Retail 101

Editor's Note: Retail use, most often including entertainment, is becoming a necessary and inevitable component of mixed-use projects around the country. Developers and owners who, until now, have concentrated most of their efforts on office or industrial use may have some trepidation about dipping their toes into retail development. But there are rewards for those who have taken the plunge, just as there are pitfalls to avoid. Some veterans shared their observations with Development.

[ By Lisa Harbatkin ]

CityVista is an 843,000-square-foot development on the site of the former D.C. Wax Museum at 5th and K streets Northwest that combines retail space, condominiums and apartments one-third of a mile from the new Washington Convention Center. Future phases to include: at top, The K at CityVista, a 12-story condominium building; and The V at CityVista, a nine-story apartment building. Lowe Enterprises Real Estate Group is master developer of the project.

"With two-thirds of NAIOP members reporting some level of involvement with mixed-use properties over the next three years," Chairman of the Board Robert Cutlip says that "NAIOP will continue to increase the level of support and resources to meet the unique requirements of developing in this challenging environment." With its roots in suburban development, NAIOP members have historically operated in mixed-use environments. However, the newer developments are evolving in unique and interesting ways, incorporating office, apartment, residential condominiums, entertainment, hotel, special use facilities and, of course, retail. It's no surprise that NAIOP has seen a surge in interest among its members to share development best practices and lessons learned.

Retail is trend-driven and changes constantly, so it demands flexibility. It adds unpredictability and complexity to the economics of a development. Careful attention must be paid to how retail fits in with other project components, as well as the optimum store mix. It also requires designing store spaces for easy retrofit. When residential components are part of the development, it requires rethinking security, parking, garbage collection and venting from restaurants, in ways that can be more demanding than in retail/commercial projects.

"It's not a question of whether you include retail, but of how you make the components work together," said Daniel J. Slack, president of Calamos Real Estate, LLC. Many mixed-use developments now embody what Slack called "the new urbanism," essentially "pedestrian-friendly city centers that emulate the old ones." Alan Beaudette, senior vice president of Lowe Enterprises, commented that "The traditional NAIOP developer needs to figure out how to incorporate all these other elements into a project." Beaudette has twice moderated a joint ICSC-NAIOP mixed-use session at ICSC's May annual meeting.

"The critical thing is that retail is ever-changing," said Jerry Franke, president of WISPARK LLC. "What's in one day is out of mode the next. So flexibility is critical. You have to be prepared to change tenancies."

WISPARK'S Boston Lofts historic renovation in downtown Milwaukee has retail on the street level. Three floors above it that serve as Saks' regional headquarters and 74 loft apartments comprise the top floors.

Thinking About Garbage Planning for trash handling is a more complex issue in mixed-use developments than it is for single-use projects. Jerry Franke explained that "Separation is important in multiple-use projects. You don't want residential tenants mixing with commercial and other uses." Tom Michnewicz said "We design from an operational standpoint, to insure efficient operation that takes the different tenancies into account." Advance Realty's Harrison development will have service corridors inside and a service alley in an outdoor location. Loading and unloading products is a related concern. "You have to think about how you handle it tastefully so it doesn't impact the lifestyle of the residents," Beaudette said. Underground facilities and ramps, depending on specifics, are among the options. The key is that "you have to keep the noise and trash and smells away from the retail as well as the residents.

Calamos is currently developing a project with retail under commercial space, which in many ways is ideal, Slack said, because "the synergies between the two uses are endless." To cite just one, the commercial tenants won't be bothered by 6 a.m. deliveries to the stores.

When residential is part of a vertical development, a quasi-retail level with perhaps dentists, hair salons and other professional services can create buffer zones between ground-floor retail and upper-floor residential units, said Slack.

Public-private cooperation is essential to building the infrastructure for mixed-use developments, and so is a "maximum coordination effort" in designing and building the components," said Tom Michnewicz, senior vice president at Advance Realty Group Development Corporation.

Advance Realty and five other developers are building Harrison Metro Centre, under way in Harrison, New Jersey. Advance Realty is primarily a commercial developer and Harrison is its first mixed-use development.

"There are so many moving pieces in a project like this," Michnewicz said. "We recognized that location is prime. As we looked at it, and sat down with the town of Harrison, we realized that mixed residential, retail, office, hotel and a soccer stadium would work. One of the biggest challenges is keeping all the balls in the air." Industrial and commercial specialists may partner with a co-developer or build in-house expertise. "A partner gives the ability to go out and get started, rather than waiting to develop in-house capability," Beaudette said. Lowe Enterprises Real Estate Group is master developer and has a residential partner in CityVista, now underway in Washington, DC. It includes rentals, condos, retail and underground parking.

No Cookie Cutters
Nothing is new about mixed-use if you live in a city. But suburbanites and the retailers they know in mall settings may have a few barriers to conquer as they navigate new planned communities and restructured centers in smaller towns.

