Introduction: Managing change online and on the ground
Boise has made its way to the national radar when it comes to retail. Where once it used to be one of the last states considered for expansions, now it’s getting some chain stores before its larger neighbors do.
As new stores like West Elm, CVS Pharmacy and Westside Pizza open in the state, other mainstays like Macy’s and Gordman’s are closing stores.
Meanwhile, the business environment is rapidly changing for brick-and-mortar stores. Business owners have to manage intense competition from online retailers, a push toward smaller storefronts, and rapid population and demographic changes.
On June 6, The Idaho Business Review gathered a panel of retail experts to discuss these changes and more.
New competitors create an ever-changing retail landscape
There’s always going to be new competition coming in, and it doesn’t matter what sector that’s in. Whether it’s fast food or soft goods, grocery – there’s always new competitors entering the market. I think it really just becomes a case of survival of the fittest.
As a new concept comes in – we may have like 12 sandwich concepts right now – but as the new sandwich concept comes in, if it’s better, if it’s a better product, if it’s a better price point – different drivers affect consumer decisions – but I think it’s just ever changing. That’s where, looking at real estate, you always pick what you feel is the best location for that retailer so that if there is some turnover, the owner can backfill that with someone else. …
That’s the thing about real estate. No piece is the same. Every single piece is unique and different. When you’re out there working with tenants, we’re always looking for things that might not be readily available. There may not be vacancy in a strip center, and we may not go there. We may go knock on a car dealer that’s been in business for 40 years and say, “Hey, are you interested in selling your business? Because we think this might be a great location for Starbucks,” or whoever that might be.
There’s always going to be competition in every aspect of your life. Whether it’s real estate or basketball – that’s just normal.
The good news is that Idaho is doing great. There’s a robust economy, and there’s a lot of growth still happening here, so I just say be thankful you’re working in a market like this instead of some state that’s just seeing outflows and changes in industry that are not promoting growth.
The good news is it brings companies looking at your market that heretofore may not have done so. It’s that opportunity to bring new product types or new brands into the market.
As a landlord, you’re always running the risk of how much is too much – at what point are you diluting the existing tenancies that you may already have in your market. We’ve certainly found that if a retailer has made the decision to come to town, we’d rather control that than let somebody else control it.
I just want to make a comment about competition and what that has to do with turnover. If we look at Eagle and Fairview, which is the No. 1 traffic intersection in the state, and that’s where so much activity is – the Village came in with a very different product for Boise, but it’s doing well. You have a Babies R Us and a Toys R Us that were 4 miles apart, and they closed both those stores and moved them into one, and they’re doing very well. Then you have Dick’s Sporting Goods that moved into the old Toys R Us, and Cost Plus moved into the old Babies R Us, and they also lost Marshall’s, which moved across the street, so [a furniture store] went in and absorbed that, along with some other space. It’s this whole evolving nature of it that creates opportunities for other businesses when they feel like they need to relocate in the market.
And so Cost Plus moved, and Zurchers moved into the Cost Plus space, and now we’re working on a tenant to take the old Zurchers space.
It’s a big, giant game of leapfrog. So far it’s working O.K.
Sometimes competition can be a call to arms that results in good things for a community.
Way before my time here in Boise and the Boise area, there was a proposal for a downtown mall. Thank goodness that didn’t happen, because – this is just my opinion – if you look at the history of downtown malls, it’s not a pretty one. There aren’t a lot of them around anymore. Some of them have been turned into open air shopping plazas. Even if you look at some that are still viable, like Spokane’s, take a look around that mall. It’s like a neutron bomb went off, killing off all the retailers around that area.
That didn’t happen in Boise. Boise Towne Square, of course, was developed, and that – the story goes – was a call to arms for the Downtown Business Association. That’s when they got really serious about downtown Boise and its ability to compete and its ability to distinguish itself from the mall. I’m sure I’m oversimplifying it quite a bit, but I think the mall actually had an ultimately good effect, rather than having the mall downtown.
We hope we’re seeing a similar effect in Meridian. Since the Village opened, there has been a resurgence of our very small Downtown Business Association, and they’re beginning to understand that we need to compete, but not toe to toe. We can’t. Who could, with the Village? We need to distinguish ourselves – acknowledge that we’re a niche market. … So I hope that story repeats itself to our benefit in Meridian.
