2015 N Hudson Avenue – Pueblo, CO
1250 Oliver Road – Fairfield, CA
Downtown Pleasant Hill – Pleasant Hill, CA
Tractor Supply – 2000 Lakeville Hwy, Petaluma, CA
Coffee and a Donut
For the past eleven years (since I moved into my current home) I have driven past two establishments every morning at 7:30 am on my way into the office. By my calculation, this equates to approximately 2,700 unique observations that contemplated every kind of weather condition, during every season, in varied traffic conditions, occasional road work, on weekdays, and even some weekends & holidays. The findings in these observations occurred consistently (e.g. EVERY DAY) regardless of any combination of variables.
The two establishments in question are a 7-11 and a Starbucks. They are separated by a mere 352 feet. They front on the same street and have identical traffic counts, according to county traffic data. Both have left and right hand ingress and egress. Both have ample on-site parking and additional street parking – all free. Both establishments have comparably visible signage featuring standard corporate logos and colors. In short, the two establishments feature highly comparable real estate that is equally accessible to the trade area, visitors and those passing through.
Yet morning after morning, year after year, decade after decade (yes, I am in the second decade of this study) a radical and telling phenomenon occurs. Every morning, the parking lot in front of the 7-ll fills up. At exact same time the parking lot in front of the Starbucks also fills up. And that is where the similarities cease.
The 7-11 parking lot is filled with trucks. Small, medium and large trucks. Some vans too. Almost all of the trucks have lawnmowers, shovels, hoses, wheelbarrows, and other equipment. These trucks are owned by gardeners, landscapers, contractors, tree service and pool companies, etc. I’m certain of this because many of the trucks have lettering on the doors with names like Budget Pool Service, Martinez Gardening or Wilson Door Company. I have observed that many if not most of these convenience store customers own their own small business, which they operate directly out of the truck. Yet the trucks rarely have only one person in them. Usually it’s a couple of guys, sometimes several. These are presumably “crews” that work, and dine, together.
When the crew enters 7-11 they are dressed in remarkably similar apparel. Worn jeans, boots, a T-shirt, and an unbuttoned long sleeve over shirt (frequently plaid). When the crew exits the 7-11, they each carry with them a cup of coffee and a baked item – usually a donut. The crew does not purchase oatmeal, egg sandwiches, bagels or fruit. The crew drinks coffee and eats donuts. The crew does not wait for someone to make their coffee for them. They pour their own from handy coffee pots that stand ready in a variety of flavors.
At precisely the same moment that the owner/operators of the crew are doing business with the owner/operator of the 7-11 store, exactly 352 feet to the north, the parking lot in front of Starbucks also fills with cars. There are no trucks in front of Starbucks, only cars, SUVs and mini vans. There are sports cars, German sedans and electric and hybrid vehicles. None of these vehicles have lettering on the doors with a business name. But several have bike racks, ski racks or occasional paddle boards rigged to the top. Virtually none of these cars have more than one person in them. The customers are all dressed in business casual attire – some more buttoned down than others. They all carry a smartphone.
The Starbucks customers spend more time in the store. That’s because so many of them have a lengthy order (just for the coffee) and they have to wait while someone else makes it. This gives the store a full, busy vibe, sort of like a club. Even though Starbucks does now offer a donut on their menu (one) most of the club orders something else. Although it’s not a foolproof observation, since none of the club has their business name emblazoned on their vehicle, I wonder how many of them own their own business. Not many I think. Just like the people who serve them their coffee.
I can’t help but observe that despite how obviously different the crew and the club are on the outside, what they absolutely have in common is a morning ritual centered around coffee and a donut (or a latte and a scone). And while their rituals are remarkably similar, the crew and the club have compartmentalized themselves into cliques through a variety of differentiators including job description, apparel, automobile choice and the price point of their coffee and donut.
Is there one central factor the keeps the crew and the club outside of each other’s place? Is it price? I think that’s a little bit of the reason. Is it because of social status? Probably some of that too. Mostly, I believe that the crew and the club repeat their choice every day because they fit into their own places perfectly, they feel comfortable among their peer group, and their store choice suits their lifestyle.
There is an invisible line that separates the crew and the club. They almost never cross the line. The proven and lasting retail brands, brands like 7-11 and Starbucks, are the ones that identify with a big audience of customers such as these and can offer them something fundamental. The audiences can be very different on the outside, but the crew and the club remind us that most people want the same thing – they just want it offered in their own unique way.
