Will Urbanized Suburban Downtowns Attain New Levels of Comparative Strength as the Economy Recovers?

Posted on December 5, 2020 by DANTH

By N. David Milder

Going Out on a Limb

Over recent months I’ve been getting a sense that some suburban downtowns may well make relatively strong recoveries from our current virus induced economic crisis, and relatively speaking, stronger even than those of our superstar downtowns. This also prompted me to think that the current and potential strengths of some of these suburban downtowns are too often underestimated and overlooked. I’m venturing to presume that others may also find these thoughts of interest and they are presented below. Please, let me know what you think about them.

Suburban Downtowns Are Different and Often Surprisingly Strong

Last year Bill Ryan and I did some research on dataset covering all of the 259 downtowns in cities in the 25,000 to 75,000 population range in seven Midwestern states. Our findings will appear in an article in the Winter 2020 issue of the Economic Development Journal, titled Living and Working Downtown: Is It a Population Growth Engine for Small Cities? Included in the dataset were 167 suburbs that usually are parts of relatively large metropolitan areas in which much larger cities are the cores, and 92 independent cities that are themselves the cores of a smaller metropolitan or micropolitan area. We were struck by how different these two types of downtowns are in many important respects. For instance:

Though less multi-functional, the suburban downtowns averaged about the same number of residents 3,089, as the independent downtowns, 3,294.
However, suburban downtowns had a higher population growth rate, 5% to 0.23%, and a lot fewer had declining populations, 31% versus 46%
Moreover, the suburban downtowns scored much lower on our two measures of live-workers in their downtowns, between 3.1% and 8.7%, than the independents, 12% to 29%. Additionally, such low levels even were present in the suburbs that had attracted relatively large numbers of office workers to other parts of their city, such as Dublin, OH, with 42,200+ in 2017

One factor that helps explain the greater strength of the suburban downtowns is that they are very probably located in metro areas with significantly stronger economies than the smaller metros the independent cities are anchoring.

A trend that helps to explain the low live-work numbers in suburban downtowns is that most suburban residents are not drawn to the type of dense housing units their downtowns tend to offer. National surveys for many years now have continued to show that about half of the adult population prefers living in the suburbs and that the vast majority of people who live in the suburbs want to be there. (See the table above.) That strongly implies that they prefer the urban lifestyle that includes single family homes, lower population densities, a slower pace of life, significant car use, and an environment that is predominantly “green” rather than concrete and asphalt.

Moreover, when these suburbs do attract offices they tend to be located in office park-like developments, within about a 5-minute drive of, but not in their downtowns.

The Importance of CSD Functions in Suburban Downtowns

Our findings also had some strong potential implications for a far broader range of downtowns:

Suburban downtown residential populations are not driven by the presence of downtown jobs, as some experts believe is the case with our large and superstar downtowns.
Consequently, they must be driven by other factors. Since the downtown populations of the suburbs and independents are so close, these other factors are probably as strong or stronger than downtown employment is in non-suburban downtowns. These other factors certainly are not weak, and they also could be present in non-suburban downtowns, too.
A very probable strong factor are the suburban downtowns’ Central Social District (CSD) assets: its housing, restaurants, bars, parks, athletic fields, public spaces, cinemas and theaters, libraries, art galleries, maker spaces, farmers markets, community centers, houses of worship, childcare and senior centers. Indeed, it can be reasonably argued that the suburban downtowns that have been successful in terms of popularity, use and investment have done so largely because of the strength of their CSD functions.
Housing is a very important CSD function. Two advantages suburban downtown housing may have are the likely greater comparative affordability of its costs and the convenience of it locations. In struggling downtowns units may be affordable because they are in poor condition and can only command cheap rents. In more successful downtowns, it may be that apartment rents/costs are cheaper than renting/owning an apartment in the region’s core city, or living in a suburban single family house (e.g., empty nesters), and/or because the apartment is occupied by several people who share the rent payments (young adults).
Units close to mass transit will probably be convenient for those who commute by rail or bus to large employment centers elsewhere in the region. Indeed, in these suburban districts, the commuters who live in TOD residential developments may be the equivalents, in terms of economic impacts, of the live-workers found in and near the cores of our largest downtowns. However, according to one report, NJ Transit has found that only 12.5% to 25% of the residents in the TOD projects developed around its stations are NJT commuters.¹
These downtown residents can bring in substantial purchasing power. For example, it was estimated that, around 2010, the roughly 1,500 new occupied residential units in downtown Morristown, NJ, would bring in about $72 million in potential retail spending power.²
Undeniably, when the CSD assets of a suburban downtown are strong, the district is highly urban in character, and more analogous to a strong big city neighborhood commercial district, such as Williamsburg in Brooklyn, or Forest Hills in Queens, than to a sizeable rural town. We might characterize these districts as “urbanized suburban downtowns.”
Typically, suburban downtowns have a Greater Downtown area that includes the downtown and nearby areas from which people can conveniently get to and from the downtown core , some on foot, but most by car. Sorry, folks, but we are talking about the suburbs here. That may be changing in the near future as AV vans and greater use of e-scooters and bikes come more into play.
The non-district portion of the Greater Downtown area can have relatively significant population and workforce densities and be the source of a lot of the customer traffic of downtown merchants. These users also can strongly influence the image of the downtown.
Unfortunately, there is no study of urbanized suburban downtowns. Some districts that I would include in that category are in Wellesley, MA; Englewood, NJ; Morristown, NJ; Cranford, NJ; Westfield, NJ; and Cranford, NJ.
Some have had strong GAFO retail, though that has weakened substantially with the upheavals in the retail industry over the past decade and the Covid crisis. Some have a lot of office workers located nearby in their town who are important lunchtime customers. Some have PACs, theaters and/or cinemas. All are walkable and have lots of eateries, coffee shops, and drinking places. All are surrounded by residential populations with high percentages of creatives – some also have large numbers of creatives working within or very near the town.
This suggests that non-suburban downtowns can also flourish by strengthening their CSD assets.

Suburban Creatives

For many creatives, these urbanized suburban downtowns may be extremely attractive, especially if they either: 1) prefer the suburban lifestyle when it comes to single family housing and green spaces, yet still enjoy urban type entertainment venues such as good restaurants and cultural events, or 2) they are nesting and need affordable and relatively spacious residential units, while also appreciating many aspects of urban entertainment and leisure time activities. The fact that these suburbs often have excellent public school systems also makes them attractive to core city nesting creatives who are looking for a more affordable place to live. In NYC, for example, the private elementary school average cost per student is $13,000 per year and for private high schools the average is $25,267 per year. With taxes, parents will probably need double that amount of their income to cover those costs.

My prior research on 14 counties in Northern NJ that are suburbs of NYC or Philadelphia – see the above table — certainly suggests that in 2010 very substantial numbers of creatives lived, worked or even possibly live-worked in these communities. Interestingly, the median of the percentage of their workforces that were creatives was 31%, but the median of the residential adult population in the labor force who were creatives was 40.3%. See above table. In Somerset and Hunterdon Counties over 50% of the residents in the labor force were creatives. So these suburban counties of superstar cities/downtowns probably have been recruiting lots of creative residents for decades. The size and economic power of these suburban creatives often seems to be overlooked because so much attention is focused on the young creatives being attracted to hip urban neighborhoods of the superstar cities.

Some downtowns in these high creatives counties have tried to attract more creatives to spark economic growth, while what they probably needed to do was to better leverage the numerous creatives they already had! Far too little attention has been paid to these suburban creatives.

The downtowns in these counties did not have anywhere near the number of apartments or condo units needed to house all of these creatives, so it seems reasonable to deduce that most were living in the single family type homes the suburbs are famous for. It also seems reasonable to deduce that the vast majority of these creatives probably were living there because they liked the lifestyles these suburbs support. In turn, this seems to counter the blindered visions of where creatives want to live that only focus on hip urban neighborhoods. Furthermore, it also counters visions that just focus on the young creatives who may indeed have a significant tendency to live in the hip urban neighborhoods, by showing lots of probably older creatives, who have probably nested, prefer suburban or rural residential areas.

Some Downtowns Will Be Better Positioned to Recover Economically Than Others

There already is plenty of evidence that points to the imputation that suburban downtowns, especially those that are urbanized, will be much better positioned to have a successful economic recovery than others. There are also a number of steps their leaders can take that will further solidify their strong recovery positions.

Tourists. Most suburban downtowns, especially those that have been urbanized, are unlikely to be heavily dependent on tourist customer traffic/expenditures as are the downtowns in our large cities such NYC, Washington, D.C., San Francisco, etc., or in rural towns where tourism is the main economic engine. In those areas the collapse of their tourist markets have had large negative impacts.

Moreover, the resurgence of tourism will be hampered by other factors besides the pandemic’s impacts. International politics is one. For example, It probably will be very hard for our major downtowns to regain the strong flows of big spending Chinese tourists they once had. Even under an optimistic scenario, it very probably will take a few years for tourism to return to prior levels in these downtowns.

Office Workers. Merchants in our big city downtowns have also been clobbered by the disappearance of their office workers. In many of them only abut 20% to 30% are now showing up. Moreover the growing adoption of remote work probably means that the number of office workers employed in our largest downtowns probably will decrease by 16% to 22% after the crisis.³ In contrast, in the suburbs – e.g., Morristown, NJ, Dublin OH, Garden City, NY – that have attracted large numbers of jobs, office worker presence has remained substantially higher through the crisis than in central cities, and they are also more likely to fully recover more quickly. The suburban office workers do not have to use public transportation to commute to work. Consequently, these suburban towns are unlikely to be hurt as much by remote working or to experience their office jobs being decanted to less populated, and less public transit dependent areas as may happen in our large cities. To the contrary, some suburbs may be substantial recipients of such workforce decanting and the growth in remote working. Their downtowns will benefit from this.

Foot Traffic. It should not be surprising then to find that while in many large downtowns foot traffic has fallen by roughly 60% – 70% since 2019, it has been substantially less in their suburbs. See chart nearby.⁴ Foot traffic is critical to the health of any downtown. The suburbs may not need to recover as much as the center cities on this key variable.

Downtown Small Merchants. Truth be told, small merchants have been a disappearing breed in big city downtowns well before Covid19 appeared. At best they have retreated from the major commercial corridors to sidestreets. A number of factors were involved such as: unaffordable rents; associated real estate bubbles and consequent landlord needs for high paying tenants; new landlords who knew nothing about managing retail properties, and redevelopment that forced closures and relocations. In contrast, small merchants remain the primary occupants of the storefronts in most suburban downtowns, though vacancy rates have continued to creep up for many years now, and non-retail uses continue to increase.

While there has not been any rigorous systematic study, a review of many reports on the internet suggests that merchants who are more dependent on residential markets and less on tourists and office workers were doing significantly better than those who were focused on tourists. Many of our largest downtowns have relatively few residential units within their boundaries, but a whole lot within a Greater Downtown area that includes nearby neighborhoods from which residents can easily and quickly get to the downtown core. That would suggest that merchants in suburban downtowns, especially those with substantial new market rate housing, will not be among those hardest hit. Of course, that does not mean that they are not being hurt or stressed, but it may indicate that it will be relatively easier for them to survive and recover.

Downtown Retail Chains.

Superstar Downtowns, In these districts retailers have long paid extremely high rents for premier retail locations. However, in recent years, real estate bubbles and high rents have resulted in high “availability rates, ” with 20% or more not being unusual. The above table details such a situation in Manhattan in Q2 of 2019. Most of those locations have been very dependent on tapping office worker and tourist shoppers and their ability to again earn meaningful profits probably awaits the return of those shoppers at some still unknown time in the future. The prior high availability rate suggests problems that the Covid19 crisis can only have exacerbated.