When it comes to e-commerce, I don’t know how many times I’ve done this – my husband would probably tell you it’s a lot: I order something online, at Nordstrom for example, and it doesn’t work out, and I take it back to Nordstrom Rack, but when I leave, it turns out I have more than when I went there. So I think that the retailers that are blending those concepts that have e-commerce and the ability to have a store experience are the ones who are going to be successful.
Bryan C. Vaughn
Change happens in every facet of life. Competition breeds, as Andrea noted, survival of the fittest. That is helping retailers out there that have a path to figure out how to change themselves and become more relevant. …
You’re seeing a lot of big box tenants repurposing a part of their property or portion of their store to compete on an e-commerce level. It helps evolve those that really do have that need to fit into the retail marketplace to see competition so they can make the decisions internally to make the right corrections.
As change happens, things will go up, they will go down, but I think competition is what really is a tenant of capitalism. For retailers to survive in this world, they have to be ever-evolving. …
As you’ve seen e-commerce the growth of e-commerce, you’ve also seen competition on a local level pick up. … The reality is that local, small shop, craftsman-type retail is actually coming back to life. … People will pay a premium for that. That change is happening. It’s impacting national retailers; it’s impacting local retailers. I would say that e-commerce is actually probably bringing along local retail because Amazon doesn’t fulfill everything that they ship you out of a fulfillment center. They use small, local retailers, and when you want to buy something that’s unique, it may come from a local retailer. You may get it in the mail with an Amazon label on it, but it has somebody else’s address.
Change is going to always be there; competition is going to always be there, but there is obviously an upside to competition, and that is figuring out how to survive and even prosper.
The whole e-commerce thing has broadened the base so much of choice, it’s made pricing so much more competitive, and the actual source of where the product is coming from is almost irrelevant. …
The merchants that are figuring this out – figuring out how to utilize the omni-channel platforms – are the ones that are going to do well in the end because they can service all ends. It can be the ultimate of convenience, depending on whether the purchase takes place in the store, whether you’re ordering it online and picking it up in the store, whether you’re returning it – and your statistic is proven out. Usually anytime someone can return to the store, there’s usually more spending that’s done.
The thing that’s strange is different merchants are handling this differently. There are some store managers that will tell you, “Hey, I love the e-commerce thing. I go home at night and come to work the next morning and find out I did a whole X-thousand dollars while I slept.”
And there are other merchants that don’t credit the online sales from the particular region or radius of zip codes to a particular store. Then they’re coming back to the landlord saying, “Hey, our occupancy cost is beyond what our sales are justifying.”
As landlords we don’t have the ability to peek behind the e-curtain and see how much of that volume is not being attributed to the marketplace being served by our store.
The malls that change with the times will survive and thrive
You need to be changing. We’re seeing the weeding out across the country of shopping centers that have not tried to do something to stay up with the times and aren’t in dynamite markets where you’ve got population densities to support the square footage of retail there. They’re probably in for some rough times.
I know we’ve just felt like you have to be remodeling, you have to be trying to introduce whoever you can as the new and interesting stores into your property.
The difficult part of this when you’re dealing with chain stores – national tenants – you could have the best Sear’s store in the entire country, but if the whole ship sinks, what good is that? I feel like over the years we’ve lived through that in some of our shopping centers. …
It’s an opportunistic industry. One plight creates an opportunity for someone else and other uses.
If you take a minute and think about, where did the big box concept even come from? It came from when grocery stores decided that that 25-30,000 square foot format in a neighborhood center was insufficient for their bigger plans – they all needed to be 50, and then 7,000 feet, then 120,000 feet – and it left just a dearth of these small anchor boxes. They whole concept of the Office Depots and the PetSmarts and that type of thing really was spawned from that opportunity of space that was there and available. …
Opportunities surface, and sometimes they’re painful when you’re living through them. But people are creative and opportunistic and solutions, in the end, tend to be found.
