CREJ - Retail Properties Quarterly - May 2016
Along with the new apartment projects sprouting up across the city, new retail space seems to be popping up on every corner throughout the Denver market with no signs of slowing down. It is currently estimated that over the next 18 to 24 months, the central Denver market will add an additional 2 million to 3 million square feet of retail space to an existing 34 million sf of retail supply. The good news, from a statistical perspective, is that much of this additional retail space is supported by the dynamic growth in resident population the market has been experiencing during the last few years. From July 2014 to July 2015, Colorado’s population increased by almost 101,000 people, according to the U.S. Census Bureau. While growth in both residential and retail drives numerous benefits to our local economy and often fosters a vibrant retail shopping experience, rapid growth, particularly in the retail sector, presents some significant challenges. During the design and leasing phase of any project, one of the most significant of these issues is creating a market appropriate merchandising plan. With so much new retail space coming on line, it is important to ask: How do I create a tenant mix that makes my project a destination and distinguishes it from everything else in the market? Ultimately, the goal is to establish a tenant mix that creates moments of discovery and encourages consumers to extend their length of stay. Just as grocery stores place milk in the rear of the store, which forces customers to walk past all the other merchandise, strategically planning how and where particular retail tenants are located within your project should receive the same level of consideration. Establishing a merchandising plan not only helps outline a vision for the project, but also provides direction to the entire development team regarding the targeted tenant mix, levels of amenities and related design elements for the overall project. To be clear, a merchandising plan is more of a wish list than a predetermined leasing plan; however, establishing this discipline within your firm will keep everyone on the same page, particularly early in the development process. Creating a merchandising plan is fairly straightforward – simply take out the proposed site plan and assign target retailer names (or categories) to each space. The complexity lies in determining which uses work best next to each other and, more importantly, which mix of uses helps generate the highest rate of return. By way of example, cell phone stores tend to pay a higher rent when they are located next to a daily traffic generator, such as Starbucks. When asked where the Verizon store is located, most consumers say, “It is next to the Starbucks,” or provide a similar location identifier. This is largely because individual consumers typically only use a cell phone store when they need it and fairly infrequently. However, when they need a cell phone store, locating it in a consumer’s regular shopping pattern is an important site selection criteria for similar types of retail tenants. Therefore, creating a merchandising plan that reflects this interdependent relationship among retail tenants is a sound strategy. In addition, a merchandising plan should reflect the competitive landscape and the immediate market demand. Far too often, merchandising plans are more aspirational than reality based. For example, if a new project is in close proximity to an established retail center, creating a plan that includes tenants already in the market, or for which there is not sufficient retail demand, has a high potential for failure. However, close proximity to an existing retail concentration presents an opportunity to create an alternative retail experience, which might feel more authentic and local. For years, “local and regional” also meant “mom and pop” and/ or “limited creditworthiness,” but as retail is getting more sophisticated, so are the retail operators. Identifying a concept that might only have a single unit, but has financial support for three to five more units, could be exactly the type of tenant to target for your next retail project. In the last five years, there has been an increasing interest in pop-up and “marketplace” retail space. While this type of retail drives traffic in the short term, unless the concepts rotate on a regular basis or create a significant anchor for your project, interest in this type of retail tends to wane over the long term. In addition, depending on organizational size and capacity, managing these retail spaces tends to require more dedicated oversight and resources, relative to the management of a traditional retail tenant. When it comes to determining the exact ratio of national versus local tenants to create a vibrant retail mix, there is no one size-fits-all. However, if your project is in a highly competitive market or not gaining the attention of national retailers, there often are great local and regional concepts that may work better to drive traffic to your retail project. With national retailers opening fewer brick-and-mortar locations, the most successful developers generally are those who create a market-appropriate merchandising plan early in the development process and get creative regarding their tenant mix.