By: Nellie Day, As published in Western Real Estate Business
First it was Mervyn’s, then Linens ‘n Things, Circuit City and Borders. Next thing you knew, Best Buy and Staples had announced they would close some stores. Even with the recession in our rearview mirrors, it’s clear that many retailers are having a difficult time adapting to the new economy. Couple that with the ever-increasing popularity of online shopping, and it’s been a recipe for disaster for some major companies that were huge players not too long ago.
Our most recent wave of closures involved Loehmann’s liquidation, JC Penney’s downsizing, the Sears-Kmart consolidation, Blockbuster exiting the retail market and RadioShack shuttering quite a few stores. Even the tech space isn’t safe in this new economy. Sony, which opened its first retail store in Seattle’s University Village eight years ago and is widely considered a competitor to the Apple Store and Microsoft Store, recently announced it was closing 20 of its 31 stores. This includes its original University Village location, as well as stores in Las Vegas, Cherry Creek, Colo., and five California locations.
While the list of retailers returning space may be long, landlords can’t just sit on their hands and wonder what happened. Instead, they get to work, doing anything and everything to fill that space, attract new tenants and keep their current tenants happy. Because after all, nobody wins when a rent-paying tenant’s neighbor is a 45,000-square-foot former Best Buy location with graffiti on the side of the wall.
ALTERNATIVE REALTY
“As big box space becomes vacant, traditional retailers―which includes discount tenants, such as dollar stores and things of that nature―usually capitalize on the opportunity to acquire solids real estate,” says Christine Deschaine, senior vice president at Kennedy Wilson Brokerage Group’s Beverly Hills, Calif. office. “However, some of these big box spaces that have recently become vacant have been filled by nontraditional tenant types, such as fitness tenants, medical offices, or in some cases, schools of some sort.”
Just 20 years ago, it would be difficult to picture a school or a church existing alongside shoppers. But in today’s day and age, diversification really does seem to be the key to low-risk investment success. By bringing more uses to a center, such as gyms or dentists’ offices, fellow tenants are introduced to a whole new clientele.
One example is White Road Plaza, a 152,439-square-foot grocery-anchored shopping center east of Highway 680 in San Jose, Calif. When White Road’s 4,800-sqare-foot Blockbuster Video store closed last year, the center’s leasing agent courted a healthcare company.
“Foothill Community Health Center sought a move from a traditional office complex to an easily accessible location that would provide amenities for both patients and staff,” says Sean O’Carroll of Cornish & Carey Commercial Newmark Knight Frank (C&CCNKF). O’Carroll represented the center’s landlord, White Road Partners LLC, and affiliate of Doerken Properties, along with Lindy Spieker. “White Road Plaza is the right occupancy solution for Foothill, and the busy medical center attracts new potential customers into the shopping center.”
Another potential perk to fellow tenants is the loyalty that comes with a client base willing to relocate with their service providers. If a customer is willing to put forth the extra effort to follow a company to a new center and a potentially new part of town, then chances are they may extend that same loyalty to its surrounding businesses if they can get them in the doors.
Customers and employees of Foothill Community Health Center can also enjoy the services and products provided by Mi Pueblo Foods, Rite Aid, dd’s Discounts, Papa Chau’s Chinese Fast Food, Starbuck’s and Tim’s BBQ Pit. Who doesn’t need a caffeinated pick-me-up before a long shift at reception, or a little comfort food after a doctor’s appointment?
With this strategy in mind, AZ Dental is expanding into two fellow San Jose shopping centers, Brokaw Commons and Village Oaks Shopping Center. Dollinger Properties’ 100,000-square-foot Brokaw Commons contains a variety of other errand-accomplishing retailers one could pair with a dental appointment. Fellow tenants include the UPS Store, AAA Auto Club, Chase and T-Mobile, among others.
Perhaps the most interesting tenant at Brokaw Commons is its anchor tenant. The center was the first to open a City Sports Club in Northern California. Consequently, it also became the first health club-anchored center in the Bay Area, according to O’Carroll. City Sports Club occupies a 45,000-square-foot space at the center. It is owned by Fitness International LLC, which also owns LA Fitness.
“Gyms provide a steady stream of customers and are ideal anchors, or co-anchors of daily needs centers, especially those with specialty grocery stores, healthy eateries and other healthcare services,” says Matt Hammond, director of retail brokerage at Coreland Companies in Tustin, Calif. “We have replaced big- and medium-box space, and even combined small shop space to accommodate a full spectrum of gyms―from a 22,000-square-foot Planet Fitness in Anaheim, to a 10,000-square-foot UFC gym in Corona.”
