NEW YORK — The retail real estate industry is changing by leaps and bounds, from the perspectives of the developers who build projects for retailers and of the service providers, brokers and lenders who make retail deals happen.
The desire for dense urban centers, as opposed to retail sprawl, continues to enhance the popularity of mixed-use town centers, projects that are more difficult to create than the traditional regional mall and that require creativity, partnership and, most important, a willingness to break new ground in how to think about retail.
WWD recently was host to two executives from different sides of the business, lifestyle developer Yaromir Steiner, founder and chief executive officer of Steiner + Associates Inc., and retail real estate service provider Robert Pressman, executive vice president, national retail division, of Studley Inc., who were asked to weigh in on today’s issues and the challenges facing retailers, developers and service providers in the future.
WWD: What is your business doing right now?
Yaromir Steiner: My company is building open-air, town-center properties. I am building a project in Milwaukee and a project in Dayton [Ohio]. After that, we’re working in Texas and Virginia, the same town-center projects where we create urban environments. The variation is that we started to introduce office spaces in the project above the retail, then introduced apartments and now condominiums. Now we find ourselves being developers of all kinds of things. We used to do one thing and now we have to do retail, residential and office, and consequently the projects are getting bigger and more ponderous, more difficult to finance. The banks that can finance them now become fewer, so it’s more challenging. It’s exciting, but it’s more challenging.
WWD: Do you find the municipalities are welcoming these kinds of projects?
Y.S.: I am sensing a switch, or maybe it’s because I’m working in municipalities that feel that way. Before, any retail that generated property tax was good. Now, people are concerned about the built environment, the social impact, the way people live and how they live together, and the places you create. It’s a whole new dimension. Our approach to retail development specifies those non-material needs as well as the material needs. The proof is in the pudding. They always cooperate in public ventures.
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WWD: How is your business changing?
Robert Pressman: Our practice is a multiservice practice for retail. Yaromir mentioned the development side having to focus on more things, and we find that same trend compelling on the brokerage service side. Our services go beyond real estate into financial services, business planning, and we get involved with the developers and the tenant side. Today, it’s all interconnected.
WWD: How you work differently with developers?
R.P.: Our team was appointed by LNR Property Corp. to do the largest retail project in downtown L.A. Downtown L.A. has been rediscovered, and they are doing two 40-story towers of residential, 700 condominiums. And we’re doing the 250,000-square-foot base of retail on four acres. It’s a classic mixed-use development. We’re not just doing the brokerage and leasing, but also got involved in designing the project. We got involved in the layout of the retail, the size, the types of tenant and merchandising mix, all of those things that are critical to the success of the retail. So rather than coming in at the back end and just doing leasing, we’re coming in at the front end, sitting down with the architects, developers and working on the project. It’s complementary parts of the projects coming together in these more complex, larger, more sophisticated projects happening now.
WWD: As the developers and service providers grow more sophisticated as they think about retail planning and how retail fits into the public sphere, are retailers growing more sophisticated as well?
R.P.: Yes, no and maybe. The big-box retailers are still accustomed to driving the wagon. They are accustomed to the luxury big-box retailers get. But in the more urban mixed-use projects where you’re not building 1 million square feet of retail, you’re building smaller. The developer can’t do those kinds of giveaways. So you’re finding new things, a concept I call mini anchors, like 25,000-square-foot, or 30,000-square-foot stores that are bigger than an average mall store but not 100,000 or 200,000 square feet. Several of them, as opposed to one large anchor, can anchor a lot of the urban projects. Bed Bath & Beyond, H&M, DSW, Virgin Megastores, there are a whole group of stores in that size that can fit this category.
Y.S.: I think you need to look at retailers in the suburban areas and ask them to do some urban modifications, and then you will see the difference between retailers. Some progressive retailers will really understand the aspirational needs of their customers’ way of life and they are willing to adapt their product. Target, for example, has a group that specifically focuses on how to fit their stores in unusual areas even in suburban locations. And I think the retailer has to start thinking about how we fit in urban fabrics by fitting into different levels, modifying their entrances, their designs, multiple entrances, deal with carts. I think we are at the tipping point right now. Target is the first to give in, and I think you will find more retailers following suit.
WWD: How will department stores like Barneys or Neiman Marcus adapt to atypical spaces?
R.P.: It depends. Bloomingdale’s experimented with a specialty store format and did 10,000 square feet in [Manhattan’s] SoHo instead of a large-scale store. That kind of format can be the vehicle for Federated to get into the market and compete with the likes of Neiman Marcus and Bergdorf’s. The format can work in other sophisticated urban environments. Everybody’s trying to reinvent pieces of itself to figure out how to expand and fit into markets that they wouldn’t traditionally fit into. Particularly as we get away from the no-brainer markets, when retailers move into markets that are not as obvious in terms of fashion, what will be that model for that market.
WWD: Do retailers ever fall prey to the standards that they set for themselves in terms of where they should be and who their customer is?
Y.S.: I am absolutely shocked by the lack of sophistication and lack of understanding of statistics and demographics by some American retailers. Absolutely shocked. On the other hand, there are clearly some people who do this very well. Gap, for example, has very sophisticated tools on how to evaluate locations, but many, many companies use an analytical approach that concludes they can make their stores fit anywhere.
R.P.: I would agree. As a service provider, we’re providing analysis as a service now, and one of the first things that we do for a retailer to expand nationally is look at our own independent research on the retailer’s demographics, not just census stuff; we drill down to issues. We recently did a study for a beauty company that makes decisions on what types of tenants they do well next to in centers, better in warm or cold weather, in cities or suburbs, on second floor or multilevel, because people can’t afford to make mistakes today. Mistakes are very expensive for everybody, so for a retailer to avoid mistakes, do the homework up-front.
WWD: Going forward, what are your concerns about the growth of the retail market?
R.P.: Retailers having too many stores is still a problem. In the old days, when there was inflation, retailers would grow by inflation, 5, 6, 7 percent. With inflation at historically low levels, there’s no natural growth or true unit growth. For example, if I sold 10 of these units last week, can I sell 11 of these this week? And that creates pressure to have more units. There’s also a consolidation trend — Federated and May, Sears and Kmart — and those are good things because there will be a narrowing of brands. So I hope that will bring a balance, that consolidation will bring a narrowing of brands. And between retailers wanting to expand, hopefully you will see a healthy balance.
Y.S.: My biggest concern is that in the town-center category there is not enough discipline yet. When the enclosed mall model was established, there was a very identifiable product type and locations, and you could make a decision of what is good and what is bad very easily. Right now, we’re in a phase where new town centers are becoming [popular], and it’s not always simple to determine which are the right decisions, and which are not. My biggest fear is retailers making mistakes in one project versus another, and the whole category will be hurt. So it’s really important that some kind of discipline grows out of that. It’s a whole new way of thinking.
If you look at the long view, including population and income increases, consumer spending is going to go up only 2 to 3 percent in true dollars year-over-year. So that growth is all we can expect. But within it, it’s a total maelstrom, things are mixing up, tenants are dying, new retailers are coming and changing. So we have to know there will be a growth in overall volume, there will be turmoil within categories. It’s a great period with a lot of change.