Is mixed-use the future of retail? The Urbane Franchisor explores
Photo by Nicholas Upton
There’s an interesting dichotomy playing out in the urban retail scene as more cities encourage or require ground-floor retail spaces in residential, office or mixed-use buildings, while at the same time retailers and casual dining brands are facing an (almost) unprecedented wave of closures.
Requiring retail spaces on the floor of new buildings comes from the best of municipal intentions. Cities don’t want to make life difficult for landlords, restaurateurs or retailers. Their press for more ground-floor retail spaces is about creating lively urban environments where people want to live, work and play. Urbanist thinking says that more doors, windows and “eyes on the street” makes residents more comfortable and encourages tourists or other newcomers to keep exploring.
Even so, there’s no shortage of new or almost-new buildings that are fully occupied on upper stories, but vacant at the ground level. This suggests some landlords are willing to give the city what they want, but haven’t put in the effort to fill said storefronts or split them up into smaller, more attractive spaces. Since developers aren’t building nearly the amount of suburban retail as they did in previous eras, these urban ground-floor vacancies are a prime opportunity for franchisees and franchisors alike. The trick is knowing what buildings make sense and which are vacant for a reason—and best avoided.
Follow the tenant mix
It’s important to understand just how difficult this era is for certain segments of the food or retail worlds. Garrick Brown, head of retail research at Cushman & Wakefield, said the U.S. has already seen more closures than it did in all of 2018 through just the first four months of this year.
He predicts the next recession will wash away countless challenged concepts, with the Trump tax cuts, short-term investor pressure for publicly traded concepts and fear of landlord litigation keeping countless locations or even whole brands open as zombie tenants, rather than something with longer-term staying power.
“When you’re publicly traded in retail today, you’re damned if you do and damned if you don’t,” Brown said. “If you decide to take on strategic closures, which are going to be good for your bottom line in the long run, your stock is going to suffer even though that’s probably what’s best for the company.”
Completing the paradox of this current era in real estate, there are also countless brands expanding in nearly all corners of franchising. In general, value players such as TJ Maxx, H&M or clothing reuse concepts are continuing to grow, while mass-market offerings like JCPenney and Macy’s keep struggling. High-end malls and brands are also broadly doing well with ultra-low vacancy rates. Because of this polarity, overall vacancy rates have largely remained steady, still tight in healthy markets.
In searching for attractive mixed-use buildings, Brown urged prospective tenants to follow the office and multi-family buildings that are mostly leased up. He also noted that as the U.S. population continues growing, cities have captured more than 20 percent of that growth, which bodes well for a future that’s more urban than the present.
“The future of retail right now is mixed use, and retail is becoming an amenity,” he added. “The way we’re going to deal with having been over-retailed and the disruption caused by e-commerce is we’re going to become increasingly about mixed use because it builds a more supportive environment for retail, the retail that still works.”
NordHaus in MPLS awaits its first tenants.
Look to the nord star
Here in our hometown of Minneapolis, a perfect example of mixed-use construction just opened. Called NordHaus, a riff on the area’s Scandinavian roots, it’s a high-end 20-story building with 280 apartments above 22,000 square feet of retail space on the far edge of the very hot St. Anthony Main retail node.
The first retail tenant is Haus Salon, an eight-year-old super-chic brand that is yet another amenity for the project’s apartment dwellers, along with the fitness center, pool deck, pet washing bays and hot tub.
Filling out the rest of the retail spaces is the job of Tim Bloom, principal at Bloom Commercial. He stressed that because the project, developed and owned by Lennar, is a “premier project” compared to the existing spaces in the neighborhood, his leasing focus is on boosting those amenities for the building’s residents, rather than approving whoever comes with a check in hand.
In determining what vacant space is an opportunity versus a death trap, Bloom suggested that franchisees and franchisors have real estate teams with local connections, rather than an out-of-city or out-of-state team that lacks grassroots relationships in a given market.
He added that working with franchise brands that operate company-owned locations is reassuring on his side of the equation, because that means the corporate team knows what it’s like to run the stores at the local level and likely isn’t accepting low-quality franchisees.
“The good franchisors understand they need to really help” franchisees select sites—“you can’t just throw a dart at a map and pick a site,” he said. “The ones that really have skin in the game and are out there running stores are the ones that make a lot of sense” for landlords and brokers.
Painting with a Twist isn’t afraid of older mixed-use buildings, as seen in Philadelphia.
Getting ready to pounce
Painting with a Twist, which recently acquired Bottle & Bottega, has a unique view on the retail real estate landscape. Viewing its paint-and-sip real estate as its primary marketing vehicle, landing locations on Main & Main isn’t as important, since customers are willing to drive to the nearest location after advance planning, rather than stopping in as an impulse buy.
“Building the unit, ordering the fixtures and signage and doing the pre-opening marketing, those are easy,” said Chief Development Officer Richard Leveille. “Finding the right real estate is hard.”
During his long career in franchising, including time with The Lost Cajun and Smoothie King, Leveille said he’s learned that if a space has an available-for-lease sign hanging, that’s often an indicator the space may be flawed, since good landlords work to fill spaces behind the scenes in advance, before needing to post a sign.
“It’s all about who you know and making those connections so you can get those premier spaces before they ever come available,” he said. “When a landlord has a tenant that’s struggling or a landlord is going to build a new building or add onto a shopping center, they proactively pick and choose who is the right mix for their center, and you have to be on that A list or you don’t get it.”
For newcomers to franchised real estate, he recommended seeking out the “two or three” real estate firms that have the best connections in a given market. He recommends cultivating the relationship and making sure they know what you’re looking for, so if you get a call about an upcoming vacancy, you can be ready to react.
While both its brands have more suburban units, each have sizable urban portfolios, including some that have been that first mover in a new, or newly repositioned space.
Because street visibility isn’t as important since most brand touches start with a Google search, Leveille and his team look for drive times of less than 15 minutes, female-oriented tenants in the area and, most importantly, ample lighting and outward safety when so many guests are walking to their cars at night after a glass or two of wine.
For mixed-use spaces, he recommends looking closely at who is above the ground level, be it offices or residences. In assessing “the state of the economy of the building itself,” he said some condos or apartments have remote or even foreign owners, meaning some are vacant most of the year.
In addition, softer points like safe crosswalks, nearby walking paths and healthy pedestrian and auto traffic counts can be critical factors that are often overlooked. To get some of that demographic and traffic data, he recommends business owners contact downtown development districts or associations that are tailor-made to give prospective tenants hard data to help them make the call.
With cell phones now tracking our every move, he added that new-age real estate software can dive much deeper, showing clients who’s visiting the area, what competitors they patronize and producing travel patterns that can be plotted on a map to learn much more about habits and tastes than was ever possible even a few years ago.
Echoing the other experts, Leveille said if a location looks like a good match for a given building or neighborhood, landing the space comes down to personal networking with the brokers and landlords who can make it happen.
“It’s about who you know and being there when a tenant is failing and the landlord’s looking to replace them,” he said. “How many tenants are out there looking for a 2,000-square-foot space? There’s hundreds of them. That landlord has a lot of choices on who’s going to fill that space, so you somehow or another have to be on the top of the stack, and that takes a lot of effort.”
Tom Kaiser, pictured on opposite page, is senior editor of Franchise Times and writes about urban tales in franchising in each issue. Send story ideas to email@example.com