I do a lot of work in one of the most desirable, successful and functional downtowns in Northern California – Walnut Creek. Over the years we’ve grown our traditional retail brokerage practice of representing retailers and restaurants with their expansions or representing the owners and developers of shopping centers throughout Northern California, with a High Street business centered around downtown Walnut Creek and its’ super-desirable Neiman and Nordstrom anchored mall – Broadway Plaza.
Today our High Street business is fully one third of the firm’s practice – even more in some years. Because our offices are located in the center of Walnut Creek’s downtown core, we get to experience the vibrant dining, shopping and community scene both as locals who spend our day here, and as a vendor who traffics in real estate sales and lease transactions. We experience the simple pleasures everyday of enjoying breakfast, lunch or dinner, shoe shines, haircuts, shopping and after work drinks all within a block or two of our front door.
This downtown is a delicious mix of international megastores and local / regional retail and restaurant establishments. The downtown is conveniently divided by a sort of Mason Dixon line (Mt Diablo Blvd) that separates the historic old downtown to the north (whose owners you’ve never heard of) from the institutionally owned new downtown to the south (whose owners include Macerich, Kimco, Essex, Vornado, Equity One, etc). This immediate proximity of the old and the new, the big and the small, the local entrepreneur with the world class brand, the chain restaurant and the local artisan bistro creates an ever changing and fascinating tapestry of architectural styles, original offerings, price points and target clientele. It’s as provincial as Mayberry, and as polished as Madison Avenue, all at the same time.
Because you can live, work, dine, shop, date or do hundreds of other things downtown ( …ice skate, visit the library, take an art class…) the offering is broad and all encompassing. It caters to any and every lifestyle. And this, in part, is how the term “lifestyle center” came about, as developers have tried to capture some of the special chemistry that happens in vibrant, organic downtowns like Walnut Creek in their projects.
But what I’ve observed, with just a few exceptions, is how the term “lifestyle center” has become cheapened to the point of becoming meaningless. While at its best, lifestyle centers mix a few small businesses with formulaic chain stores, more often we see any project that boasts a movie theater and bookstore trying to lay claim to the “lifestyle” imprimatur. Ownership of so called lifestyle centers, like most other product types has come to be dominated by a relatively small group of national and regional developers who replicate the same mix of apparel, dining and entertainment chains from one project to the next. Understandably of course. The developer wants reliable credit tenants and financeable projects. Hello Panda Express…goodbye start up Thai bistro.
Another problem is scale. Whereas an organic lifestyle market like Walnut Creek has some 2.5 M square feet of retail space, plus housing, office buildings and civic places, the largest lifestyle centers are but a few hundred thousand square feet.
Before our lives were so convenient, they were authentic. The same can be said of retail environments. I’ve formed the opinion that the words “lifestyle” and “center” really don’t belong together. Any developer that tries to capture the magic of authentic lifestyle in a 100, 200 or even 300,000 square foot center, while meeting underwriting standards and thus de-emphasizing the artisan, the startup, the entrepreneur or the local barber is really just building formula retail with a new name.
The recession of 2008-10 took a far greater toll on lifestyle centers than neighborhood centers, power centers or regional malls. Why? Because so called lifestyle centers, largely filled with apparel, dining and entertainment brands, offered very little in the way of daily needs or essential shopping. Yet our vibrant downtowns held the line far more ably (Walnut Creek’s max recession era vacancy rate was 5.9%). The reason? Because these authentic, original lifestyle environments were essential to their communities on multiple levels, like they always have been. They have been “daily needs” environments since before the concept had a name, and they are much more.
Singer/songwriter Barbara Mandrel famously crooned, “I was country, when country wasn’t cool”. Places like Mountain View, Burlingame, Willow Glen, Walnut Creek and even sleepy little burgs Clayton and Lodi can say something similar. They always have been, and still are, where authentic lifestyle retail is found.
The Inconvenient Truth About Mixed Use
As far as trends in retail real estate development go, none during my 30-years in the industry has been more counter-productive or government-driven than residential over retail mixed-use development (RRMU).
Pick just about any Bay Area city and you will easily identify any number of RRMU projects that have been proposed, entitled and/or developed over the past ten years. And with rare exception, these projects suffer the same ills…relatively high vacancy rates, substantially below market rents, poor credit tenancies and a high turnover rate of the brokerage firms that try, with little success, to lease what is un-leasable.
Don’t get me wrong – as a design concept RRMU works beautifully…in Paris. And in Manhattan. And therein lies a big part of the problem. City planners and city councils across Northern California have revealed an inferiority complex to major urban markets around the world and tried to force feed this utterly urban product type into sprawling suburbs from Concord to Novato to San Jose. Only guess what, the most important ingredient is missing – concentrated, massive, pedestrian populations.