Many of these retailers are in the luxury market and BCG recently estimated strong declines in luxury retail sales for 2020 and 2021, with a recovery appearing in 2022, BCG also found that many more shoppers are now trading down than trading up.⁵Moreover, online sales of luxury merchandise has been growing significantly.

Many observers expect a new equilibrium between retailer and landlord needs will be reached in the coming years. However, until then retail in these big downtowns may be somewhat unstable. While the landlords of the luxury retailers may continue to claim that all is well, 20% availability rates and the disappearance of key market segments are strong visible evidence that those assertions are not true.

Retail Chains Resurging Post Crisis in Suburban Downtowns. The claim has been made that the closure of many malls and chains will set free so much market share that retail chains and small independent retailers located in suburban downtowns will grow and prosper as the current crisis ebbs. There is probably some merit to this claim – but not much.

Most suburban downtowns have not attracted large numbers of GAFO retail chains, though they often do quite well with those selling necessities such as groceries, convenience goods, and medicines. That is not likely to change in the future because these districts lacked and will continue to lack the required locational assets. Few have the auto traffic that passed near the malls. If retail chains do return to the suburbs, standalone locations abutting high traffic roads on the periphery of these towns may very likely be preferred to those in their downtowns. However, some in wealthier market areas – e.g., Westfield and Englewood in NJ, Wellesley in MA — have in the past attracted lots of GAFO chains, and they often were like open air lifestyle mall downtowns. Even then, though, while the number of retail chains present in these districts was often impressive, according to information confidentially provided by one well known national brokerage firm, their profits per store usually ranked relatively low within their chains. They were thus among the most prone to be closed if their chain got into financial trouble. So unsurprisingly their strength and numbers were eroded by the Great Recession, new competitors appearing both online and from strengthened malls, the retail chains’ corporate weaknesses being magnified by the process of creative destruction occurring in the retail industry, and the negative economic impacts of Covid19. For example since 2009, one of these retail chain rich suburban downtowns has lost the following chains: Esprit, Coach, Chico’s, Ann Taylor, Lucky Brand, White House-Black Market, Janis & Jack, Papyrus, Aerosoles, Victoria’s Secret, Eileen Fisher, Coldwater Creek, Kiels, Omaha Steaks, and Game Stop.

For many years the trophy retailers downtown leaders wanted to attract were largely in the apparel sector, e.g., The Gap, Chico’s, Talbert’s, Ann Taylor, Victoria’s Secret. Today, that sector is in disarray – even some off-pricers, like Stein Mart, that had been seen as well positioned, have fallen.

The argument for the supposed market share being yielded by closing malls and retail chains being captured by retailers in suburban downtowns has a number of problems analytically:

The demand for some kinds of merchandise has been in long decline, e.g., for apparel. This has been influenced by the trend toward informal workplace attire that has been strongly reinforced by the current crisis, and the growth in remote working. It also has been impacted by consumers wanting to spend more for interesting and rewarding experiences than for things.
More than ever, retail chains are looking for low risk locations. These locations tend to be in areas where there are significant numbers of fairly affluent shoppers or very large numbers of easily accessible shoppers with more modest incomes. About 20% of our malls were doing well prior to the crisis, and they tend to capture these affluent shoppers. Walmart, Target, Costco, Best Buy, et al are prospering even during the crisis from their growing proficiency with omnichannel marketing strategies. They are attracting the mid-market shoppers. These malls and big boxes are formidable competitors and probably are sopping up lots of any market share the folded malls and retail chains yielded.
E-retail was growing impressively before the Covid19 economic crisis, but its growth has accelerated substantially during the crisis, and strong evidence suggests these high e-sales levels will not diminish all that much as the economy improves. E-commerce definitely has and will capture substantial portions of any market share that folding malls and chains might yield.
There seems to be fundamental weaknesses with the business model used by retail chains, especially when they are taken over by hedge funds and the like. Bean counters seldom are good merchants, much less great ones!
Internet born retailers may look for spaces in suburban downtowns, but their behavior to date indicates they will look for locations in higher income market areas with strong customer flows. For example, Warby Parker now is located in downtown Hoboken and downtown Westfield in NJ. They are unlikely to flood our suburban downtowns.
The failed malls and chains probably will yield a relatively small amount of market share that downtown retailers might capture. Small downtown merchants are much more likely to benefit from that yielded market share simply because they need much lower sales revenues to survive. That said, these small merchants still better have other market segments to tap.

There is little reason to believe that our recovery from this crisis will somehow coincide with the resurging strength of our specialty retail chains. Because of their high rents, landlords in our large downtowns will probability continue to seek retail chain tenants, or shift to other users who can pay those rents. Consequently, the large downtowns will continue to feel the impacts of the process of creative destruction that the retail industry still is in. On the other hand, relatively few suburban downtowns had many GAFO retail chains, and their numbers were substantially reduced even before the Covid19 crisis. Consequently, they neither benefit a lot from the presence of these retail chains, nor are they very vulnerable to the substantial vicissitudes that these chains may continue to face.

The Costs and Availability of Space. The ability of small merchants to recover and for startups to succeed will be significantly influenced by the availability and costs of their storefront spaces. While deflated rents and increased availability can be expected in both suburban and center city districts, the suburban rents long have been significantly lower and probably will remain so in a relative fashion well into the future. This fact, combined with the greater stability of their potential consumer market segments, probably will give the suburban merchants a greater chance of achieving a sound recovery, or a startup succeeding, than their center city peers might have.

Rent costs are particularly important for restaurant operations.

Remote Working.

The suburbs are also likely to benefit significantly from the shift to remote working:

Their numerous creative residents are likely to be in occupations prone to remote working.
Remote workers are likely to favor downtowns with strong CSD assets as they seek relief from the social isolation of their home offices, and they often also require business services and supplies.
Suburban communities are likely to have more relatively affordable housing, with more space per rental dollar than their regions’ center cities. This may attract many remote workers who are residents of the regions core cities. However, the affordability advantage might be blunted by rent deflation in the core city. For example, reports indicate that rents in Manhattan below 96^th Street have already fallen by 20% to 30%.
Also recent research has shown that significant economic growth based on quality of life assets and the attraction of remote workers can lead to rising housing costs even in rural areas.
What will not be blunted, however, are the large numbers of people who prefer living in the suburbs, and they often include commensurately significant numbers of creatives, the group most prone to becoming remote workers.
It is fairly probable jobs will be decanted by a significant number of corporations from their prime big city locations to less expensive, auto accessible suburban satellite locations. Such office facilities will have cheaper rents than those in the core city downtowns, and provide corporate tenants places where their remote workers can come to get the social interactions they need to help their productivity, creativity and career advancement.

Recovering CSD Functions.

Many CSD venues have been hit very hard by the pandemic’s economic adversities. Almost all performance and exhibition venues have been closed or their public access severely limited. Many pamper niche operations closed permanently or shifted to operating online. Yet many of these operations, when allowed by local governments, have reopened on a limited basis, and the characteristics of some suggest that they will recover along with the local economy.

Two characteristics will determine those that will recover quicker and stronger and those that will not: if they are for profit operations and if they are large.

Small Arts Organizations. About 40% of the arts nonprofits are usually in the red financially, and mortally threatened by strong economic recessions and economic crises such as the present one. ⁶ Their business model is so dependent on contributions from numerous sources that their financial recoveries are seldom easy. So downtowns of all sizes are likely to have to wait quite a while for these smaller arts organizations to recover and contribute to their vitality.

Pamper Niches. In contrast, many of the pamper niche operations are for profits and relatively small – hair and nail salons, Pilates and yoga studios, dance schools, martial arts, studios, spas and gyms. They have relatively very low start up and operating costs, and little need to keep large inventories of goods on hand. While many were quick to close during an economic crisis, they are also relatively easy to restart or start anew as the economy improves. They are also the types of operations that often occupy large numbers of downtown storefronts, especially in the suburbs. Indeed, in many of our suburban downtowns there have long been complaints that these pamper niche operations were crowding out retail tenants because they could pay the higher rents landlords were looking for that small retailers found unaffordable.

Restaurants. Some of the most important CSD venues for all downtowns are their restaurants and bars. From early on in the crisis, there have been dire predictions of calamitous levels of restaurant failures – one foresaw the prospect of 85% of our eateries failing.⁷ These claims seemed to be supported by prior research showing that the average small restaurant only had enough cash on hand to cover their expenses for so few day, 16, that they were unlikely to stay open if they faced a major economic crisis – see table below. Months later, well into the current crisis, the Census Bureau’s Pulse surveys of small businesses have had consistently similar findings.⁸ One might have thought that by then their numbers would have declined as many went out of business. National survey data seems to indicate that about 20% of our restaurants may have closed do far.

The Center City district in Philadelphia recently published very interesting and well researched counter findings about restaurant closures.⁹ Well into the crisis, their survey found that only about 5% of their 1,078 restaurants had closed permanently, with another 19% closed temporarily. Just 19% were deemed fully opened and have indoor dining. Perhaps most interesting are the 600 restaurants (about 55%) that are classified as partially opened because they have outdoor dining, or only do take outs and deliveries.

My observations in the solidly middle income neighborhoods close to my home here in Queens, NY, also found a surprisingly low number of permanent restaurant closures. My communications with some suburban downtown managers yielded similar observations. The only reports of numerous closures I’ve found were about the eateries in the Midtown Manhattan CBD that are so dependent on tourist and office worker customers. The City’s Comptroller just issued a report that “found that more than 2,800 small businesses had permanently closed between March 1 and July 10, including at least 1,289 restaurants.” That would mean that about 5% of NYC’s restaurants closed, on par with the Center City findings.¹⁰

The fascinating question is: How are so many restaurants surviving so long when they never seem to have enough cash on hand to do so? CARES or other government program dollars? Owners not taking any salary? Dipping into their 401ks? Tapping extended family resources? Landlord forbearance? Public donations via gift cards, crowdfunding, etc.? The Center City research findings suggest a possible viable explanation: many are in some stage of operational hibernation – e.g., the 19% that are temporally closed and the 55% who are partially opened. Their reduced operational metabolism rates translate into a reduced need for cash. In turn, that means that the cash they have on hand can cover more days of operation. It also may mean that financial tools that are well within the restaurant owners control – such as dipping into 401ks, using credit cards, tapping family resources, etc. – can get many through the survival phase of this crisis if they hibernate. That also would mean that they are making substantial personal and family sacrifices in the hope that they again will earn meaningful annual incomes as they emerge from hibernation during the economy recovery.

If recovery means that these restauranteurs have to come out of hibernation and compete to again win adequate annual incomes, then it may prove to be a time period as, or even more, arduous than was the survival phase of the crisis. More restaurants may close because they will need to earn a lot more money to thrive than they did to survive, while they may have depleted the financial resources that helped them to survive thus far. Local market conditions will probably play a very important role in determining those eateries that will survive and those that will fail.

Households in the top income quintile (above $109,743 in 2017) accounted for about 38% of all the consumer spending for food away from home; those in the top two quintiles (above $66,898 in 2017) accounted about 61% of those expenditures. See table above. Moreover, so far into the crisis, employment in households with incomes above $60,000 has been far more secure than for those with lower incomes. Downtown restaurants able to easily tap affluent residential customers are more likely to survive the recovery than those that are not. The urbanized suburban downtowns tend to be in rather affluent market areas: in 2016, I estimated the annual household income at $188,000 for downtown Wellesley, MA; $131,000 for downtown Englewood, NJ; $152,000 for downtown Westfield, NJ, and $165,000 for downtown, Morristown, NJ. That will help their restaurants recover relatively quickly and substantially.

