Wednesday, October 2, 2013

How You Can Influence Retail Site Decisions

This is the final article in a trilogy of articles about retail site selection in Alabama. The first article explained how retailers make their site decisions, the second discussed the role of government in this process, and this article will discuss your role. Yes, you, as a citizen and shopper, can have an important role in attracting retailers to your neighborhood.

As explained earlier, retailers make their decision about where to locate stores based on demographics and statistics, and very much on the same–store sales of retailers already in place. These same–store sales show the current sales in comparison to the sales from the previous year. If sales are going up then retailers are interested.

The second article discussed how government can be involved in the process, to not only help retailers understand the market and its characteristics, but also to help fund some of the infrastructure and other required expenses. Yes, retail development is private enterprise, but government can help make the site or environment ripe for that private investment.

Retailers live for the customers, and that, of course, is you. All that retailers do, in their store concepts, their advertisements, their product offerings, their customer service, and every other thing they do, is all about you. Retailers live to make you happy, to make you comfortable, and to make you delighted to part with the contents of your wallet or purse. Therefore, it should be no surprise that you have influence beyond what you might expect with retailers.

For starters, recall that retailers are not simply some corporate giant, but rather retailers are organizations of people, humans, that relate to the world like you do and that respond to your interaction with them as humans. These retailers, these humans, want to keep you interested and they want to cater to your whims.

So, how can you translate this power that you may not have known that you had into influence on where retailers locate next? First, you can recognize that you are the customer, you are the one with the money. You have a voice. Then you can see how the retailer wants to hear from you.

Recall from the earlier articles that same–store sales, how the store is doing this year in comparison to last year, is a strong motivator of retailers. If you frequent and shop the existing retailers in your market then the numbers of those stores will be better. This author does not really want to suggest that you shop where you are not happy, but this author will say that if the same–store sales are not good in the market then retailers looking for new locations will seek greener pastures.

Also, you can think about your neighborhood. Recall too that retail site selectors are those humans and they think like you do. Where do you like to go on vacation? Somewhere nice? Somewhere well tended and fun, where it looks like there is prosperity? Someplace that you feel safe? Retailers are people too, and these same factors influence them.

Recall that the people recommending sites to upper management have reputations to maintain, bonuses to earn, and their personal success on their mind. They want to recommend places where their company will flourish.

You have some control over your community and how it looks and feels. You probably have some control over how your home looks from the street. Retailers drive by your home and try to judge you out their car windows. How your neighborhood looks is a significant factor in site selection. Make your home look neater and better and retailers, driving by, will think better about locating a store in your neighborhood.

Retail site selection may be mysterious at first, but the process is really simple. Retailers look at data, governments help make deals work, and you help present your community in the best light. When all three analyses are positive, we have new stores, and that is, of course, what we all want

Tuesday, October 1, 2013

How Government Influences Retail Site Decisions

In the first article in this trilogy this author attempted to demystify how retail site decisions are made by retailers. As opposed to being made at the direction of City leaders, the decisions are part art and part science, with a strong dose of human influence. In this article, this author will explain how governments do have a significant role in the siting of retailers in their communities.

As explained previously, municipalities in Alabama depend dramatically on sales – tax collections for the provision of basic government services. Cities really want retailers in their jurisdictions because the sales tax generated is the money that cities use to perform their duties.

Cities, therefore, work hard to encourage retailers to set up shop within their borders and to start collecting sales tax. While government can want retailers in their cities all day long, there are only so many things that Cities can actually do to encourage retailers. Retailers make their own decisions based on demographics and how existing stores are performing, but governments can influence this process notably.

Retail development has never been particularly easy, and following the Great Recession it is certainly more challenging now. Like the rest of us, retailers are stretched and strained and they find it a challenge to open new stores. Government, however, can help retailers, without violating its restrictions about investing only in the public domain.
Sewers and electric service and roadways are very expensive, and these critical services do not generally motivate sales or excite people. When was the last time you heard of someone having a party at their home to celebrate their new air conditioning system? While infrastructure is vital, it does not do more than help create a venue for business. Government can help with this important aspect of retail development.

Government can also help on the front end of a site decision by providing retailers with critical information that may not be otherwise available. As noted, retailers make decisions based on demographics and statistics, and Cities often have access to information required for a decision that is not otherwise easily available.

Governments can also financially incentivize retail development. Cities have long been involved in incentivizing industrial development and job creation, which is wonderful, but Cities increasingly recognize the importance of retail activity to support municipal services and also to generate a high quality of life that industries and potential employers want to see and understand. These incentives now have a broad spectrum, from Tax Increment Financing Districts, which use the difference between the before and after property–tax collections to fund infrastructure, and to other direct investments. 