Retail developments thrive and enjoy competitive demand for their vacancies only when merchants and restaurants can succeed. The ingredients for the retailer’s success are universally known and proven: easy access, convenient parking, strong co-tenants and proximity to a desirable trade area. In the Bay Area’s primarily suburban sub markets, well over 90% of shoppers get to their shopping and dining destinations by car. Only one of the Bay Area’s nine counties, San Francisco, can make a legitimate claim to having the kind of fundamentals that support RRMU, and even then only in select neighborhoods
But the retail landscape in every other Bay Area county is overwhelmingly suburban in nature and comprised of shopping centers, power centers and regional malls with abundant parking, or traditional downtowns that cater to auto-oriented shoppers via street parking and proximate parking structures. Against successful and entrenched assets like these, with their ease of parking, strong anchor tenants and broad offerings, RRMU projects seek vainly to attract tenants who soberly see futures with no parking, no reliable anchor tenants nor the traffic they generate, and above all, no customers.
The Bay Area’s numerous submarkets fail to meet the fundamental criteria for RRMU for more reasons than lack of residential density. Remember that the European and east coast markets where RRMU has historically evolved are typically centuries old and have a far more restricted infrastructure of freeways, parking and roadways, which were all necessary factors in the natural growth of RRMU in those markets. RRMU worked in these markets because at the time that they developed, there was no alternative. Infrastructure in Northern California however is based on a 20th century standard, which gave rise to suburbs and the retail projects that serve them, thus eliminating the critical cause & effect chemistry needed for successful RRMU. Government elites have ignored these realities while advancing their Euro model for our communities.
Rapt by the dogma of New Urbanism, our municipal planners have uniformly ignored the fact that retail by its very nature likes to congregate. In retail lease planning, this reality is expressed through anchor tenants, larger formats and critical mass. Yet New Urbanism’s RRMU designs plug its’ ears and closes its’ eyes to this essential truth.
Tragically, today’s sophisticated residential developers have learned the game. The hot residential market allows them to build out projects where they can plug in zero income for the retail space they are forced by the municipality to build, knowing it will struggle at best. But strong returns on the residential pro forma compensate for the retail write offs, thus giving birth to another RRMU project whose ground floor is destined to lay vacant, or perhaps be leased by a start-up nail salon or martial arts operation with no credit or resume, if the landlord is lucky.
Of course there are a handful of exceptions. Santana Row and Bay Street among them (although projects like these have more regional mall DNA than RRMU). Also, an admirable niche is being developed by select firms like BHV Centerstreet Properties, that are delivering mixed use projects that seek to blend functional, first class retail with high quality residential. But for every smashing success, there are perhaps thirty train wrecks. City staffs who have no responsibility to finance, lease or manage the projects they conceive and require, are increasingly a class of folk with their hands on the gears of approval, yet with no boots on the ground understanding how retail leasing works or of the utterly flawed nature of their dreams.
Our city planners all seem to attend the same conferences and seminars – those hosted by an alphabet soup of trade organizations such as ULI, ICSC and BOMA. They bring back the trendy design concept du jour (e.g. Residential over retail mixed use, transit villages, adaptive re-use, etc.) back to Northern California’s overwhelmingly suburban retail markets, and proceed to jam developers with un-leasable designs, if those developers hope to seek approval in that city.
So who exactly is campaigning for the RRMU design concept? Not the risk-savvy developers that have learned how this product type rarely succeeds. Clearly not the high quality retailers and first class dining establishments that consistently choose to avoid these projects, leaving them half vacant. Yet RRMU projects continue apace in a bizarro real estate world where the laws of supply and demand have been suspended by ivory tower planners who suffer none of the consequences of these failures, unlike the developers jammed with building them, the banks that might loan on them, or the brokerage firms charged with leasing them.
De-coupled from the financial realities of designing and building retail projects that will attract quality tenants and manage to stay leased in markets both good and bad, our bureaucrats appear more interested in how a project looks or if it comports with the latest fashion in the urban Meccas.
Brokerage firms like ours increasingly experience visits from exasperated multi-family developers who have realized that they have a mounting problem on their hands. With growing concern, they see how the vacancy problem in their commercial portfolios is getting bigger and has no apparent cure. Makeshift leasing solutions have become commonplace as sophisticated institutional developers populate their “retail” spaces with complimentary fitness and meeting rooms in order to shrink, if only slightly, their inventories of dead space.
While Adam Smith’s “Invisible hand” would give the consumer, the merchant, the builder and the community at large what they want, namely, parking, convenience, anchor tenants, and projects that succeed, our bureaucrats have charted their own path. One that looks like Paris, but with empty buildings.