Let’s compare the prospects during the recovery phase of this crisis for restaurants in our superstar downtowns with those in our urbanized suburban downtowns:

Markets: The superstars must wait for the return of two very large market segments, office workers and tourists. Their residential markets may not be all that strong. Financially, that means many may have to wait quite a bit of time for their revenues and profits to return to the levels their owners were sacrificing to stay in business for. Their potential residential customers live mostly in nearby neighborhoods that are likely to have their own restaurants that are much closer to them. In contrast, the suburban downtown eateries rely mainly on the residential market segment that has never gone away and that savvy operators have been serving with takeouts, deliveries, and curbside deliveries during the crisis. These suburban eateries may also have office workers who are still present in the town in significant numbers, and others returning at a rapid rate as the virus’s impacts subside because of their reliance on autos to commute. New remote workers and newly decanted office installations may add significantly to their numbers. The suburbs’ consumer markets will start strong and may get even stronger. The superstars’ markets will start off very uncertain and require an unclear length of time to reach an iffy level of recovery. For example, though their office workerforces eventually may return, they’re very likely to be, at best, about 16% smaller in number.

Most arts tourists (tourists who attend arts events) visiting our large cities are not big spenders. A study of 21 study regions with populations over one million by Americans for the Arts that included the cities of San Jose, Dallas, San Diego, San Antonio, Phoenix, Philadelphia, Miami—Dade and Chicago found that, in 2016, the average arts tourist spent about $51.41 a day. See the table above. About 31% of that went for meals and drinks, averaging $16.05. Another $6.57 went for refreshments and snacks. While there certainly are significant numbers of wealthy arts tourists and they are likely to be among those who resume visiting our superstar downtowns fairly early, they will tend to go to the higher priced eateries. The less expensive eateries in these downtowns are less likely to see their tourist patrons return as quickly or as robustly. Their recovery is likely to be weaker and slower
Rents. During normal times, the lower commercial rents in suburban downtowns may have been equivalent to those in the superstar districts when the number of potential diners and their spending power are considered. Today, with the superstars’ disappeared market segments, increased risk, and uncertain rent deflation, suburban commercial rents look like a much better buy for all businesses, especially restaurants that are so rent sensitive.

Performing Arts Venues, Museums and Galleries. One might assume that the superstars are far richer in major arts, cultural and entertainment venues than the suburban downtowns, and that will help them to be better at attracting people back to their districts. In turn, that would enable them to better support local merchants. A closer look, however, reveals that their advantages may not be as strong as many might assume.

For example, superstar CBDs often have surprisingly few of these venues. In Midtown Manhattan, there are only two important museums, MoMA and the Morgan Library & Museum. The Metropolitan Museum, Whitney, Frick, Guggenheim, Neue Galerie, New Museum, Folk Art Museum, and many others are not. The major area for art galleries was in Soho, but is now in Chelsea and other parts of Manhattan. In Cleveland, the prestigious Cleveland Museum and Severance Hall, home to the Cleveland Symphony, are located about five miles from the heart of the downtown. It’s theater district, Playhouse Square, is about one mile away. Similarly, in Philadelphia, the Museum of Art, the Barnes and the Rodin Museum are outside the downtown district. MOCA and The Broad are In downtown LA, but LACMA. Hammer, Norton Simon, Annenberg, Huntington Library and Getty Center are not. Still, many of these superstar downtown museums are themselves superstars and that means that they are very dependent on tourists for visitation. For example, about 75% of MoMA’s visitors are tourists. See table above. Their full recovery and ability to activate the downtown will probably await the return of the tourists.

Strong art museums are seldom found in suburban downtowns, so how strongly these districts are activated is not dependent upon them, or their recoveries, or the return of lots of tourists.

Theater clusters are certainly to be found In some of these large downtowns such as Manhattan and Houston, as are performing arts venues such as Carnegie Hall and Madison Square Garden in Manhattan, the Kimmel Center for the Performing Arts in Center City Philadelphia, and the Music Center in downtown LA. However, in Manhattan, the Lincoln Center for the Performing Arts is located close to, but beyond the Midtown CBD. These venues are often considered world class, and that usually means that they, too, are heavily dependent on tourist ticket buyers. About 66% of the attendance of Broadway’s theaters are tourists, as is about 46% of Lincoln Center’s. Some observers claim that tourists will return once these venues open. However, getting Broadway shows ready to open will take time as will the scheduling and staging of other performing arts events. The Broadway League, for example, is now talking about reopenings starting around June 2021, but how long it will take to achieve a full recovery is still unknown.

These performing arts venues have another characteristic that poses serious problems for the downtowns and neighborhoods in which they are located. For very substantial parts of many days they are dead and inert, only coming alive outside for relatively brief moments before and after performances that occur usually during the evenings and a few afternoons. When inert, they diminish from, instead of contributing to, the sense of activation and pedestrian friendliness of the sidewalks they abut.

A number of these urbanized suburban downtowns do have sizeable performing arts venues, though most do not. In NJ, for example, The Count Basie Theater in Red Bank was the attendance leader among the state’s theaters in 2016 and 2017 selling 235,000 tickets. It has a budget of around $17,000,000.¹¹ The Mayo Performing Arts Center in Morristown, NJ, has an annual attendance of about 200,000 and an annual budget of about $8, 000,000. It is a major component of the downtown’s strong and broadly defined entertainment niche that also includes a six-screen movie theater and eateries and bars that have annual sales above $100 million. The Bergen County PAC also has attendance in excess of 200,000 and an annual budget of about $10,000,000. These performing arts organizations have significant budget, and their audiences are not heavily dependent on tourists. Similar performing arts venues located in less affluent suburban markets have budgets well under $2,000,000 and lower attendance. The larger the budget, the more likely these performing arts organizations will survive through this crisis and recover. Once social distancing precautions are lifted, their primarily regional audiences, often from affluent households with members in creative occupations, can be expected to quickly return as their productions are presented. However, many of the weaker suburban performing arts organizations may struggle to recover or fall to the wayside—as will be the case pretty much everywhere.

Some Challenges and Opportunities Suburban Downtowns Will Likely Face

Downtown Cinemas Are Again In Danger. DANTH, Inc has been following the plight of downtown movie theaters for about 15 years. During that time streaming via cable or online was a persistent and slow growing threat to our traditional brick and mortar movie theaters. By releasing movies electronically either before or simultaneously with the theater releases the potential audiences of the theaters are substantially diminished. The Covid19 crisis has shut down movie theaters either completely or substantially. Streaming has grown enormously in utility, attraction and supporters among producers, and there is general agreement in the trades that it will be much more important in the future, and there is no going back. It’s a very cheap and efficient distribution channel that is unconstrained by the need for social isolation. Warner Bros. just announced that it will release all of its 2021 films on HBO Max at the same time that they open in theaters. Other studios are expected to soon follow.¹²

This Problem Is Especially Dire for Many Suburban Downtowns. How many movie theaters and theater chains will survive the crisis is a question of considerable interest to all types of downtowns, but much more important for those in the suburbs. For many, their movie theaters are their strongest arts/entertainment draw, especially after dark. Moreover, they invariably occupy strategically important locations in buildings that often are difficult to convert to other uses. Also, movie houses are among the most reasonably priced of all entertainment venues, and they have rather few user frictions compared to going to a sports event, concert or stage play.

Streaming may mean that it will be much more difficult for operators to make sufficient profits to recover from the crisis and stay in business long term. However, during the digital projection conversion crisis of a few years ago, many towns used community owned businesses to step in and save their cinemas. Suburban downtown leaders soon may find that tool can be used to save theirs’s, too. Moreover, a whole toolbox of tools to capture community value is emerging that also can be used. The leaders of these suburban downtowns should prepare for such a contingency since quick action is often needed to save these cinemas.

Unrealized Potential to Develop Strong and Well – Activated Public Spaces. By and large suburban downtowns lack popular, well-used downtown public spaces. Within their communities, the parks are generally located elsewhere. Additionally, even when they do have a physical public space downtown they are usually badly under-utilized, mainly purposed as adornments, ceremonial venues, and weakly scheduled event spaces. Where the missing vibrant public spaces are most surprising is in the urbanized suburban downtowns that have so many potential eager users and operations such as loads of strong eateries that mesh well with them.

In the past, this was just a missed opportunity, but with the need of these downtowns to have strong attractions that can again draw lots of people downtown, they well may be a savvy strategic move, or even a necessity. This need will also be reinforced if the local cinema weakens or closes.

The crisis induced closed streets and parklets can also provide these suburban downtowns a way of creating quickly and cheaply some needed spaces. Given that the sidewalks in many of these districts are fairly narrow, such projects can have a variety of immediate benefits. Still, the formula behind strong public spaces such Bryant Park can be distilled to scale to the smaller sizes and different characteristics of the urbanized suburban downtowns. A good place to start doing this is Andy Manshel’s new book Learning From Bryant Park.¹³ Here are a few things that interested downtown leaders might consider:

Location really matters. A public space on the periphery will have far fewer users and far weaker positive impacts on its surrounding properties and their uses.
How the space is programmed will have a far greater impact than how it is physically designed or how pretty it was meant to be. This is a major point that Andy strongly argues for.
Simple things really matter: as Holly White pointed out, if you want people to stay, they will need places to sit. Shade also counts. Andy stresses in his book that you don’t have to spend big bucks to succeed.
With programming, test things out and if they don’t work well, learn what went wrong, then either fix them, or do something better. Also, iterate, keep refreshing an improving the programming you have.
Just don’t think about events. Think also about how people-watching can be facilitated and enhanced. Public spaces can proved opportunities for people to do things, to let them become the space’s performers such as chess tables, boules courts, ping pong tables, reading rooms, ice skating rinks, carousels, swings, climbing rocks, etc.

Bottomlines

Urbanized suburban downtowns, with strong CSD functions, that are able to draw upon large numbers of creative class households, have growing numbers of remote workers, and maintain steady consumer market segments are well positioned to experience relatively strong economic recoveries from the Covid19 induced economic crisis. They can do even better if they take steps to protect their movie theaters and develop vibrant public spaces.

It’s about time that academics and economic development professionals realize that suburban downtowns do not grow or function in the same ways that our urban districts do. The suburban districts depend far, far less on being employment centers and more on being the central place for people to meet, enjoy themselves, help each other, buy necessities, and sometimes to buy non-necessities. Daytime workforces may be very important customers for district merchants, but their workplaces are far more often than not located beyond the district’s borders, and sometimes even in other towns. Their downtown housing is not driven strongly by live-workers, yet it can provide a very important in-close user/shopper base. Most of their shoppers also get to the downtown by car, and will continue to do so until AV shuttles and micro mobility vehicles provide viable alternatives.

ENDNOTES

1) Source: John Shapiro, formerly of Phillips Preiss Shapiro Associates, based on interviews with New Jersey Transit officials while working on multiple TOD projects in northern NJ, including for NJT.

2) DANTH, Inc. Morristown Retail Revitalization Strategy and Action Plan, September 2010 https://www.ndavidmilder.com/wp-content/uploads/2012/05/Morristown.pdf

3) N. David Milder. Remote work: An example of how to identify a downtown-related trend breeze that probably will outlast the COVID-19 crisis. Journal of Urban Regeneration and Renewal Vol. 14, 2, 1–20. Forthcoming.

4) The chart is from: Michael Sasso and Andre Tartar. U.S. Downtowns Yearn for Vaccines as Merchant Traffic Off 79%. https://www.bloomberg.com/news/articles/2020-12-03/u-s-downtowns-yearn-for-vaccine-as-merchant-traffic-falls-70?sref=mHw3n8zP

5) Christine Barton. BCG LUXURY PERSPECTIVE. Luxury First Look 2021| Where are we headed? September 2020. Presented at the Future of Luxury Conference, September 23-24, 2020, convened by Luxury Daily.

