Retail Location Strategies

Learning the New Rules for Site Selection Will Keep You Ahead of the Game.

By Kathleen Rose, CCIM |

Nationwide, the retail sector enjoyed robust growth during the first half of the decade, due in great part to the continued expansion of big boxes. The excitement, however, is dying down, as several category-killer retailers experience slowing sales. The once-zealous players are becoming more cautious, and once again the rules of the game are changing for developers and commercial brokers.

New Development Drivers
Traditionally, retail centers have been defined as either regional, community, or neighborhood, with standard tenants for each of these categories. Recently, though, the lines have blurred, as discount department stores anchor regional malls and traditional mall tenants move in-line at strip centers or into freestanding locations.

The three familiar categories have now polarized into either regional or neighborhood locations. Lackluster performance has caused the retreat or merger of a number of retail chains, both large and small. The theater and entertainment group, once shunned by many developers and anchor retailers, is fast becoming the darling of the industry. And in the wake of continuing retail bankruptcies and mergers, capital markets are taking a closer look at new development. In fact, many financial institutions have reallocated funds for property types, dropping retail from the most-favored status.

With fewer dollars focused on this overbuilt market-and cautious tenants becoming more selective in choosing new locations-developers and retailers must be more creative. As a result, new deals will rely less on the credit of the tenant and more on the developer's use and positioning of a site as it relates to the market.

Location, Location, Location?
What does all of this mean if you have a site looking for a use or a use looking for a site? Throw out those preconceived ideas about location, as the old adage is in a state of evolution. Market, market, market is a more-appropriate concept for the future as retailers and developers alike ask not "Is this a good location," but rather "Is this the best location in the market, given the competition?"

Historically, the criteria for many retailers has included a location on Main and Main, with a minimum population within a specific radius, generally concentric rings of 1, 3, 5, or 10 miles. But providing demographics based on concentric rings and identifying the competition are no longer enough to sell a buyer on a location. Road systems, buyer preferences, and new venues of competition must now be considered, making use of the new technologically advanced systems that overlay mapping, demographics, and other data.

Consistency in consumer behavior also plays a part in the decision-making process, as cluster analysis, which identifies similar behavior patterns within similar demographic tracts, becomes prevalent. Psychographics-adding psychology, behavior, and lifestyles to demographic data-is also being utilized. For example, the shopping patterns in the Midwest are not the same as those in the New York City metropolitan area when parking, road access, and visibility are considered.

Providing information on the existing, proposed, and potential competition surrounding each site is critical when reviewing any location. Geodemographic systems have quickly become the choice among savvy market researchers, as the use of one or more of these systems has proved successful in selecting new store locations. Doing research and providing this information are now key to satisfying retailers and capital markets.

Retailers, developers, and brokers must push the envelope and look beyond the obvious to find creative options. For example, Tandy's Incredible Universe, the cutting edge of electronics retailing, includes in-store McDonald's in its 185,000-square-foot stores. Brand recognition has made Starbucks a household word, with locations in malls, airports, stadiums, and most recently, flying the friendly skies with United Airlines.

Current Trends
With many retailers opting for locations in more densely populated areas, sites currently occupied for other uses are finding new life as adaptive reuse becomes the standard in urban economic development. Many of the nation's retailers are discovering the substantial dollar volumes that are largely untapped in the major urban markets. Obsolescent industrial buildings in A locations are making way for new supermarkets, Wal-Marts, and Home Depots across the country. In fact, Wal-Mart is considering obsolescence in its new prototype by designing stores that can be converted into multifamily housing in the future. Communities with enterprise zones and other economic incentives are getting a second chance as retailers rediscover downtown in more-affluent markets. A shining example is the Circle Centre redevelopment in Indianapolis.

B locations, or those neighborhood centers once anchored by supermarkets, are getting a breath of new life from Rite Aid, Walgreens, and CVS as consumers yearn for service and convenience.

In addition, the surviving supermarkets and large discount department stores are anchoring regional malls. K mart now focuses on its superstore concept in metropolitan locations, with Wal-Mart continuing to identify gaps in suburban markets. There are fewer active big-box players; therefore, opportunities for regional mall locations, as they become repositioned, will become more prevalent.

The Challenge of Cyber Retailing
Technology is making a dramatic impact on the retail industry as a whole. A recent Gallup Poll study concluded that 40 percent of all shoppers are now using nonstore venues to make some of their purchases. Another recent study concluded that electronic shopping could shift 10 percent to 20 percent of sales away from retail stores.

In addition to catalog and TV shopping, cyber retailing has entered the scene, and continuing advances in infotechnology will make home shopping more desirable. Many retailers now have World Wide Web pages on the Internet to market their goods, making cyberspace the great equalizer as retailers of all sizes compete on an even electronic playing field.

At a recent panel discussion regarding retail strategies, a panelist and counsel for a major supermarket company in the Northeast stated that his company is "rethinking" the concept of the 25-year lease, as the speed of technology is changing the way retailing will be done in the future. The Catalina Marketing Corporation is currently beta testing a new Web site that will allow consumers to comparison shop at local supermarkets. The site also provides on-line advertising from manufacturers and coupons that consumers can print from their home computers.