"The cookie-cutter decisions in this business are done," Franke said. "You have to solve the same menu of items, but you can't solve them the same way." With these new lifestyle tenancies, said Chuck Lanyard, principal and director of brokerage services at The Goldstein Group, "The idea is that these lifestyle stores that people had to go to the mall for are right in their own neighborhoods." Consumers have ready access to cleaners, florists, restaurants and other services.

A retail specialist, Goldstein Group has worked with a variety of approaches in New Jersey. It is looking to attract a supermarket as the anchor tenant, which in turn will attract specialty stores. Livingston Town Center is a lifestyle center with a quality and upscale focus.

In Brick Church Commons in the city of East Orange, Goldstein is working on a transit-oriented development. These developments generally consist of mid-rise verticals with retail, residential and perhaps some office, near a train station.

"Culturally, it's a transition that retailers and consumers have to make in these suburban locations," said Beaudette.

"Having potential conflicting uses in close proximity requires the developer to get inside the mind of the ultimate buyers and visitors to see what makes them comfortable," said Franke.

Brand-name retailers, especially those accustomed to malls and shopping centers, can face challenges in mixed-use locations, Beaudette remarked. They are not likely to have in-front or close-by parking and they'll have to make their own adjustments to other project components.

Big boxes and national brand retailers may also have to explore their own new business models, Beaudette continued. Land is more expensive and rents will be higher. "These retailers will have to have smaller, more flexible stores," he said.

Lanyard pointed out that "the retailers aren't relying on the residential components of a mixed-use project. They're also looking at the market potential of the overall area."

Planning the Mix
Can you develop the mix of components that you believe the market will respond to? That, of course, involves zoning. Many jurisdictions have adapted their zoning codes to accommodate mixed-use and other creative approaches to development, but some barriers and problems remain.

When it comes to zoning, "The more flexible the regulations, the better." Jerry Franke said, stressing the importance of working with local authorities and community groups. "If you try to write an ordinance, it will fail."

Beaudette observed that "Retail changes the financials. It could be a loss leader, but you might need it to make the project work. The retail component is very important to the community. Residential is essentially a burden to a city because it has to provide services. Cities love retail because it gets sales tax revenues."

Michnewicz commented, "Ideally, you want a balance of tenants for credit purposes. When you go for your financing, you want those credit tenants as well as small mom-and-pops. The challenge is the mix."

The new lifestyle centers generally have an anchor that drives the other uses, said Slack. "If you're trying to be a destination, a restaurant place, you focus on those first. People would have dinner, take a stroll, then go sit in a little coffee shop and have dessert and enjoy some entertainment," he said.

The key point is that what you start with "tends to set the tone of the other retailers you might draw," Slack continued. "A spa might draw soft goods like a ladies' handbags boutique. So you've created a destination. You keep people there and they'll spend more than they would in the corner convenience store where they pull up, buy and leave."

In deciding the mix, developers are creating synergies between uses, said Slack. As an example, in an office/hotel development, "you don't need to create parking for everyone," he said. Office users need the parking for the work day, while a hotel and perhaps a movie theater would need it later.

Retailers have their own concerns. "Retailers don't like to pioneer," said Michnewicz. "They want to know the demographics and what's there and what's coming." Advance Realty started with smaller stores in Harrison, but made plans at the same time for attracting the larger names.

Getting it right, Franke said, "requires a unique development team." And even then, it may not work. Boston Lofts won an award for its role in revitalizing a downtown center. But Franke and WISPARK got a lesson in the potential problems when they turned their attention to the Pabst brewery site.

WISPARK included experts in historic preservation, retail and entertainment on its Pabst team. But too many players, from potential tenants to the city of Milwaukee, still got cold feet, and the plans fell apart.

Ultimately, the Pabst project "turned in the last 48 hours. It was the wrong project at the wrong time," said Franke. "Certain key [entertainment] tenants had five-year-and-out escape clauses. The city was very involved in assessing the financing, and was afraid that if the entertainment fell apart, it would all fall apart."

Or to put it another way, "You have to do a reasonable analysis. Understand the trends in your market," Franke said. But, he added, "There is no amount of planning that replaces dumb luck in this business."

Beaudette observed that "Retail concepts come and go, and that's got to be part of the shell." Restaurants, and perhaps grocery spaces, need special venting and that has to be planned early on. Electrical and water service, floor draining and refrigeration requirements all went into planning for the full-service Safeway at CityVista, for example.

Sidewalks should be about 15 to 20 feet wide, "the wider, the better," Slack said. "That allows for a better flow of pedestrian traffic and for al fresco dining without it being an impediment. This helps make it a place, gives it a personality. Wider sidewalks also encourage window-shopping." In retail, Slack continued, "the opportunity is to mix the big box with small stores." That makes the shopping experience pleasant and adds convenience. Too many large stores make walking from one to the other difficult, and could send people back to their cars. Developers should also understand that national names and big box retailers "may or may not be interested, but often what makes a place interesting are the locals."

Lisa Harbatkin is contributing editor of Development.