6) Roland Kushner and Randy Cohen. National Arts Index 2016, Americans for the Art, p.2. https://www.americansforthearts.org/sites/default/files/2016%20NAI%20%20Final%20Report%20%202-23-16.pdf

7) Irene Jiang. “85% of independent restaurants may go out of business by the end of 2020, according to the Independent Restaurant Coalition”. Jun 14, 2020, Business Insider. https://www.businessinsider.com/85-of-independent-restaurants-could-permanently-close-in-2020-report-2020-6). Matthew Haag. One-Third of New York’s Small Businesses May Be Gone Forever. New York Times. August 3, 2020 (https://www.nytimes.com/2020/08/03/nyregion/nyc-small-businesses-closing-coronavirus.html).

8) Source: Small Business Pulse Survey Updated Oct 15th, 2020 https://portal.census.gov/pulse/data/

9) Center City Reports. Monitoring Philadelphia’s Economic Recovery November 2020 https://centercityphila.org/uploads/attachments/ckh6j2igf5o52lxqdijdqeye6-monitoring-philadelphias-economic-recovery-nov-2020.pdf

10) Comptroller Stringer Proposes Plan to Support and Promote Small Businesses This Holiday Season Amid COVID-19 Resurgence. https://comptroller.nyc.gov/newsroom/comptroller-stringer-proposes-plan-to-support-and-promote-small-businesses-this-holiday-season-amid-covid-19-resurgence/?mc_cid=b3ea7a4601&mc_eid=5f0ebc4c65

11) Budget data are from theaters’ IRS1099 Forms’ attendance from annual reports, and interviews.

12) Sara Fischer. Warner Bros. to release all 2021 movies on HBO Max and in theaters at same time. Axios. December 3, 2020. https://www.axios.com/warner-bros-hbo-max-2021-c45cc542-b509-4d04-9041-9c463e49f512.html

13) Andrew M. Manshel. Learning from Bryant Park: Revitalizing Cities, Towns, and Public Spaces. Rutgers University Press, April 2020.

THE AMERICAN DOWNTOWN REVITALIZATION REVIEW (THE ADRR)

Posted on April 7, 2020 by DANTH

FOR IMMEDIATE RELEASE

Online version available at: www.theadrr.com

Contact:
N. David Milder, Editor
The ADRR — The American Downtown Revitalization Review
718-805-9507 [email protected]

THE CREATION OF THE AMERICAN DOWNTOWN REVITALIZATION REVIEW (THE ADRR)

There currently is no real professional journal for the downtown revitalization field. For many years, that has been strongly lamented by many of the field’s best thinkers. To remedy that situation, a band of accomplished downtown revitalization professionals are creating The ADRR. It will be a free online publication, appearing four times each year. The target date for the debut issue is now set for the June 1-15, 2020 timeframe, with the second issue aimed for the Sept 7-14, 2020 timeframe.

This ADRR is intended to be a lean and mean operation, based totally on the availability of free online resources and the time, energy and elan contributed by its authors, advisory and editorial board members, and its editor.

How to Subscribe to The ADRR

Those interested can now visit The ADRR’s website, www.theadrr.com , where, on the home page, they can sign up to become subscribers. This enrollment places the subscriber on a MailChimp mailing list so that they can receive New Issue Alerts (see below).

How Issues of The ADRR Will Be Distributed.

New Issue Alerts, containing the Tables of Contents of issues and links to their downloadable pdfs of articles are sent to subscribers via a MailChimp email blast and posted to the ADRR’s website. Each issue’s pdf files initially will be stored in a folder in ND Milder’s Dropbox account from which they can be downloaded. Subscribers can download only those articles they want to read and whenever they want to read them. The ADRR also can be found via Google searches.

The Content We Are Aiming For.
Only manuscripts about major downtown needs, issues and trends will be considered for publication. They will be thought pieces and not just reports about a downtown’s programs and policies that its leaders want to brag about. Articles must have broad salience and their recommendations broad applicability within the field. The “voice” of The ADRR will be anti-puff, and very factual, evidence driven, though not dully academic. Discussions of problems and failures will be considered as relevant as success stories if, as so often is the case, something substantial can be learned from them. The ADRR will not avoid controversial issues.

Also, the focus of The ADRR will not be overwhelmingly on our largest most urban downtowns, but also provide a lot of content and relevant assistance to those in our small and medium sized communities, be they in suburban or rural areas.

Who Will Write the Articles?

Hopefully, they will be from people in a broad range of occupations – downtown managers and leaders, municipal officials, academics, developers, landlords, businesspeople, consultants, etc. — who have significant downtown related knowledge and experience.

Curated Articles and Wildflowers. Initially, the ADRR will solicit articles to prime the content pump. Once The ADRR is up and running some articles will continue to be solicited on topics deemed a high priority by the editorial board members. Each board member can select a topic to curate an article on and seek the author(s) to write them. However, there still will be a continual traditional general call for submissions (wildflowers) focused on subjects selected by their authors. All submissions, curated or wildflower, must demonstrate sufficient merit to warrant publication in The ADRR. All submitted articles will be reviewed by board members. We hope to see many submissions!

Article Length and Author Responsibilities.

There will be short reads and long reads. Articles of 1,500 to 5,000 words will be considered. Multi-part articles of exceptional merit and salience will also be considered. What counts is their quality, not their length. Authors must have their articles thoroughly proofread prior to submission. Poorly proofed manuscripts will be rejected. Guidelines for submissions may be found on The ADRR website.

Publication Schedule:

Published four times per year, with a minimum of 5 articles in each issue. Given that this is an online publication, from a production perspective, the number and length of the articles is not a particular problem. However, from an editorial and content management perspective, the number of articles and their lengths can quickly become burdensome.

How It Will Be Organized.

The ADRR will be published by an informal group for its first year, with no person or group having ownership.

Editor. During the ADRR’s first year, N. David Milder has volunteered to serve as its editor.

The Advisory/Editorial Board :

Jerome Barth, Fifth Avenue Association
Michael J Berne, MJB Consulting
Laurel Brown, UpIncoming Ventures
Katherine Correll, Downtown Colorado, Inc.
Dave Feehan, Civitas Consulting
Bob Goldsmith, Downtown NJ, and Greenbaum Rowe
Stephen Goldsmith, Center for the Living City
Nicholas Kalogeresis, The Lakota Group
Kris Larson, Hollywood Property Owners Alliance.
Paul R. Levy, Center City District, Philadelphia
Beth Anne Macdonald, Commercial District Services
Andrew M. Manshel, author
N. David Milder, DANTH, Inc
John Shapiro, Pratt Institute
Norman Walzer, Northern Illinois University

Articles in our first issue that will be published in June 2020

Michael Berne, MJB Consulting, Working Title, ” Bringing Downtown Retail Back After COVID-19”
Roberta Brandes Gratz, “Malls of Culture.”
Andrew M. Manshel, “Is ED Really a Problem?”
N. David Milder, DANTH, Inc., “Developing a New Approach to Downtown Market Research Projects – Part 1.”
Aaron M. Renn, Heartland Intelligence, “Bus vs. Light Rail.”
Michael Stumpf, Place Dynamics, “Using Cellphone Data to Identify Downtown User Sheds”.
The Spotlight: “Keeping Our Small Merchants Open Through the COVID-19 Crisis”
- Katherine Correll, Downtown Colorado, Inc.
- David Feehan, Civitas Consulting
- Isaac Kremer, Metuchen Downtown Alliance
- Errin Welty, Wisconsin Economic Development Corporation.

Some Downtown Equity Issues

Posted on March 17, 2018 by DANTH

Part 2 of the A Closer Look at Some Strategic Challenges Generated by the New Normal for Our Downtowns Series of Articles

By N. David Milder

Introduction.

There are a number of issues that involve questions about who will visit, live, work and play in our downtowns and how all stakeholders – be they those who live, work and play there or those who own properties and businesses – can share in their successes. The term “equity” seems to fit all of these issues. Their emergence has been relatively recent, and their full dimensions are probably yet to be grasped. As a result, most are not on the radar screens of many downtown leaders, save in those cities where the problems have already become very acute and/or nationally visible, e.g., affordable housing in San Francisco and the entire Bay region.

The core equity issues are essentially about what our values and preferences are and how they will be applied to many of the component parts of these successful downtowns. Decades ago, at their nadir, downtowns had a different set of users and, often, different stakeholders. Strong concerns about equity were not really salient since there were so few goodies to distribute and so few people who wanted either a psychological or legal stake in these districts. These days, that has all changed. The equity issues are generated by downtown and community successes, sometimes huge ones, not their failures!

Way back when, it may have been from one of Jane Jacobs’s books, I learned two axioms about downtowns that have stayed with me ever since:

A downtown needs its community’s residents to take psychological ownership of it. It must become “my downtown” in their guts. When that happens, they will not only use it, but also politically defend it, and support efforts to improve it. Psychologically, they become stakeholders.
A downtown should be everyone’s place. It should have attractions suitable for large swathes of the community. It also should be the community’s central gathering place. Anyone acting in an orderly manner should be welcome.

During the decades when downtowns were in decline, it seemed as if few people within their communities wanted to take psychological possession of them. Today’s successful downtowns show a marked ability to attract many more people, many of whom are affluent and well-educated, to live, work and play in them. In some, where the median price of a residential unit exceeds $1m and where the price of a ticket to a show or ballgame can exceed $1,000 in secondary markets, many local residents may wonder what’s there in the downtown for them?

Who Can Afford to Live Downtown?

Downtown experts agree that more residents in the downtown and in neighborhoods within reasonable walking distances of it have been the strongest engine for downtown revitalization. Yet, more housing in those places is proving to be a double-edged sword and concerns about middle income and “workforce housing” are popping up across the nation. The situation in San Francisco has attracted a lot of national attention and demonstrates many aspects of this problem. Nearby Silicon Valley has had a famed economic success and many of its relatively well-paid workers seek housing in San Francisco. For example, Google-owned buses haul hordes of them to and fro daily. The result has been a very expensive housing market in the entire Bay area. It’s become very difficult for these relatively affluent workers to find affordable housing and those pressures are also impacting other types of workers. One response is to accept smaller and/or unusual types of dwellings. Here’s a recent headline in the New York Times: “Dorm Living for Professionals Comes to San Francisco” (1). The article goes on to detail that: “In search of reasonable rent, the middle-class backbone of San Francisco — maître d’s, teachers, bookstore managers, lounge musicians, copywriters and merchandise planners — are engaging in an unusual experiment in communal living: They are moving into dorms.”

Dorms and other “co-living” arrangements are just one solution path San Franciscans have followed to cope with their region’s skyrocketing housing costs. For example, Business Insider even headlined that: “A 23-year-old Google employee lives in a truck in the company’s parking lot and saves 90% of his income” (2).

A Cargo Container Converted into a Small House in San Franciso.

The Tiny House movement has even penetrated the San Francisco area as evidenced by the photo above taken from an article in Business Insider (3). In this instance, a cargo shipping container was converted into the wee home. Some more affluent San Franciscans have spent $1m+ to purchase and renovate “earthquake shacks,” or are living on boats in the bay. Still others are squeezing together with a large number of roommates into an apartment or house (4).

High housing costs are not confined to San Francisco. As can be seen in the above table, in all 10 of these highly successful major cities, the ratio of median home prices to median household incomes exceed the 5.1 level deemed to indicate serious unaffordability.

An important question: are the housing costs in smaller communities than our major cities also skyrocketing and having adverse impacts? Probably yes, if they are located in a region, such as the San Francisco Bay Area, where the whole area is thriving economically. For example, the communities where the Jobs, Zuckerbergs, Pages, and Ellisons live are small and hyper expensive. In less economically robust regions, one might expect a more complicated picture. My hypothesis is that higher housing prices are an inevitable result of a downtown and its community becoming successful, desirable places to live, work and play. So, where that has happened, the prices will very likely be higher. For instance, in districts that have recently experienced a significant revitalization that was propelled by mix-use, residential anchored projects. This has happened in a number of suburban communities around our major cities, especially those served by commuter rail. Otherwise, in smaller towns and cities, housing prices probably have not skyrocketed. For some smaller towns, their lower housing costs when combined with strong quality-of-life assets, and decent broadband and transportation access, might give them a meaningful competitive edge in attracting new residents and businesses.

