Attracting Local Retailers to Office Buildings
By: A-P Hurd, Skip Stone
Bringing in an independent coffee or sandwich shop rather than a national chain can mean extra work for a developer, but it can also make for livelier lobbies and streetscapes.
IN THE PAST, office buildings didn’t need retail space. They might have a sundries shop and maybe a sandwich shop on the ground floor. That situation changed dramatically with the wave of urban office buildings developed in the last 15 years. All of a sudden, many cities were requiring buildings in the urban core to include ground-floor retail space. Quick on their heels, developers began reaching out to attract food and beverage as well as other retail tenants as part of the amenity package for new Class A office buildings.
Thinking back 10 years, most office developers’ first instinct was to bring in credit tenant retailers such as Taco del Mar, Starbucks and Jimmy John’s. Ideally, they looked for national chains; at a minimum, they accepted regional chains. Given the fit-out costs for food and beverage retail space – including electrical, bathrooms, hoods and venting – developers were wary of spending that money on a fly-by-night operator that might take the developer’s “loan” for tenant improvements and then not survive the lease term.
Yet developers often complain about these national retail tenants: how demanding they can be, how they need everything built to their brand standards, how they are so inflexible. That got some developers wondering if there was a better way.
Sometime during the last decade, office tenants also got pickier about the kind of retail offerings their office buildings provided. Imagine: they wanted the food to taste good! They wanted it to be locally sourced. They began to recognize that the retail space was impacting the brand of their building.
That caused some developers to think less about the credit they were getting on that 1,500-square-foot space; instead, they began to think of retail more like any other amenity in which they would invest, such as gyms, better elevators or showers and locker rooms. With this change in perspective on their TI investment, some decided to turn their attention to attracting the kind of local and character-filled retail spaces that tenants were requesting.
These developers found that the best local retailers had some similarities with “old” office retail, but also several differences. They had great brand vision, much more flexibility than national retailers about how to build out their space and limited access to capital. Also, many of the most attractive retail options – for a developer, its tenants and the building – only had one existing location that typically was run by the owner. In order to get this type of tenant into a new building, developers learned that they often had to work hand-in-hand with the retail business owner to develop a business plan for their new location that would enable them to ramp up in a downtown market and hire a manager for their existing location so that they could focus their energy on making the new location pay off.
In order to hedge their downside while providing the biggest possible TI budget, more developers found themselves building out these spaces to very warm shells, with electrical, heating, plumbing, basic lighting and finished concrete floors. This, in turn, led to more detailed collaboration between landlord and tenant on the final design for the space. Collaboration became a way to manage risk: Even if the tenant didn’t make it, the space could be re-let to another local tenant without significant downtime or reinvestment. At the same time, it made the tenants happy, because the developer was providing the full cost of Type-1 hoods, and a reasonable TI allowance on top of that.
Attracting and working with local retailers involves much more work than leasing to national credit tenants. But it also results in much more of a partnership between office landlords and their retail tenants. Developers are finding that their investment in understanding and supporting local retail tenants is ultimately producing better results for the whole building.
That kind of experience is what makes being a developer so much fun. It’s what makes developers feel connected to the communities in which they work. The concept of “placemaking” can feel like something abstract that only architects and planners do, until that Tuesday morning when you’re meeting with your coffee retailer to develop a sales strategy for the next three months. A year later, when you walk by and notice that the lobby is lively, the retailer is thriving and the building has become open and porous to the street, you feel a tremendous amount of joy in having made something special. Not just a monument, carved out of thin air, but a piece of fabric woven into the places around it and the people who occupy it.
A-P Hurd (email@example.com) is president, Skip Stone, and former president and chief development officer, Touchstone.