Direct investments are more common lately as, frankly, municipalities are increasingly desperate for sales tax collections to fund basic government functions. This desperation can lead, sometimes, to poor decisions where Cities over–invest in retail projects. Retail projects, like all investments, can face challenges, and Cities can sometimes be left holding the bag. Still these investments can be prudent and actually necessary to make retail deals happen in communities.

Retail development is private enterprise for sure, but government can help, and government has a highly specific and important interest in helping retail locate in its municipalities. While the incentives and financial assistance can be the difference in whether a retail development occurs or not, Cities need to use caution that their public funds are well and cautiously invested.

How Retailers Make Site Decisions

In Alabama retail sales tax is the lifeblood of municipalities. With the lowest property taxes in the country our cities depend on sales taxes to repair potholes, provide police protection, and to deliver other municipal services. Also, retail offerings are considered fun by most of us. We like to shop and we like the experiences that retailers and restaurants offer us.
So how do these retailers come to our community? How do they make their site decisions? Are our mayors' offices and economic development organizations picking the retailers that come to our neighborhood? How does this work?
Retail site selection can be a mystery, and for sure it is not understood by most of us. In execution, retail site selection is as much art as science, although many of us may think that the decisions just happen or are made by city leaders. Actually, there are a number of factors that influence the decision, and there is a significant human factor involved.
To be sure, retailers keep track of the key indicators that motivate their decisions. These indicators include the population of an area, the income of its residents, the traffic on its roadways, the other retailers in the market that are successful, those stores' specific sales numbers, and the general growth of the community.
Retailers principally base their decisions on how other retailers are doing in the market. Success brings success, and retailers are powerfully motivated by existing retailers' "same – store sales," being the current years' sales volumes compared with last – year's sales volumes. These criteria can create a quandary for some markets where there are simply not stores or same – store sales for retailers to consider. This situation creates a burden on those that want to motivate retailers to come to a market when there are not the principal measures of retail success to generate the necessary interest.
Some citizens think that their mayors or City leaders choose which retailers go where in their cities. This, really, is not the case. While the economic – development activities of cities and chambers of commerce can cause retailers to take notice of a market, the specific demographics and analytical conditions of a market are far more motivating.
This is not to say that retail decisions are all based on numbers and statistics. There is a significant human – nature factor that influences site – selection decisions. Think about your job for a moment, and how you want to help the enterprise with which you work. Think about your recommendations to your senior decision – makers about where the next store should locate. Think about your bonus.
Commercial real estate employees of a retailer or restaurant want to make good and successful recommendations. They want to feel positive about locations where they are asking their companies to invest perhaps millions of dollars. Those people, just like us, want to recommend "nice places," places where they would like to visit and shop, places where they think people will often go to shop and spend money. This is a significant influence on real estate site decisions. Does the place seem nice and prosperous to you?
So, as much as you think that someone in your town may be picking neighborhoods and locations for retail development, it is actually a complicated process that involves numbers, statistics, and a good dose of human analysis. In subsequent articles, this author will discuss what governments can do to foster and encourage retail development, and then what you, as a citizen, can do to be part of this process.

Monday, September 30, 2013

Location, Location, Location? Are the Rules Changing?

In 2007, I was most honored and pleased to be admitted to Class Six of the Advanced Management Development Program (AMDP) at the Harvard University Graduate School of Design. The AMDP is a year - plus long Executive Education program for practitioners of commercial real estate that have practiced for at least fifteen (15) years. The program commences with a two - week session in July, then a one - week session in February, focusing on a group project, and then another two - week session the next July, plus then completing an elective course and presenting an individual commercial real estate project. Upon completion, graduates are granted full alumni status to the Graduate School of Design (GSD). The GSD is where Harvard houses most of its real estate programs, recognizing the pivotal importance of design in commercial real estate.

The AMDP is, as I say, the most fun a grown up can have in school. In my class were eighteen (18) students, seventeen (17) gentlemen and one (1) dear lady. The class members had either lived or worked, or still lived and worked, in nine (9) countries. There were several of us from the United States, including three (3) from the south.

The program is just outstanding. There are no slackers in this arena and the instruction and dialogue are top - shelf. The professors are from the GSD, Harvard Business School, Harvard Law School, MIT, and then practitioners of the highest success from around the world. The experience is truly heady, and participation really changes the level of your interaction with commercial real estate and your view of the world. As I said, I am honored to be a graduate and I continue to enjoy the experience.

Each summer all graduates from the twelve (12) classes thus far are invited back to campus for a two - day reunion and interaction with the current classes. The July session gives some overlap of the current class and the next class and there are joint sessions with both classes. This fine combination gives the opportunity to expand your interaction beyond just your own class. The reunion consists of classes on Thursday, a fine dinner at the Harvard Faculty Club on Thursday night, and then classes on Friday. I just attended the 2013 reunion and, as usual, I am peaked with new perspectives about how the world works.