“Micro-living,” i.e. living in units of 300 to 400 SF or less is a growing phenomenon in cities across the globe where their economic success has pushed housing prices well beyond what middle-income and even upper-middle-income persons/households can afford. In the U.S. they can be found in many of our largest cities — e.g., Boston, Chicago, and NYC – but especially in cities such as Atlanta, Cincinnati, Denver, Pittsburgh, Seattle, St. Louis and Washington D.C., where the share of single person households exceeds 40%. The mini apartments also are not unusual in Tokyo and many European cities (5).

To provide some perspective on these 300 SF to 400 SF units, consider that in the recent past many of their occupants would have rented studio apartments. Their average size in NYC, San Francisco, and Oakland are 550, SF 514 SF and 531 SF respectively. The micro-living units are 20%+ to 40%+ smaller than the studios. Also, consider that in the 20 most populous metro areas there is a distinct trend toward smaller units – though all still average above 854 SF (see the above table). The decreases in size have been smallest is in the metro area that have very high costs and low costs and highest in the high cost and moderate cost markets.

The small units, such as those in dorm or co-living buildings, often have desirable social/communal advantages that attract their inhabitants. Whether a true equity issue exists for these residents under these conditions depends on whether the inhabitants really want to live in such units or are occupying them because they are the best of the bad options available to them.

This discussion would also be more informed if there was some research establishing that humans need abodes that have XYZ square feet of living space. My memory says that HUD somewhere at some time established that dwellings were overcrowded if a unit’s occupants have less than 188 SF each. I have not found any research that supports a number like that. Moreover, it is highly probable that the personal space needs vary culturally. For example, NYC subways certainly get crowded, but I doubt that their riders would accpt either the level of crowdedness found in the Tokyo subways or their use of car packers to assure that the subway cars are maximally stuffed with riders. Moreover, there are many people in neighborhoods in the Borough of Queens in NYC, such Kew Gardens, Forest Hills, Bayside, who use the l far more expensive Long Island Rail Road rather than experiencing the crowded subways.

Many San Franciscans and residents of other high price communities have responded to the housing equity issue with their feet. A recent report notes that: “San Francisco lost more residents than any other city in the US in the last quarter of 2017…. San Francisco lost net 15,489 residents; about 24% more than the next-highest loser on the list, New York City” (6). This behavior pattern probably results in area firms losing a lot of talented employees. Of course, very high housing prices probably will also dissuade a significant number of talented people from taking jobs located in a community.

Tourists and Tight Housing Markets. City leaders, their economic development officials and local business operators often brag about how many tourists and second homeowners they have and all the revenues and jobs that means for their local economies. However, the residents of many of these communities may tell a different story. They may note that the retail developed for tourist shoppers really does not provide the types of merchandise and services they need or want and often creates seasonal traffic nightmares on local streets. In many communities, large and small, tourists also have impacted negatively on the housing market from the perspective of the needs of local residents.

Moses Gates, in a study by Regional Plan Association (RPA), noted that: “54,764 apartments in New York City … are vacant, according to the 2014 Housing and Vacancy Survey – but not really. These are apartments used for ‘seasonal, occasional, or recreational use’ – i.e., pieds-à-terre or second homes” (7). He went on to state that:

“We also need to better leverage our housing inventory, especially in places where land is scarce and building new homes is difficult. One way to do that is through policies like a tax surcharge on second homes in the New York City (or a pied-à-terre tax) designed to get mostly unused apartments back on the housing market.”

It should also be noted that strong suspicions have been raised about many of these pieds-à-terre in some of our biggest and most tourist-popular cities (e.g., NYC, Miami, etc.) being money-laundering operations for their wealthy and unknown foreign owners.

Many of these units are vacant for most of the year. They thus do not contribute the pedestrian traffic to the sidewalks below nor the expenditures in the city’s shops, restaurants and entertainment venues that one might reasonably expect – nor the sales taxes on those expenditures.

Are these second homeowners to be treated differently from a downtown’s normal stakeholders? Laws probably protect them in many ways, but I am certain that many local residents would say there is something unjust stirring here that must be fixed.

Airbnb has seemed to be looking for trouble in a host of cities, quickly getting into conflict with city governments because of its alleged flaunting of local laws and putative negative impacts on the availability of affordable housing. As a recent study published in the APA Journal noted, Airbnb had been criticized for enabling:

“…tourism accommodations to penetrate residential neighborhoods, which creates conflicts between visitors and residents, displacing permanent accommodations in high-demand cities and exacerbating affordability pressures for low-income groups (8).

Governments, at all levels, have for decades often mounted programs to cope with the affordable housing issue, though they almost always targeted low-income and impoverished households. Also, the units produced by those programs usually were placed in poor neighborhoods or in those very out of the way, e.g. Far Rockaway here in NYC. The downtown housing equity issue differs in that the targeted population is middle or even upper-middle-income households and that the units produced for them should be at least within a very reasonable travel time of the downtown. It would also probably be a good idea to have representatives of these residents and their employers extensively involved in the development of the needed housing units.

Downtown Success Encourages Landlords to Ask Independent Retailers for Unaffordable Rents

This problem is made more complicated by the fact that to properly understand it one must break it down analytically into three constituent parts: fairness to the merchants, impacts on vacancies, and the impacts of the loss of popular, able merchants. In many discussions of the affordable retail rent problem, things get murky as attention quickly shifts from one of these sub-issues to another. My objective here is not to provide definitive solutions, but to help illuminate the problem and to suggest some solution paths that may be worth exploring.

The Problem Is Not New. Unaffordable retail rents are an issue that long predates the Great Recession. For example, back in the late 1970s, when I surveyed street-level merchants in Charlotte’s CBD about how they were impacted by an off-street, internal shopping network that was created by overstreet bridges connecting a number of new buildings, they replied that it took traffic from the sidewalks and led to hard to afford rent increases. In the two districts I managed, I never met a small merchant who did not have something negative to say about their rent increases.

Generally, when downtowns or neighborhoods become observably successful, they not only attract retail chains, but also tend to attract many other types of businesses, such as personal, professional and financial service operations. A very high percentage of these operations can afford higher retail rents than the average independent retailer. Some, such as the banks, are willing and able to spend a lot more on rents than even the well-heeled retail chains. As one observer noted: “Banks frequently overpay by 15% to 20% or more on average for real estate compared to other retailers for comparable space. Over 10 or 20 years we’re talking a lot of money!” (9).

I put together the above table for an article I wrote back in 2010. It shows how much space a merchant could afford to lease if 15% of his or her annual sales were devoted to paying rent (10). The 15% figure makes the analysis somewhat conservative, as a more accurate number would the 8% to 12% range for downtown merchants and about 10% for restaurants. Small merchants just cannot afford a whole lot of space in any successful district unless they have very significant annual sales.

Small retailers have not been the only group impacted on. Jeremiah Moss, in his book Vanishing New York, describes how bohemian artistic live-work areas, such as the East Village, were erased by major retail chains coming in.

Why Do Landlords Ask for Unreasonable Rents? Landlords are not necessarily being venal or thoughtless if they sign these higher paying tenants when they appear on their doorsteps. They are simply responding rationally to proven market demand. Of course, even then, they must decide, perhaps just implicitly, that these non-retail uses will ultimately generate more value than if a current small retail tenant was retained. However, one might ask if they considered how that tenant might affect nearby businesses and buildings or if they just considered their own bottom lines. Obviously, another important question is if considering the impacts of a potential tenant on the district should be obligatory in some way, shape or form? This problem would ease if a landlord or an accomplished EDO owned a lot of downtown properties with retail tenants and managed them like a mall, but that is an unlikely outcome.

Here are some other patterns that I have found in the ways landlords establish their rent increases

Some increases are based on a reasonably accurate assessment of local rising property values and dominant asking rents. Both of these may already reflect the district’s growing success. These landlords tend to avoid asking for the highest rents. Among them, are a number of experienced professionals who see the landlord function as having strong stewardship aspects and consider what is good not only for their properties but also for those that are near them. I fear that they are a dying breed. How instead can we develop more of them?
Some small landlords I’ve spoken to simply could not explain the reasons for their very high rent increases, save to say they were products of their best judgments. Among those that I have met, many were new to the U.S. and new to local property and retail markets. A number of them would stubbornly maintain unreasonable asking rents for a year or more. These landlords do not typically care who their tenant is as long as they pay the asked for rent. Here the high rents and vacancies are being sustained by landlord ignorance and management ineptitude. Newness to the area is another factor.
Other increases are based on hopes, often wishful, that a national chain or other higher paying tenants can be attracted that will pay much higher rents and have a better credit rating than those of the current independent retail tenant. An analysis of the local retail market is either perfunctorily done or simply missing. An example of this is Wong Kee, located in Manhattan’s Chinatown. It recently “succumbed to a new landlord and rising rents.” It was in Chinatown for nearly 30 years. Its lease was not renewed. by the landlord. The landlord wants to build a pharmacy in its place, though there are already several pharmacies nearby (11). This type of landlord needs to learn what is really feasible from a business recruitment perspective.
A few other landlords – usually those unfamiliar with the downtown, retailing or even property ownership – will ask for very large increases because they paid way too much for their newly purchased building. Their huge rent increases are what they need to financially stay whole. This may be because their bank loan agreement probably stipulated a formula for determining what the rents should be. There was little room for them to consider local market factors, even if they wanted to — and too many didn’t care anyway. According to Jerimiah Moss, banks will devalue a property if it has a small business tenant but increase it for a retail chain tenant. “There’s benefit to waiting for chain stores. If you are a hedge fund manager running a portfolio you leave it empty and take a write-off” (12). In other words, such landlords have tax incentives that encourage them to demand very high rents and tolerate long-term vacancies. They also seem absolutely oblivious about how a vibrant district will increase their local property values and bottom lines.

The Fairness Issue. Local residents and civic leaders may feel that some of the merchants facing unaffordable rent increases are being unfairly treated. This issue is implicitly present in most usages of the phrase “unaffordable rents” where unaffordable is really seen as a synonym for unfair. Should such an equivalence be accepted? Moreover, why should any government entity or nonprofit help those facing unaffordable rents? Market forces are freely at work and, to quote Barzini in the Godfather, “After all, we are not a bunch of communists.” I would argue that it is not the unfairness of the unaffordable rents that justifies remedial action, but their most important impacts: long-term and multiple vacancies and the loss of many popular, high-quality merchants.

Vacancies. First, let’s establish that a certain level of vacancies is necessary for a downtown to work correctly and prevent ossification. Downtowns need some churn to recruit new, attractive merchants and to get rid of the dregs. I think it’s generally accepted that a vacancy rate below 5% suppresses the desired level of churn while one above around 10% can have bad effects on the district. Many consultants, downtown leaders and, perhaps more frequently, elected officials, believe that vacancies can be an unattractive creeping plague. However, the real problem about vacancies may not be the emptiness of the storefront, but the absence of an accomplish operator to occupy it. Let me anticipate those who will claim that a cluster of empty storefronts is visually an eyesore for the district, diminishes its walkability and a puts a blemish on its reputation, by asking: Is the district really any better when the vacancies are filled by unpopular, inept operations? Bad operators can repel customers and downtown visitors even more than empty storefronts.

It is also important to realize that any valid explanation of today’s retail vacancies must take a multi-causal approach that includes far more cautious consumer behavior, the rise of Millennials who prefer experiences over things, significantly reduced demand by retail chains in terms of both the number and size of their new locations, and affordable rents. The reduced retail demand is especially relevant because many of the landlords that were pushing out independents were doing so in hopes of recruiting the very chains that were hardest hit by reduced consumer favor and demand, such as the apparel specialty retailers.