As you talk about malls and what they’re doing to keep their tenants, Boise Towne Square has twice as many stores today as when it opened. The mall opened with 99 stores, and there’s only 16 of the original stores still there. That’s not a negative thing. My wife would say I still wear the same clothes I wore in 1988 [when the mall opened], but most people don’t. …
The mall is a great example of an enterprise in this market. The rents are higher than they were way back then; it’s not suffering. … There’s a lot different retailers in there. I think that 25 years from now it will still be standing, and it will be a lot different from what it is today.
Prices per square foot
Bryan C. Vaughn
As a landlord, I always want to see [prices] go up, but I don’t think that’s quite the case. In Boise, we have seen a major growth in our average. We’ve seen it go below where it’s been, we’ve seen it come above it, but we still kind of tend to be in retail an average of around $17 to $18 a square foot. Office tends to still be around $19 a square foot.
I haven’t been in Boise longer than 15 years, but I know people who have and they’re telling me, “Hey, 30 years ago office was $18 or $19 a square foot. To speak to rents, yeah, you see number pressure in rents over the last few years, largely because you’re seeing construction catch up with development. You’ve seen that need to be able to get your projects funded because they need that higher rent, but I don’t know that Boise is going to see an astronomic growth in rent any time soon or wants to.
I remember before the downturn, it went from below $20 a square foot to well above $28 a square foot, and then it came crashing back down. So we don’t want to see a dramatic change in rents; we just want to make sure those things that are being built are sustainable.
From that standpoint, I think e-commerce and showrooming and things like that will continue to change the nature of shopping centers. You’ll see shopping centers start to incorporate things like that more often.
I think it’s interesting right now, too, because I think it depends on the motivation of the owner of the property. We’re seeing some landlords that aren’t long term holders that are wiling to give more than I would be willing to give in tenant improvement allowance because they’re looking to increase the rent per square foot because they’re looking at turning around and selling the center. So when you apply that cap rate to the rent, they’re getting a better number.
‘For any retail to survive, we still have to be able to park it.’
Bob Mitchell[General Growth Properties is] finding that because most shopping malls are built with so much parking that’s never used, department stores are loosening their requirement on how much parking is needed. The cities are dropping their requirements, and some developers are putting apartments around the perimeters of these properties. They’re well-located real estate and you can have office, apartment and some retail all together—that’s a combination for success.
Down in Orem, Utah, we’re redeveloping what was the University Mall, a shopping center that my father and my uncle opened in 1973 and have owned through the whole time. It’s a traditional mall: 112 acres with more than half of it asphalt.
We are in the process right now – we’re a few years into it – where we have almost 500 rental units constructed, and we’ve got our first 120,000 square foot office building constructed. We spent several million dollars on a big park and now we’re moving to some structured parking to support the retail. We just decided we’ve got to densify and bring this in. We have covenants that we have to maintain parking ratios for those retail users based on deck agreements and lease agreements. In that setting, we have a big canvas to work from. …
It kind of depends on the municipality. Sometimes I feel like municipal people all go to the same seminars and come back with the same concepts. Years ago it was serpentine sidewalks through a development was better than straight sidewalks. And then roundabouts were the traffic answer to every problem for some years. [But] it’s not a one-size-fits-all deal. Parking sometimes gets thrown into the same mix. …
Out here in the West, it doesn’t matter – we’re still pretty rural, even when we talk downtowns. We just don’t have the density; it’s not like being in Chicago or somewhere like that where you’ve got thousands and thousands and thousands of people stacked up within a short distance, or the Bay Area, right?
For any retail to survive, we still have to be able to park it. It’s great to talk about walkable communities and bicycling and it’s wonderful, and those trends are taking place as we’re building more apartment units and housing in the cities – it’s evolving. But I still think most of our cities and towns here in the West, we’re a long ways from being able to be a true walkable community. You can put a restaurant in, but if there is not parking in it, they will not survive. They just won’t last. …
I know there are some redevelopments where – you mentioned, Bryan, the opportunity with some of the big box stores that obviously have way to much parking. The problem is most shopping centers were designed for Black Friday, and the rest of the year you don’t need it. It has provided opportunities to create other retail pad buildings, restaurant pads out front. I know there are some developers that have even peeled off the back of a big box building, knocked part of it down to make that building smaller to make their ratios such that they could justify doing something up front. I’ve never been able to make that make sense.
