8/29/12647854/uber-self-driving-poll

14) See: Roberts above and http://www.govtech.com/fs/perspectives/How-Autonomous-Cars-Buses-Will-Change-Urban-Planning-Industry-Perspective.html

15) Bureau of Transportation Statistics, US Department of Transportation. “Passenger Travel Facts and Figures 2015,” P.11. https://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/PTFF_Complete.pdf

16) NYCEDC. StatsBee Blog. New Yorkers and Cars. April 5, 2012.   https://www.nycedc.com/blog-entry/new-yorkers-and-cars

17) See Lee above #13.

18) AAA Fact Sheet: Vehicle technology Survey – Phase II. 2017.   http://newsroom.aaa.com/2017/03/americans-feel-unsafe-sharing-road-fully-self-driving-cars/

19) All bullets from: Tim Bajarin. “Why Bran Ferren’s TED Talk Is Required Viewing for All Techies. Pcmag.com. March 31, 2014. https://www.pcmag.com/article2/0,2817,2455647,00.asp

20) Downloaded from: https://www.theatlantic.com/technology/archive/2017/08/inside-waymos-secret-testing-and-simulation-facilities/537648/

21) See Lee above #13.

22) http://www.govtech.com/fs/perspectives/Driverless-Cars-and-the-Disruptions-They-Will-Bring.html

23) Ibid.

24) David Feehan. “Suddenly it’s 1900 again)”. Parking Today. July 2013. http://www.parkingtoday.com/articledetails.php?id=1463