It is also important to consider that reducing landlord asking rents is not the only way of reducing vacancies. As Andy Manshel reminded me, good results can be achieved by “animating vacant storefronts with temporary art or high-quality other pop up uses.” He also suggested that vacancies could be taxed, motivating landlords to sign leases.

Generally, it can be reasonably argued that concern about vacancies is a misunderstanding of the essential core problem.

The Loss of Popular, High-Quality Merchants. That core problem is not the emptiness of the vacancies, but that ill-informed landlord rent increases can result in the closings of independent merchants who are well-loved in the community. They are real losses for their customers, nearby business owners, and their district. Additionally, it usually is very hard to replace them.

However, it must be understood, that by definition, about half of a downtown’s merchants will be below average in their performance, including their ability to satisfy local customers. Are the potential closings of poorly performing, unpopular merchants the type of losses that are worthy of preventive actions by an EDO or municipal interventions? Some, who are ideologically committed to small businesses, may say yes, believing every small firm by definition is worth retaining or saving. Yet, many savvy downtown managers and civic leaders see a prime result of their revitalization efforts being the replacement of their poor-quality merchants, not necessarily with bigger operators or chains, but with higher quality operations.

Who Should Receive Help? One might cogently argue that the harm done to the public and/or district that would result from the closing of a popular and able merchant might justify an EDO or municipal intervention, but how much sway should the “fairness” of the rent increase have? For example, should an unpopular or incompetent merchant who gets an unaffordable rent increase be helped? That would imply that the fairness issue carries the day. Or will assistance only go to merchants who are able and/or popular? Is the fairness issue unrelated to the issue of the merchant’s value to the community or district? I would suggest that the fairness issue only becomes relevant when the merchant’s community value criterion is satisfied.

My observations suggest that the merchant’s value to the community is very likely to be considered when one specific business favored by an important segment of the community announces that it will soon need to move or close – whatever the cause, e.g., poor sales, increased competition, workforce problems, high operating costs (including costs of space) etc. In contrast, because of the sheer number of businesses involved, municipal attempts to remediate unaffordable rents cannot logistically evaluate each of the benefiting firms and it would probably be a political nightmare to do so anyway. As a result, the fairness issue seems to prevail when municipal actions are taken. For example, here in NYC, the City Council has passed a bill that reduces the Commercial Rent Tax that businesses have to pay if they are located in Manhattan below 96^th Street, pay $250,000+ annually in rent, and that have annual revenues under $5m (13).

In several large cities across the nation — NYC being one of them — proposals also have appeared for rent control laws that cover properties with retail uses.

What Kind of Programs Do We Need to Cope with the Unaffordable Rents Problem? Municipal actions tend to treat quality merchants and underachievers in the same way, probably out of necessity. Moreover, both the retail rent control and merchant tax abatements seem to be rather shotgun approaches aimed at helping broad classes of small merchants. The key actors, whose behaviors need to be altered, are the landlords, not the merchants. The retail rent control approach carries with it great potential dangers and certain resistance from the entire real estate community. Yes, the tax abatement helps some worthy merchants, but it also helps make the unaffordable rent increases more bearable. In that way, it implies the increases are justified.

Downtown EDOs may be in a far better position to mount more effective programs to influence landlord behavior. Many of the landlords are probably on their boards and many others have engaged in their programs. Anyone who wants to educate or convince landlords has to have won their esteem, trust, and confidence. The goal of such an educational effort cannot unrealistically be to convince large numbers of landlords. Instead, it should be, to convince a savvy few among them who can lead by example and thereby also exert some market pressures for others to follow.

Probably the best solution to the affordable retail rents problem is to help able merchants buy the spaces they need to do business. They might do this alone or as a group. Buying a single storefront space is unlikely unless it is from some kind of retail coop or condo. In many suburban towns and cities with populations under around 100,000, I’ve encountered retailers who own the entire buildings in which their stores are located. In big, high rent districts with stores located in big expensive buildings that is not likely

It might be possible for buildings that have multiple storefronts to lease, that a partnership of some kind might buy either the entire building if it is cheap enough or just the retail spaces in the larger more expensive buildings. These groups of retailer property buyers most likely will not emerge organically from the merchants themselves. Probably, they will need the catalytic interventions of teams lead by the downtown EDO that has strong active support from the municipal government and a civic-minded developer.

Local governments can do a lot to assist the development of the retailer-owned co-op or condo buildings:

Provide low-cost land or a low-cost building.
PILOTS just as developers are ordinarily given.
Other abatements such as on NYC Commercial Rent Taxes.

The EDO might also help the buyers connect to financial organizations that will provide them with loans that have reasonable terms.

If helping able retailers purchase their spaces is not viable, here are some other actions that might be tried to assist these merchants. Their effectiveness is far from assured. To influence landlords, local governments might consider:

Using zoning and tax incentives to reduce spaces so that they are smaller than what chain stores would want, perhaps around 1,500 SF to 2,000 SF. Landlord blowback can be expected. Also, quality independent merchants might find such spaces too small and a few chains now might still find them suitable.
Use zoning to limit where chain stores can go. This has been done for personal service operations and big boxes. Various legal and political problems can be expected. Landlord blowback can be expected.
Use their own legislative powers to change its tax code to erase any incentives for landlords to demand higher rents and tolerate long vacancies. Also, vacancies might be taxed as if they were occupied.
Use their external political influence to change the state’s tax code to erase any incentives for landlords to demand higher rents and tolerate long vacancies

If the retailer space purchasing option is not viable, to influence landlords, downtown EDOs might consider:

Creating either a formula that landlords can use to calculate an appropriate affordable rent for their retail spaces or to identify the steps in an analytical process that can help landlords make a well-reasoned decision about rent increases.
Educating landlords about the importance of taking into consideration district benefits and harms in their recruitment decisions.
Make a special effort that targets landlords new to the district, retailing or property ownership.
Jawbone banks about the value of small merchants to properties and downtown.
Issue a brief annual report that identifies the most “recruitable” types of businesses to the district and the types of spaces they will want.
Publicly praise and disseminate information about what landlords who are effectively dealing with the rent increase issue are doing.

To help high value, threatened merchants, downtown EDOs should assist them to:

Find new locations. Deft use of the Internet can help many independent retailers thrive in locations previously deemed less than optimum.
Find financing for the move.
Publicize their new location to let current and potential customers know where they now are.

Who Can Play Downtown?

As Central Social District (CSD) functions and venues have become of growing importance to the vibrancy and success of our downtowns, this basic question has become correspondingly important.

A few years ago, I put together the above table to demonstrate the user frictions that five specific CSD venues and two types of CSD venues have here in NYC. The specific venues were Bryant Park, Lincoln Center (LCPA), Madison Square Garden (MSG), The Museum of Modern Art, and The Metropolitan Museum of Art. The types of venues were movie theaters and Broadway theaters. The user frictions I looked at were:

When the venues were open.
Their admission fees.
Whether the user’s schedule could drive a visit or does the user have to conform to what is available on the venue’s schedule of performances.
Can the venue be used for visits that last 45 minutes or less? Lots of downtown visitors have holes in their schedules of that length and districts that have venues that can entertainingly plug those holes will be much stronger than those that cannot.

From the perspective of when the venues are open for people to use them, hands down Bryant Park has the most hours open, followed by the movie theaters. LCPA and MSG are basically closed during most days, while the two museums are closed 5 nights a week. If you work or go to school, these results mean that some venues are much harder to use than others.

Another key friction is how much it costs to be admitted to these venues and here is where many downtown users are simply priced out. Again, Bryant Park followed by movie theaters are the most affordable – and in many instances by gargantuan amounts of dollars:

Bryant Park is free to enter and the fees for using some of its attractions, such as riding the carousel or ice skating, are reasonable. It and other parks in the city cost the least to use.
At the time I did the research, my check of cinemas in Manhattan showed the average price for a ticket was about $13. Nationally, at the time it was about $8. I would argue that movie house ticket prices should be the benchmark of affordability because so many people still go to the movies.
MoMA and the Metropolitan Museum of Art rank next in lowest general admission prices. The Met “asks” for a $25 donation; MoMA requires it. The Met request is based on the deal the city made when giving land for the museum that gives NYC residents free admission. Residents can pay what they want or nothing at all. A $25 fee/donation to these museums would be 1.9 times more than the average cost of a movie ticket in Manhattan.
The prices at Lincoln Center are pricey. An average ticket to the opera costs $156. That’s 12 times more than going to a movie and taking a four-member family could cost a real bundle. If you want to accept alpine, nose-bleed seats you can get a ticket to a NY Philharmonic concert for about $29. But prices go up to about $112/concert if you are a subscriber to a series. That’s 8.6 times more than a movie ticket. Tickets to the opera and philharmonic concerts can be even higher than those cited if they are purchased on the secondary market and there is strong demand for them. But, given that their audiences have weakened in recent years, the markups are not as large as for Broadway shows or Madison Square Garden events. Perhaps in recognition of its high admission prices as well as its mission to serve a broad public, the Philharmonic does give a lot of free concerts on the LCPA’s campus as well as in the boroughs outside Manhattan. It also has a significant educational program in NYC’s schools.
In 2013, the average price for a ticket to a Broadway show was $98.64. Back in 1955, for her birthday, I took my girlfriend to see Mr. Wonderful on Broadway. We had dinner before at a steakhouse, Gallagher’s and to get to and from I hired a limo. It was a very memorable evening. The whole thing cost under $70, with the fifth-row center seats costing about $8.50 each. Adjusting for inflation, the price of those tickets would be $73.91 in 2013 dollars, substantially less than the actual $98.64. The difference is probably substantially accounted for by higher costs, such as for labor, talent, marketing, and equipment, etc. The biggest problems with today’s Broadway theater ticket prices is that so many of the tickets are bought by dealers who then resell them at substantial markups and that some hot plays are asking for $500 a ticket. Paying $1,000+ per ticket for hot shows.in the secondary market is far from uncommon.
The average ticket to a Knicks game at Madison Square Garden, in 2013, cost $125, while a ticket to a Rangers was $78. A ticket to a Billy Joel concert at the Garden could range from from $64 to $124. However, here too, a significant percentage of the tickets are captured by dealers in the secondary market and prices for a very popular game or concert can go above $1,000. Joe Six-Pack fans are unlikely to have the financial resources to attend with any regularity the basketball and hockey games of their favorite teams. Their attendance is more likely confined to special occasions for which they either plan early and save or are gifted. For these fans, downtown sports bars may be one way to deliver the more affordable TV access to these games in an arena-like, fan-filled setting.

Parks, other public spaces, and movie theaters are entertainment venues that help make a downtown everyone’s neighborhood. They are the most easily accessible and the least expensive to visit. Consequently, they provide reasons for most of a community’s population to take psychological possession of their downtown. Where they are absent or weak, the downtown will be lacking very important support mechanisms. On the other hand, attendance at the events of many high culture performing arts venues, popular concerts, and professional sports events can only be afforded by those with above-average amounts of discretionary dollars to spend. These folks, too, are assets for their downtowns, assets that downtown leaders only dreamed of attracting in years past.

The Impact of Tourism. The table above was generated from data published online by the Broadway League. It shows just how much the attendance at Broadway shows is dominated by out-of-towners. Just 22% of the ticket holders are NYC residents. Another 18% come from the surrounding suburbs. Most, 61%, are tourists, with about 46% coming from other parts of the USA and about 15% from other countries.

Strong tourism can have important impacts on a local economy. For example, here in NYC, we have about 60 million tourist visitors annually and their direct spending in 2016 amounted to about $64.8 billion (14). About 6.45 billion went to firms in the recreation and entertainment industries. Without tourist expenditures for Broadway tickets, the relatively high ticket prices probably would not have been reached or maintained. One may wonder if a lower flow of tourists would have resulted in lower Broadway theater ticket prices that would have attracted more buyers from NYC residents and from folks in the surrounding suburbs.