One of the things planners hate is too much parking. We generally find, most of the places I’ve worked, that … developers often want and need more parking than our requirements call for. Not in every case.
But the lack of parking can create opportunities. The parking dynamic – lack of parking, the vitality, the densification of downtown Boise, relatively speaking – created a situation where urban renewal could then be used to fund strategically parking facilities around the city. Like those or hate those, that is something that otherwise we wouldn’t have except for that dynamic. And that is, once again, a discussion that’s beginning to happen in downtown
Meridian. Lack of parking becomes – I don’t want to say it’s a problem we want to have, but it certainly can help you go to the next level in terms of strategically providing parking, which can then benefit multiple properties.
Impact fees play a large role in planning
ACHD impact fees are very punitive. … Fees are a front end cost for businesses that I think everyone, generally, in this room would wonder – that whole formula for highway impact fees and do businesses really generate so much new business on a particular street that it justifies charging them more money when the population hasn’t increased?
I’ve been an advocate for many years of treating downtowns differently when it comes to impact fees and other requirements. Certainly from a roadway standpoint – roadway fees, transportation impact fees – downtowns are different. The housing, retail, many other things are functioning in very different ways. Any traffic engineer can tell you this. So many places around the country that have a system of transportation impact fees or a system that requires infrastructure to be current with development … make exceptions for downtown. They either exempt a certain area of downtown from those fees or those requirements or they reduce those requirements. … Then they manage according to being a coherent area with its own transportation system, multimodal system. It really shouldn’t be subject to being suburbia anywhere. It’s really a very different animal. We haven’t gotten a lot of traction on that here locally, unfortunately. It’s something we really need to be looking at if we care about our downtowns.
Bryan C. Vaughn
In downtown Boise, a lot of times you’re not generating the traffic that you would in suburbia, especially if you go to an area that’s greenfield. If you put up a new shopping area on a corner where there’s been nothing there before, certainly you’re impacting down the roadway the amount of cars traveling there and therefore need to probably share in that cost. …
But I would argue that in downtown Boise, … are you bringing more cars there or actually taking cars off the road? Retail certainly drives traffic and will always do that; we’ll always be subject to some impacts. …
Impact can greatly differ from jurisdiction to jurisdiction, and there are certainly plenty of jurisdictions that will have negative impacts on the pipeline as they have too strong of an impact fee structure. But I wouldn’t say I’ve found that to be too much the case in Idaho. But it obviously depends on what the use is.
Second-generation big box space can revive a shopping center
I think you see, again, more of a creative use of that space [when a big box tenant moves out]. I think if you go out to Nampa, Garrity, and I haven’t been into the business yet, but the backfill for the Sports Authority box was a concept called Circus Tricks, which I believe is like indoor trapeze and fitness entertainment.
You also see the ever-emerging trampoline park, which is a big deal – I have two boys, and we spend a lot of money at Jump Time.
I think you’ve seen some people to an office type of use, a call center. And again, I’m working on an assignment that’s a former Walmart, and it’s just getting cut up into smaller pieces: Petco, Ross, some of those other smaller retailers.
As usual, you’re seeing the discount retailers thrive, and they’re willing to step in and backfill those spaces now that they might not be at the same rent that you’re getting from your current tenant. It’s just ever evolving and ever changing. Sometimes people hit the panic button when they see a big tenant go out, but I just have faith in people coming up with new ideas and creative ways to backfill space. It will be interesting to see what happens with the Macy’s store out in Nampa.
Bryan C. Vaughn
A lot depends on the physical presence of the big box – is it deeper? Is it longer? Frontage is always better in a big box retrofit. I can think of a few examples where we’d like to see some big boxes go out: Mr. Hawkins owns a nice piece of property in Nampa with K-Mart, and I watched Mr. Woodbury reuse a K-Mart in Missoula and recreate a very vibrant shopping center. …
It depends largely on where that real estate is. A lot of people look at K-Mart and Sears and say, “Hey, they hold a lot of really good real estate.” They use that to leverage and keep themselves alive. We’ve watched cycles of Sears fall apart and real estate brings it back to life, … and [they] do it again and do it again, and they are still lingering there.
