How the Downturn Alters the Retail Site Selection Process
(Each month, Site Optimizer discusses industry trends—most importantly, leasing issues—with experts in the retail real estate industry in our Tenant’s Perspective interviews.)
Even as retailers cut back on new store growth, many are still looking to either expand in an existing market or open in a new one at some point in the next year. Yves Mizrahi, president of the real estate strategies group at Seattle-based architecture and design firm Callison, offers some advice on how retailers can find the right site in the current climate.
Site Optimizer: How has the site selection process changed in the past year due to the downturn?
Mizrahi: Has it changed? Yes. But I think the overall way to look at site selection hasn’t, meaning that the details of looking at demographics, looking at the customer, getting the right type of real estate product, those things haven’t changed. But I think in the last year, there have been dramatic changes in some of the markets. Those that have been tried and true, where they’ve been extremely strong, have had 20 or 30 percent vacancies within the past year. Certain streets have been affected or certain malls. Certain streets in New York, their traffic is down 30 percent whereas several streets away, it’s down 10.
SO: What are the challenges for retailers looking to expand within the next year? Are there also opportunities?
Mizrahi: I think, again, back to the fact that before, you could open a store and have to wait a few months [before the store resonated with customers]. The difference is now it could be three or four years. In fact, you may have to close the store. The challenge is that the margin for error is a lot more. There is more risk. The opportunity, in my opinion, is much greater. I’ve been through four recessions now in my career. By far, this is the worst. [I tell retailers] this is the opportunity for us to go into a market that we ordinarily could not afford. You could secure locations that you’ve never been able to before. Everyone is so gun shy right now. I’m dealing with some properties that are class-A trophy but they’re entertaining pop-ups. I think the conditions are right if you have the capital, the positioning and the wherewithal and the risk factor.
SO: Are demographics as helpful these days for retailers looking to expand, given how quickly communities are changing in the recession? What numbers and stats are the most important to watch now?
Mizrahi: You always have to start with basic demographics. Where we’ve gone way past that right now is we use psychographics. The demographics can tell us whether you have the right people. What the demographics can’t tell you without psychographics is whether those people are going to buy. The Midwest may have incredible demographics…but they may be value-oriented. That kind of information is really what is given more importance. In the past you could be 80 percent right using just basic demographics and still be ok. Now it cold be a matter of survival or not. It’s the propensity to buy that’s huge.
SO: What advice can you give a retailer who’s trying to expand to a site in a new area?
Mizrahi: After you’ve done all your homework and you get all the market stats, I always believe in lots of visits. You need to go visit that trade area and market area at all times, every day of the week. After you look at all the analysis of information, you want to stand on that corner, take a look at the foot traffic and see if it’s consistent through different times of day. Certain streets in California and L.A. don’t get going until 11 a.m. and stop at 6 p.m. Your average ticket has to be much higher because the traffic count is slower.
SO: How much should retailers push for co-tenancy clauses and are landlords still willing to accept them?
Mizrahi: If you can get it – if you’re big enough to have enough leverage – then you should always have it. I’ve always recommended it. This year it saved a lot of retailers because they were able to close an underperforming store without buying out the lease because they have major occupancy clauses in there. The problem is for the start-ups, a lot of times it’s very difficult to get that. It’s definitely worth it. It’s proven its worth this year.
SO: Anything else you want to tell retailers who want or need to expand?
Mizrahi: I think the biggest thing is to make sure you do your front-end business modeling up front and not rush that too much. You start your business modeling and that takes you to a real estate strategy and you can then look at markets that are truly affordable. What happens is some retailers shortchange that front-end work. They say, “We’ll just stretch our model and make this work.” That’s a big mistake. Especially in this market we’re in, if you don’t hit it you might wind up having to close that store.