As is happening in many entertainment niches (defined to include cultural/arts venues) across the nation, tourism now accounts for very high percentages of the attendance at many of NYC’s major entertainment venues. This is particularly true for our most prestigious museums, where tourists account for 75% or more of their attendance (see table above). These institutions aspire to be and are world-class venues. That means that though they are located in NYC, for New Yorkers, they are no longer just theirs. Some psychological adjustments may be needed. As I write this I remember many years ago, when my neighbors and shopkeepers in Paris warned me in the late spring, that soon “your Americans and the Germans would come” and Paris would not be the same until the fall. They were absolutely right. The buildings, the Seine, the Metro, the museums were all the same, but Paris in the summer was very different. My French friends explained that they felt during the summertime as if their beloved city is taken over by foreigners. It’s really not theirs during those months. Things may have changed in Paris since my student days there, but that sense of tourists taking over is one I’ve encountered in several other communities here in the USA

Tourism can be boon for many downtowns, but it also often is a two-edged sword, that brings a number of problems with it. Some of these problems are obvious, such as how tourism can impact housing and retail, while others may be quite subtle, such as residents psychologically feeling dispossessed in their own communities. Part of the New Normal, as more and more downtowns become adept at attracting tourists, will also be the emergence of these problems.

ENDNOTES

1. Nellie Bowles. “Dorm Living for Professionals Comes to San Francisco.” New York Times. March 4, 2018. Retrieved from: https://www.nytimes.com/2018/03/04/technology/dorm-living-grown-ups-san-francisco.html?

2. “Employee lives in truck in parking lot.” “Business Insider. October 2015. http://www.businessinsider.com/google-employee-lives-in-truck-in-parking-lot-2015-10

3. See: http://www.businessinsider.com/american-suburbs-dying-photos-2017-10#in-lieu-of-traditional-housing-some-millennials-are-turning-shipping-containers-sailboats-and-vans-into-homes-59

4. Melia Robinson. “All the crazy things happening in San Francisco because of its out-of-control housing prices.” March 6, 2018. http://www.businessinsider.com/why-people-are-leaving-san-francisco-2018-3

5. Wendy Koch, “Mini-apartments are the next big thing in U.S. cities,” USA TODAY, August 1, 2013. http://www.usatoday.com/story/news/nation/2013/07/30/tiny-apartments-apodments-catch-on-us-cities/2580179/

6. Prachi Bhardwaj. “San Francisco is losing more residents than any other city in the US, creating a shortage of U-Hauls that puts a rental at $2,000 just to move to Las Vegas” BI. March 5, 2015. http://www.businessinsider.com/san-francisco-bay-area-residents-moving-away-increase-u-haul-rental-prices-2018-3.

7. Moses Gates. “How a pied-à-terre tax could help solve New York City’s housing crisis.” City & State New York. Aug. 30, 2017. https://www.cityandstateny.com/articles/opinion/pied-a-terre-tax-could-help-solve-new-york-city-housing-crisis.html

8. Nicole Gurran and Peter Phibbs. “When Tourists Move In: How Should Urban Planners Respond to Airbnb?” Journal of the American Planning Association. January 2017. 2017https://www.tandfonline.com/doi/full/10.1080/01944363.2016.1249011)

9. Richard Pilla. “Why banks overpay for real estate” BAI Oct 6, 2015 https://www.bai.org/banking-strategies/article-detail/why-banks-overpay-for-real-estate

10. N. David Milder. “As we leave the recession, affordable downtown retail rents are a revitalization imperative.” Downtown Idea Exchange. May 2010. https://www.downtowndevelopment.com/perspectives/dixperspectives050110.pdf

11. “Wong Kee Vanished.” http://vanishingnewyork.blogspot.com/2018/03/wong-kee.html Retrieved on March 14, 2018.

12. Quoted in Edward Helmore. “New York’s vanishing shops and storefronts: ‘It’s not Amazon, it’s rent.’” The Guardian. Dec 24, 2017. https://www.theguardian.com/business/2017/dec/24/new-york-retail-shops-amazon-rent?CMP=share_btn_link

13. Sarah Maslin Nir. “Tax Break Could Help Small Shops Survive Manhattan’s Rising Rents.” New York Times. Nov. 28, 2017. https://www.nytimes.com/2017/11/28/nyregion/rent-tax-manhattan-local-shops.html

14. Tourism Economics. “The Economic Impact of Tourism in New York.” https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/NYS_Tourism_Impact_2016.pdf

Some of the Impacts of the Emerging Retail Paradigm on Downtowns

Posted on March 11, 2018 by DANTH

Part 1 of the A Closer Look at Some Strategic Challenges Generated by the New Normal for Our Downtowns Series of Articles

By N. David Milder

Introduction

As I have been arguing for about 10 years now, our downtowns, no matter their size or geographic location, will be facing a set of challenges and opportunities for the foreseeable future that are quite different from those that downtowns faced from the 1960s through the mid-2000s (1). Even as more and more downtowns are attaining great popularity and economic vibrancy, in many crucial respects they will be facing multi-faceted uncertainty and very strong forces that are ushering in significant changes. This situation will not be surprising to those who understand that downtown revitalization is a never-ending process, that even today’s successes do not vitiate the need to prepare for tomorrow’s inevitable new challenges.

Many of those changes will be behavioral, manifested in what visitors/users do downtown and the motivations for their visits. Perhaps even more disruptive – and often in positive ways – will be the changes in the ways downtown spaces, be they retail, office, residential, parking, roadways or parks will be used, and the physical changes needed to facilitate those use changes.

My observations suggest that many downtowners, who understandably are happily focused on their district’s success, are not preparing to deal with these challenges, often even though they may have already emerged in their districts. The objective of this article is to help make downtowners and their EDOs’ leaders become more aware of some of these emerging strategic challenges, so they can begin to take effective actions to respond to them.

We are seeing important changes in the ways that we shop and how we work, how retailers use their brick and mortar spaces and companies use office spaces. In a decade or two, we also will be interfacing with automobiles in entirely new ways and in anticipation of that fact, some steps should be taken either in the near future or right now. The New Normal for our Downtowns promises many large benefits, but also a lot of change and uncertainty.

The Impacts

The retail industry’s operational paradigm is undergoing a disruptive shift in a process that probably will not be completed for another decade. Today, its ultimate characteristics remain uncertain (2). Many downtown stakeholders and EDO leaders are aware of this situation and feel they cannot do much about it – after all, they think, that’s the job of the retailers. For them, the most salient characteristics of the changing retail paradigm are the reduced demand for retail spaces and the difficulty of recruiting retailers to fill vacant storefronts. However, contrary to what many of them believe, downtowners can indeed take steps to enhance the retail shopper’s downtown experiences by attracting and strengthening their downtown’s Central Social District venues, as I have written about in many previous articles (3). In a future article, I will explore the need to better connect what is happening inside downtown shops with what is happening immediately outside on downtown streets and public spaces. Below I want to focus on a number of other issues that are integrally related to the state of today’s retailing that I think downtowners need to be more aware of and prepared to act upon.

The Decline of Strolling and Browsing Shoppers and Multi-Purpose Trips. Among downtown experts, if you peel away the layers of their understanding of how downtowns optimally work, you soon get to the notions of strolling/browsing shoppers and multi-purpose visits. The competitive advantage downtowns have long had over other types of commercial districts was their ability to enable visitors, on the same visit, to easily walk to a large number of different kinds of destinations, e.g., retailer, eatery, doctor, cinema, concert hall, public park, library, bank, real estate broker, government offices, rail or bus terminal, etc. While, retail destinations were just one type among many, in years past successful downtown retailers would be attracting a lot of users and accounting for a significant portion of their district’s pedestrian traffic. The importance of having a multi-functional downtown that sparks lots of multi-purpose trips is evidenced by the very successful malls (such as the Easton Town Center in Columbus, OH) that are designed to be multi-functional – they have residential, office, personal services, and strong entertainment components – and enable their visitors to have multi-purpose trips.

In the optimal downtown, visitors brought in for whatever reason would stroll down its streets, passing shop windows that might catch their eye and draw them inside. Once in the shop, they would browse through its aisles looking at its merchandise, often buying merchandise impulsively or unplanned.

The Internet, combined with many people leading time-pressured lives, has significantly disrupted shopper behavior so that the numbers of strolling/browsing shoppers and multi-purpose visits have meaningfully diminished. Research has shown that for several years now, “(q)quick trips make up more than half of all shopping trips” (4). Many shoppers, after first doing online searches, then make targeted, quick in-quick out visits to brick and mortar shops. They don’t stroll down the streets as much but travel straight to their retail destinations. Once inside the store, they go directly to the merchandise they previously researched online. They spend less time in the stores, do far less in-store browsing and make fewer impulse purchases. Others are “click and collect” shoppers who make their purchases online and visit the shop just to pick up their merchandise.

Americans’ concerns about convenience are understandable, given the time pressures so many of them face. Downtowns that do not try to make themselves appropriately convenient – there are right and wrong ways of doing it – are negligent in their development of an effective district customer service program.

These quick in and out shoppers are not new, but the Internet has stimulated their numbers to really burgeon – and that poses a number of problems for downtowns:

They are anathema to a lot of downtowners – they are not languorous strollers or browsers. Moreover, they likely to use cars and want to park in front of their destination stores. Retailers relying strongly on this market segment are likely to want drive throughs, curb cuts, etc. On the other hand, they have also helped induce retailers to adopt smaller store formats and “click and collect” programs.
They probably are producing a significant reduction in pedestrian trips, most visible and felt in downtowns that have significant, but not huge pedestrian flows of thousands per hour. That means the vast majority of them.
How can those trips be replaced? Having and maintaining a robust flow of pedestrians is more important than maintaining any specific kind of economic use. In most instances, stronger public spaces and other Central Social District venues are probably the most effective and viable responses – they are what drives most discretionary downtown visits these days.
The quick in and out shoppers also probably reduce the number of multi-purpose trips and the ability of downtown retailers to attract customers who will also visit other types businesses in the district. How can that be remedied? Again, stronger public spaces and other Central Social District venues are probably the most effective and viable responses.
These shoppers, while in their quick in and out shopping behavior mode, are likely immune to the magnetism of the quality experiential retail environments that are increasingly seen by retail experts as the secret sauce for brick and mortar stores to have a healthy flow of customer traffic. However, they can switch their shopping behavior mode at a later time.
While I haven’t seen any research on this, I strongly suspect that designated places near these shops for Uber, Lyft and taxis drop-offs and pick-ups would also probably appeal to these customers. Of course, customer accommodations such as these will not be easy to provide, in no small measure because they would be contrary to the way many downtown leaders want their districts to operate.
That said, downtown retailers probably cannot afford to write-off shoppers in a quick in and out behavioral mode. They probably represent too many sales dollars.
Moreover, a shopper may engage in the quick in and out behavior mode on one day and then prefer being in a languorous experiential shopping environment on an another. Target’s plans for its new stores tries to offer features that appeal to people in both the convenience and experiential shopping modes (5). Ticking shoppers off on their convenience-oriented trip may dissuade them from visiting the shop when they want the experiential retail setting. When, back in 2012, I last visited Rodeo Drive in Beverly Hills, it had short-term parking spots dedicated to shoppers picking up merchandise. Other districts may want to follow suit.
Because the Internet has in a very real sense increased the number of shopping trips that have a specific retail store destination in mind, it can be argued that some retailers may be satisfied with locations that traditionally have been considered less than top rank, e.g., on a side street. Moreover, at such locations, it may be easier to provide the short-term parking and drop-off/pick-up spots for on-demand car services than at the downtown’s 100% corner.