The faculty for AMDP is truly world - class, and the professors really like to teach or interact with we AMDP students. Generally the professors interact with undergraduate and graduate students, who are not uninteresting at all, but they truly relish interacting with and teaching seasoned practitioners from all over the world. We students questioned the claim that the professors like our classes so much until we understood that indeed they are sincere. We have excellent interaction.

A regular lecturer in the AMDP is a seasoned and renowned economist and analyst, and awfully wonderful fellow too. Ray Torto formed Torto Wheaton, a commercial real estate analysis and consulting firm, and it was later merged into CBRE, where Ray is now the Chief Global Economist. I have enjoyed a nice and regular relationship with Ray for the last seven years and I respect him immensely. If Ray says it, you need to listen. Ray spoke to this year's reunion, and with his words the ground shook.

Ray's presentation involved a global overview of commercial real estate, how we should think about the industry now, and what influences are important. Yes, we talked about the impact of rising interest rates on capitalization rates and property values, and we talked about the several global economies and how population growth drives gross domestic product growth and commercial real estate opportunity and need.

We also discussed the product that the commercial real estate industry offers the economy, which is of course buildings for the production of income. Ray suggested that the commercial real estate business is essentially "the economy in a box." We manufacture products in industrial buildings, we store the products in warehouses, we sell the products in retail stores, and we count the money in offices. Thus, as goes the commercial real estate business, so goes the economy.

We also discussed how some of the concepts of those buildings are changing. We all know the ancient adage of real estate, "location, location, location." We have always interpreted this adage to relate to the drivers and conditions of that location and the impact on value and desirability of certain real estate. Ray today, though, changed the analysis, and in so doing shook the ground.

All of us are aware of the new way of doing business. Largely influenced by technology, business is different. Offices are smaller, are less important, and have different design parameters. How we shop has changed with the Internet. Delivery times have influenced storage and transportation issues in commercial real estate.

We also have different ideas as employees and workers. The new generations of workers have different attitudes about work, personal time, money, transportation, and interaction. We see the individual office fade in desirability to the collaborative space. We see the corporate office park fade in desirability to the more connected urban scene with extra - work opportunities for engagement. We see younger workers opting for less pay and more time, seeking greener and more fun and connected, more social environments. Downtown and urban settings, recently passé' and  moribund, are now the hip and cool places to work. Edgy, sketchy, rough places are more desirable than sterile "Class A" work environments. Workers want the hip, the cool, the engaged.

Employers are hearing this message. Recruiting to staid and "corporate" environments and communities is harder these days. Companies that are hip and cool, that have active after - hours scenes, that have walking and playing opportunities, that have more engaging physical environments, are where these young workers want to be.

Ray explained this in a work context that employers now are recognizing that they seek productivity, and that productivity is influenced, of course, by productive employees that demand interesting environments. With statistical data, Ray demonstrated that the intersection of Congress Street and State Avenue in the central business district (CBD) of Boston, the Class A and finest office environment and historically most successful sub - market, is suffering. The new competition in Boston is the Innovation District, or Seaport, a formerly downtrodden and challenged environment. The data show that the Innovation District enjoys a substantially higher occupancy of spaces than does the historically premiere CBD. This is a notable change.

Location, location, location may be the adage, but the definition and desirability of the location is now driven by the employees. Employers know that they must locate where they can attract employees and where they can expect the greatest productivity. This environment may no longer be the CBD, or it may be, but it may not be the area that has been the historically been the "best area" or location. The area for the best productivity is no longer determined by the bosses, but now it is determined by the employees. This is a sea change.

Ray offered a related closing point that is worthy of understanding and adoption. He indicated that the greatest risk to existing commercial real estate is obsolescence. Consider the classic "Class A" office space with a multitude of smaller offices around the perimeter and support space in the center of the building. Is this building still relevant for many office users? Users want more collaborative, interesting spaces, close to other unrelated support uses like restaurants and coffee shops and parks. What would appear to be a fine and serviceable office property could be a white elephant, with few suitors. 

Obsolescence of office buildings is a serious issue for the commercial real estate industry. Think too about how online shopping is changing retail space needs. Think as well about how the increasing attractiveness of renting interesting, generally smaller, residential spaces is changing the apartment business. Think about how technology and time demands are changing how warehouses and their locations are viewed. 

Think about your computer, your mobile telephone, and your camera. Remember how in times past you would buy a good one and keep it for years? Now, with technology and demand changes, you may keep these gadgets for just a year. Such is it with commercial real estate as well. The big issue is, though, that replacing a telephone is a nominal expense, whereas replacing a large office building is a substantial expense. Obsolescence and the new demand drivers in our economy are serious issues for commercial real estate.

So, I, as usual, loved my time at Harvard, and I return enriched and stimulated. I visited with great friends and I return with greater insight and understanding into this commercial real estate business that consumes my nights and days. I continue forward with a greater understanding of the drivers influencing commercial real estate and how this will affect my business and decisions. I am grateful for the insights and the opportunity.