Coreland represented owners with more than 4.5 million square feet of shopping center space in 2013. The company completed more than 175 transactions last year. Of that, 35 percent of those transactions involved service tenants, 32 percent were restaurants and quick-service restaurants (QSRs), and 21 percent were medical, health or fitness service providers. Surprisingly, only 13 percent of all leases closed by Coreland in 2013 were traditional retail tenants.
“I was surprised by the traditional retail tenants’ activity because it is such a shockingly low number,” Hammond admits. “I assumed it was a third of our deals. However, the low number is very representative of the changing marketplace. Commercial real estate has become a destination-focused and service-oriented environment. Developers have emphasized this for years, but I don’t think we have seen the statistics to support it at the level of everyday neighborhood/grocery-anchored shopping centers.”
This could include megaplex movie theaters that serve beer and wine, bowling alleys with lounges and performance stages for comedy acts or concerts; upscale arcades, trampoline parks and ice rinks. Multi-level centers, in particular, can capitalize on the entertainment- and service-oriented trends, according to Deschaine.
“Certain types of companies have been a bit more active when it comes to absorbing or converting vacant retail space, especially vertical retail,” she says. “A day spa like Massage Envy or a beauty school like Paul Mitchell Cosmotology can occupy upper floors in a vertical retail center, leaving the more traditional retail tenants on the lower levels.”
At the Sherman Oaks Galleria, for example, Burke Williams spa occupies on the second floor next to a dentist’s office and a 24-Hour Fitness Sport, while ArcLight Cinemas resides on Floor 3. Paul Mitchell’s school, salon and retail store occupies a space on the first floor, but it is located in the Rotunda (along with the aforementioned companies), which is still very much a part of the Galleria, but enjoys a certain level of privacy.
“We are filling our shopping centers with anything you can’t do online and I expect the trend to continue,” Hammond says. “Developers are also seeing this as a lasting trend because they are accounting for extra parking to support more restaurant and entertainment venues.”
‘FOODIE’ CATCHES FIRE
Another interesting trend has emerged as of late―and it’s also taking up quite a bit of space in our retail centers. It’s called the “Foodie” movement, and it’s catching fire, especially in many of our major metro regions.
Foodies tend to be very passionate about food. Everything from picking the restaurant to viewing its décor, asking for recommendations from the staff, appreciating the food’s presentation, pairing the food with an appropriate beverage and enjoying the meal with friends considered by many to be an experience to say the least. Many consider the mere act of easting out to be more of a hobby that a simple need for nourishment.
ThinkSplendid.com, which is led by a consumer psychologist who specializes in lifestyle industries, released an infographic in 2012 that detailed the eating habits of Millennials. The study found that 87 percent of Millennials will splurge on a nice meal even when money is tight, 40 percent will order something different every time they visit a restaurant and most Millennials tend to eat out at lunchtime.
America’s obsession with good food is also evident in many of today’s most popular TV shows, such as Top Chef, Hell’s Kitchen, and Diners, Drive-ins and Dives. Many chefs who wouldn’t get a passing glance a decade ago are now among some of the biggest celebrities in the nation.
“Interestingly, the food itself has become trendy,” O’Carroll says. “Busy professionals are eating out more often, and the Bay Area economy is strong, with robust job creation and housing markets. As market fundamentals continue to strengthen, the demand for good-quality, quick and affordable restaurant experiences will continue to grow. Additionally, restaurant and QSR tenants are insulated from growing online sales, which negatively impacts other retailers.”
Sperling’s BestPlaces recently revealed its list of Top 10 Best Cities for Foodies. Not surprisingly, the West nabbed six of the top spots. The list included Santa Rosa/Napa, Calif. (1), Portland, Ore. (2), San Francisco (5), Seattle (8), Santa Fe, N. Mex. (9), and Santa Barbara, Calif. (10). The study analyzed, among other things, the ratio of local restaurants to chain restaurants, as well as the number of craft breweries, brew pubs, micro-breweries, wine shops and wine bars per capita.
While it’s oftentimes the independently owned establishments that attract the most devout foodies, the trend translates very easily into healthy, artisanal and innovative concepts throughout the restaurant and QSR industries.