The Need to Repurpose Significant Amounts of Retail Space as Demand Declines. The need of downtown landlords to find new uses for their vacant former retail storefronts is a growing trend and found in all kinds of downtowns. Given that so many downtown properties, especially those that are not in our largest cities, will not be owned by professional real estate companies, there is a strong probability that many local landlords will need help to identify viable new uses for their long-vacant retail spaces and perhaps, then, to attract appropriate tenants. In a very basic way, the repurposing of vacant retail stores has become an essential element of viable business recruitment strategies. The problems are that too many downtown EDOs don’t have a recruitment program and that too many have failed to see that many of their stakeholder landlords need help if they are to repurpose their problematic properties.

The reasons why so much retail space now needs to be repurposed are simple and well-known:

The US has far more retail space than we really need.
Retail chains have finally wised-up and are now opening far, far fewer stores. Those that they do open are about 25% smaller than those they opened a decade ago.
The Great Recession forced a great number of small independent retailers to close, mostly because their customers’ incomes had been reduced and/or threatened. Their closure rate was not greater than that of larger retailers, but their very large absolute numbers – 91% of all retail enterprises have fewer than 20 employees — created the public’s impression that they were hurt far more than other retailers (6).
Post-recession, successfully revitalizing downtowns, be they large or small, encountered vacancies caused by landlords asking for unaffordable rents from their small independent retail tenants.

Today, high numbers of retail vacancies in our largest, densest and most expensive downtowns are not uncommon. For example, in Q3 of 2017, Manhattan’s economy was doing quite well, but its 12 major submarket areas had an “availability rate” of retail space” – a.k.a. the vacancy rate – that averaged 18%, with a low of 7% and a high of 32% (). This strongly suggests that the landlords are asking for unreasonable rents, or much of this vacant retail space is outdated, or these spaces lack sufficient market support. The spaces that are outdated or lack market support probably should be repurposed.

Since the Great Recession, my discussions with suburban downtown managers and my own field observations have indicated that a lot of former retail spaces are being repurposed organically by market forces and rented to personal and professional services operations as well as eateries. In recent years, their storefront vacancy rates have fallen to more acceptable levels, but many suburban downtown leaders worry about maintaining a sense of vibrancy with a reduced retail drawing power. I have long argued that many of the operations in personal services pamper niches can keep store windows interesting and customer traffic levels significant. However, many of these suburban downtowns may want to bring in more Central Social District type operations such as craftspeople, childcare locations, senior centers to fill their storefronts.

Tellingly, at the Illinois Institute of Rural Affair’s (IIRA) 2018 annual conference, one of the featured presentations focused on: “opportunities for communities to create vibrant downtowns by repurposing former retail stores as entertainment, service or civic destinations which better meet the needs of today’s residents” (8). My impression is that many downtown leaders in larger towns also need assistance in properly repurposing their vacant retail spaces. This IIRA presentation also hits on essential points that leaders in downtowns of all sizes need to strongly consider: the repurposing of retail vacancies should not be just to fill an empty space but seen as an important opportunity to increase the district’s vibrancy and economic well-being as well as to improve the quality-of-life available to the people in the community.

The Reconfiguration of Retail Spaces as Their Mix of Functions Change. There are a number of functions that can be part of a retail transaction process and that can be done in a brick and mortar downtown store: e.g., sales, distribution, online order fulfillment, showrooming, customer service and relationship building, inventory storage, connections to the store’s other marketing/sales channels. A lot of the effort going into finding a new retail paradigm is really about determining which of these functions should be present and how they should be carried out. The decisions retailers make about these two issues are important because they probably will have large impacts on the type and amounts of brick and mortar spaces they will need. They also could have impacts on adjacent streets and sidewalks, e.g., if a retailer’s location generates a huge increase in truck traffic because it serves as an online order fulfillment center.

The photo below shows one of the interesting combinations of functions and partnerships that can occur.

Amazon package delivery lockers outside a 7-Eleven in Forest Hills, NY

To accommodate “click and collect” shoppers, online retail giant Amazon has placed a set of package delivery lockers outside a 7-Eleven in a NYC neighborhood. This serves Amazon’s distribution needs while providing the convenience store chain with revenues from what was a dead space. Any reputable convenience store chain’s location is a potential site for such lockers.

Another example of a retailer’s interesting selection of functions is Bonobos, the online-birthed men’s clothing merchant. As of January 2018, it had opened 48 brick and mortar stores in major shopping locations around the country. While it carries lots of samples of its clothing, so customers can try them on, it has none in stock that customers can take with them after making a purchase. Their purchases are delivered to them from another central location. This retailer does not need a lot of on-site space for either storing merchandise or fulfilling orders. Many online-birthed retailers are adopting this “buy and send” approach in their brick and mortar shops.

Nordstrom has a pilot store, dubbed Nordstrom Local, that is very adventurous. It is small, only 3,000 SF, and targets upscale shoppers who can afford to participate in Nordstrom’s Trunk Club that specializes in designer clothing and providing highly personalized services. The customer interacts with stylists rather than salespeople. The only clothing in the store are those pieces that have been selected by the stylists and their customers for tying on. Customers are further pampered with coffee, juice and nail bars. Outside, space has been provided to accommodate curbside pickups. The stylists use an app to help customers select the clothing they will try on when they next visit. (9). It would not be surprising if Nordstrom soon uses artificial intelligence to let customers see what clothing items in various colors and sizes would look like on them, before selecting them for an actual try on.

The Nordstrom Local store on Melrose Place in West Hollywood. (Photo by Christina House / Los Angeles Times)

The online luxury retailer Moda Operandi offers another interesting example of how retailers may use brick and mortar locations, one that is similar in many respects to Nordstrom Local. Moda started online, but later opened a brick and mortar location on 64th Street, steps away from, though not on Madison Avenue. It is not among, yet very close to Mad Ave’s cluster of designer stores and amidst a large dense cluster of very wealthy residents. It is not a traditional store — it does not want to attract shoppers who are walking nearby. It is indifferent to pedestrian flows. It is an “appointment showroom,” where the retailer identifies the customers who will be asked if they want appointments. Those asked are filtered from Moda’s online customers who have made frequent and significant purchases. Moda knows from those purchases and their website navigation a lot about the customer’s preferences. On their appointments, Moda is able to show them a wide range of merchandise specifically selected to match their tastes. This all occurs in a very attractive, private, face-a-face setting. Moda probably sells a lot more merchandise, while the customer gets loads of privacy, recognition, and pampering as well as selections matching their preferences. Using e-commerce transactions to identify/qualify shoppers for personalized, pampering attention in brick and mortar stores may be one of tomorrow’s successful retail strategies (10).

Moda Operandi and Nordstrom Local have very strong personal service-based experiential strategies. Both are looking to have relatively small size physical presences in very well-to-do commercial districts, but that will have very high sales volumes per square foot of space. The retailing activity in their locations also is more invisible than customarily thought necessary for retail establishments. Their operational models rely on their ability to leverage pre-existing relationships – Moda through its online sales and Nordstrom through its Trunk Club – to identify customers to target for intense pampering and relationship building.

Nordstrom Local and Moda are changing the definition of what is a good downtown location for luxury retailers. Though they may be located in a downtown or neighborhood commercial district, strong pedestrian flows and strolling shoppers are irrelevant to their operational model. These locations are valued instead because they are convenient for wealthy customers to access and then receive their pampering. Also, there is a low probability their shoppers will arrive by bus or rail, travel modes that many of these shoppers consider completely déclassé.

What happens to districts like Rodeo Drive, Madison Avenue, Michigan Avenue, Newbury Street, etc. if a significant proportion of their major luxury retailers adopt a lot of the approach used by Moda Operandi and Nordstrom Local? For example, what will be the effects on who is walking on their sidewalks and the local demand for retail space. Will their retailing also become more invisible? Will they, too, have a greater need for stronger Central Social District venues to keep their sidewalks energized?

AmazonGo in Seattle. Photo by Kyle Johnson for the New York Times

The current temple for quick in – quick out shoppers is AmazonGo. Its opening in 2018 in Seattle grabbed a lot of media attention. Though relatively small, 1,800 SF, this convenience store broke new ground because its whole shopping experience uniquely involves several technologies. Check-out is automatic, not requiring a stop at a cashier or register. Shoppers need an Amazon account and the store’s app on their smartphones to enter. That allows their movements to be tracked as they move through the store and take items. When they leave the store, their account is automatically charged for the items they selected and left with.

Other large retailers, such as Home Depot and Walmart, have had self-check-outs for years, but they required the shopper to scan purchased items and then to make a credit card transaction. It took the cashier out of the equation but made the shopper do more to complete the transaction.Most shoppers did not use it. At AmazonGo the scanning and payments are automatic, the shopper needs to do nothing. Also, all customers must use the system. For years, big box stores and supermarkets have faced a lot of consumer blowback about their inconveniences – they are so large it takes a lot of time to get about and find items, checkout lines are too long, etc. Self-checkout was intended to make the shopping trip more convenient (11).

AmazonGo is small enough to easily fit into the vast majority of our downtowns, any of them that can attract a reputable convenience store chain. Lockers for Amazon’s click and collect shoppers could easily be added on to them. The success of these stores will only reinforce convenience shopping. Of course, if you think about it, Amazon’s whole business model is based on appealing to the convenienceand value-oriented shopper.

A certainty: changes are coming to retailers near you!!!

An uncertainty: what those changes will be.

Endnotes

1. See for example: “The New Normal for Downtown Retailing.” Downtown Curmudgeon. Oct 29, 2009 https://www.ndavidmilder.com/2009/10/the-new-normal-for-downtown-retailing-i-introduction

2. See: N. David Milder. “Retail at the End of 2017: Apocalypse or Evolving Paradigm Shift”. .” Downtown Curmudgeon. Dec. 3, 2017. https://www.ndavidmilder.com/2017/12/retail-at-the-end-of-2017-apocalypse-or-evolving-paradigm-shift

3. See: N. David Milder. “The New Normal For Our Downtowns Cheat Sheet.” February 1, 2017. https://www.ndavidmilder.com/2017/02/the-new-normal-for-our-downtowns-cheat-sheet

4. IRI: Quick Trips Make Up More Than Half of All Shopping Trips” Convenience Store News.07/31/2017 https://csnews.com/iri-quick-trips-make-more-half-all-shopping-trips

5. Corrine Ruff. “Target’s ‘next gen’ store caters to 2 types of customers”. Retail Dive. Nov. 13,2017. https://www.retaildive.com/news/targets-next-gen-store-caters-to-2-types-of-customers/510740/

6. N.David Milder. “Nationally, How Small Retailers Were Impacted by the Great Recession.” Downtown Curmudgeon Blog. https://www.ndavidmilder.com/2017/01/nationally-how-small-retailers-were-impacted-by-the-great-recession

7. Cushman & Wakefield, MarketBeat Manhattan Retail Q3 2017

8. See conference program.

9. Ronald D. White. “Nordstrom’s newest store aims for a personal touch — and no clothing racks”. Los Angeles times. Oct. 6, 2017. http://www.latimes.com/business/la-fi-nordstrom-local-20171006-story.html

10. A lot of this information is taken from my article on Madison Ave luxury shopping district https://www.ndavidmilder.com/2017/01/a-large-luxury-urban-retail-district-under-the-new-normal

11. Jake Bullinger.” Amazon’s Checkout-Free Store Makes Shopping Feel Like Shoplifting.” The Atlantic , Jan. 24, 2018. https://www.theatlantic.com/business/archive/2018/01/amazon-go-store-checkouts-seattle/551357/

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

Posted on December 3, 2017 by DANTH

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.

N. David Milder at DANTH, Inc.

Downtown Revitalization Specialist

Category Archives: Luxury retail

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