Ultimately these technological changes will result in a reduced need for physical space as retailers expand electronically. Tenants that may disappear from shopping centers include camera and photo-processing stores (as digital cameras, without film, become more popular), travel offices, music stores, and bank branches (that are meeting and serving customers on-line, greatly reducing costs).

All of these factors will diminish the value of location. Eventually consumers will come to value the convenience of shopping on-line over the need to personally pick out products, just as they have with catalog shopping. For example, if a retailer were to offer its products on-line, the customer who wants to touch and try on the products at a regional location could do so; others could stay at home, make a selection, place an order, and await delivery. The retailer would eliminate the need for a location in every market.

As an example, consider L.L. Bean, the leader in catalog retailing; most consumers know where they can visit its stores. Becoming a destination retailer, less emphasis is placed on location. With fewer retailers needing fewer locations, there will be an abundance of good locations. We see this trend already as the vacancies for traditional strip centers increase and their lease rates decrease.

The Next Trend
Will all of this technology eliminate the need for us to leave our homes? Human beings are by nature social creatures. Therefore, shopping will evolve into places for entertainment and socialization. In many areas of the country, particularly the waterfronts, we have already seen this new breed of retailers clustering around entertainment venues and tourist destinations. Now that value pricing has left its mark, customer service and entertainment will again become the hallmarks of retailing.

For example, theater chains and other entertainment venues are taking center stage as the anchors of new retail centers. The newest entertainment concept is Sega GameWorks, a 5,000-to-30,000-square-foot venture between Steven Spielberg's DreamWorks, MCA/Universal, and Sega. Approximately 20 freestanding and/or mall locations across the country are planned, with the first to open in late 1996 in downtown Seattle. National and regional restaurant groups are complementing the mix of this new environment.

Under All Is the Land
In many areas, few choice undeveloped sites-level and visible from the highway or easily accessible-are still available. Those remaining may have any number of challenges associated with them. Determining and providing the following information to the developer or user will undoubtedly expedite the process, and surprisingly, is often overlooked.

• Physical constraints. Does the site have difficult topography? Are the soil conditions such that blasting will be required? A review by a geologist will quickly assist in determining whether the soil conditions will result in any unusual site costs. Are there any easements or rights of way that will affect access or use of the site? Do a title search earlier rather than later to identify any potential negotiations with additional third parties.
• Conservation issues. Are wetlands on the site? Are they regulated by the state or federal government? Is the site in an established flood plain area? Reviewing local or county soils and flood plain maps will reveal these facts. Additionally, if you suspect that the site may be home to some rare species of plant or animal life, consult with a qualified botanist or biologist to avoid any surprises.
• Environmental dilemmas. Phase I and II audits may be warranted on the site-certainly any financial institution will require a preliminary study. Understanding state and federal environmental protection laws is important; however, be sure to include the reporting criteria from your lender in any requests for proposals to environmental review companies, because many of their guidelines now go beyond state or federal regulations.

Assembling a qualified and experienced team of professional consultants is critical to the success of any project. Site selection and development focus on managing the process versus monitoring the transaction.

The Players
In addition to the developers, professional consultants, brokers, and tenants, today communities themselves are very much a part of the success or failure of proposed retail projects. Citizens are more educated, sophisticated, and involved in the development of their communities. Organized grass-roots efforts opposing retail projects are no longer the exception but the norm. Community public relations is an important early step to identify opposition groups and potential objections so that issues can be negotiated and projects are presented in a manner that will win all necessary approvals. Satisfying the concerns of the municipal planning and zoning boards is critical; however, the potential always exists for a "change of heart" by one board member as a result of pressures from organized, vocal opposition-which could prove fatal to a project. In a few areas, the competition among tenants has created direct or indirect opposition for projects-an expensive lesson to learn and too often overlooked by developers.

Increased site costs, costs to development of community opposition, high land prices, and changing tax laws, including the new impairment standard (FASB Statement number 121) and IRS Section 263A (capitalizing unimproved land development costs) have contributed to rising project costs. As a result, many retailers have found themselves in the development business to maintain already thin profit margins and meet their objectives for new locations. Other new players in the site development arena include real estate investment trusts, which will continue to see mergers as shareholders demand favorable returns.

The changing rules of retail raise as many questions about site selection as they answer. For instance, what will happen when category-killer retailers finally "kill" off each other? Will we see a vast landscape of big boxes waiting for redevelopment? Will cyber retailing live up to its hype and actually decrease the need for retail space? Consider the coming decrease in disposable income-expected to drop off after 1996-as well as the compression of the retail cycle (concepts that once took 10 years to mature now fade after five or six years).

These are the factors that will continue to influence retailers in their search for perfect locations. Flexibility and preparedness will aid savvy developers and brokers in staying one step ahead of the game.