There are a lot of big boxes that need to be reused for retail; there are a lot of big boxes that can be used for other uses. They make great office centers, like Andrea pointed out, but they also make great areas that can be taken down and recreated so that you get some kind of new vibrancy on the property.
Big boxes, those that will survive, are those that incorporate their omnichannel there. They will find that they can maybe even put a hedge on Amazon by saying, “Hey, if we take 100,000 and put 25,000 square feet of it to fulfillment, we can actually deliver that same-day good.” …
There are a lot of big boxes that are ill placed and have concepts that won’t last, and we’ll probably back-fill the concepts that don’t last. But there are a lot of them out there that are a really good opportunity, and I think you develop it right now.
I think a lot of developers or landlords are looking for opportunities where it is second-generation space, where you can revive a shopping center because construction costs are getting prohibitive in a lot of markets. You’re actually seeing in the major markets vacancies increase, and you’re seeing a decrease of actual products that are in the pipeline getting built because of your cost of construction.[But] you can revitalize a property or redevelop a property – you can actually do deals that make sense … in an area that has all the other reasons to be a good retail site, other than a box being in the way that could be repurposed.
Let’s not forget that our only Cabela’s in this market was another big box – wasn’t it Costco originally? Of course that would be a rather small Costco by today’s standards. But adaptive reuse, making sure you capitalize on embedded energy from a green standpoint, these are all very important aspects of reusing big boxes. It’s been pointed out they often make good recreation facilities, climbing gyms. Churches are often looking for more square footage. … Often there’s some fantastic opportunities around that.
General Growth Properties owns the Boise mall, and I’ve talked to their folks a lot. Nationwide, in a lot of their properties they are replacing Sears stores with grocery stores, and they’re doing really well. They are putting not food courts but food bays—they have a lot of different names – where they’ll take a big department store and they’ll put an Applebee’s and Chili’s and some other complimentary large-kitchen businesses together with common seating in the middle.
‘I personally don’t think we are anywhere near a saturation point.’
Right now the amount of publicity that Boise is getting as a future growth market is kind of offsetting a little bit of that doubt [that comes with impact fees. National retailers] are looking at it and saying, “Based on the growth of sales that we’re projecting, we can absorb that fee structure.”
I think a lot of the national retailers that are coming in, too – and I hope I’m not misspeaking — are not doing ground-up development. They’re going into developments that are existing. I think some of the landlords are helping with that fee structure to get those tenants in, because they know when those tenants come, they’re also going to get X, X and X tenant. …
I personally don’t think we are anywhere near a saturation point. We just came back from ICSC [International Council of Shopping Centers] Las Vegas, and we had several new tenants that are not currently in the market approach us about coming into the market. I don’t think we’re there, and I’m a broker so I’m an optimist.
I look at what we’ve been doing in Twin Falls. We have developed a lot of additional retail and larger format retail right across the street from the mall. There, again, it’s a function of the retailers that were looking in that community and were interested in it. For us it’s a function of — somebody’s probably going to do those deals if we don’t. Granted, we’re creating competition for the stores that we already have, and there is some dilution effect. But would we rather keep the synergy all around the properties that we already control or have them go to some other site down the way? We decided maybe the best defense was a strong offense.
The other factor in that is we look at the growth that Twin Falls has been enjoying, and we think, yeah, we’re going to feel this for a while – you can’t bring that much square footage into a town that size and not feel that – but there is momentum. Overall sales in the community –overall spending – is going up, so we decided we’d ride that wave.
We also had a meeting with an interesting retailer from the New England states. Somehow the CEO of the company heard about Boise, visited Boise and said, … “I know I’m leapfrogging clear across the United States, but we need to be in Boise. We like the demographics, we like the area, we like the potential.”
It was someone that we’d never heard of when they called us. I think there’s still great things on the horizon for this market because it’s still being discovered.
August 1, 2017 Breakfast Series
Dotting the i’s: Small businesses & regulation
For more information and to register for the event, visit http://idahobusinessreview.com/events/breakfast-series/