Viewing Retail as a Journey, Not Simply a Destination; Today’s Consumer Makes Interesting Choices

AFTER ADVENT OF LIFESTYLE CENTERS, WHAT’S NEXT? “HYBRID CENTER” BEST DESCRIBES NEEDED FOCUS

Jeff Green
CEO, Jeff Green Partners

Over the last decade, the lifestyle center has captured the imagination of retail real estate developers, prestigious merchants, consumers and the general and specialist media. It has grown in scale, scope and prevalence, expanding far beyond its role in mixed-use town center and village settings, or as a standalone specialty fashion mall. Having been adapted to meet increasingly diverse geographic and demographic settings, the lifestyle center has — without question — become the preferred form of new retail development.

But what’s in a name? Does this trend have sustainable growth over the next decade? If so, is there an optimal format and what will it be like?

The good news is that the lifestyle center movement, if we might call it that, represents much of retail at its finest. Just like the best new vehicles, the “fit and finish” of retail development continues to improve and impress. We find excellence in areas like overall construction quality, architectural detailing and signage, pedestrian access (i. e. street or curb appeal) and traffic control, and lighting and landscaping.

This new curb appeal is more than skin deep. Individual merchants are making significant contributions to our retail culture with new concepts and presentation formats. They are responding to the modern consumer, who still demands value, but continues to be willing to try out new styles and tastes, from food, clothing and personal items to home furnishings and appliances. This is an opportune time to sell and to shop.

Unfortunately, as the name has grown and been applied more widely, its meaning has gotten fuzzier. The term now means different things to different audiences and, much like Big Box, a term at another point of the retail compass, it has outgrown its original stricter definition and, perhaps, usefulness.

Going forward, successful developers will realize that the future is in standalone or mixed-use projects that include what is better termed a “hybrid center” component. The reasoning goes beyond our realization that there is no longer a prototype or standard definition for a lifestyle center development. We must also understand and accept that some lifestyle centers, especially those built to a “fit anything” prototype, are not meeting sales expectations. This includes centers that have been open long enough to work out any marketing or tenant selection challenges.

Instead, we need to go back to retail site selection and tenant selection basics. Developers that are successful will need to understand each local marketplace, view it as unique, and tailor the project and its components (residential, office and the specialty retail that it might include) to meet its individual and unique needs.

The Developer-Tenant Dynamic

Remember the days when formulas were used to “optimally” fill a regional mall or larger community mall? A certain percentage of the tenants needed to focus on women’s apparel, others would sell cards and gifts, and so on. Even then, I wasn’t sure why we followed such a system.

Regardless, it has become clear that such a tactic no longer applies. It has become obsolete for several reasons. First, the “lifestyle” center appeals to merchants for its lower true rental costs. Even if they cost more to build per square foot, given the detailing and overall construction quality, tenants freed of mall common area charges (CAM) can achieve much better profitability as a result of the lower occupancy costs in a lifestyle center as compared to a regional mall. Second, the successful center combines many physical platforms, including elements of neighborhood retail, services, lifestyle and fashion tenants, and, even, specialty box retailers. The last term is much preferred over Big Box, which has negative connotations with many communities and planning officials. We should reserve the Big Box term for true big boxes, standalone “category killers” of 75,000 square feet in size and greater.

Third, we have also grown past fixed “anchor” concepts. Some centers may start out as an anchor-less combination of small specialty lifestyle tenants, then evolve into a center that may, or may not, have a fashion-oriented department store like a Von Maur or Dillards. New style anchors like cinemas are fine, but are not de rigour, either. The Irvine Spectrum in Orange County, California is a good example of a center that naturally evolved. It started as restaurants and entertainment, and is now adding Target, Robinson May and Nordstrom. As we will reiterate later, prestige retailers no longer object to being nearby a Target or Costco, for they share the same high-net worth customers.

The implications of the factors just discussed are clear. Centers with a smaller number of total tenants; tighter selection criteria for which tenants make sense for a specific project, as center developers can no longer rely on anchors to drive traffic; and new income formulas. At the same, we are finding that the most successful developers are working with select merchants to find their best, next locations—and develop and build the centers that make sense for tenants (whether in primary, secondary or tertiary markets—they all can work) and which consumers crave. Retail developers must have the good sense and confidence to create these new hybrid centers that feature the tenants that are missing from a specific market and those that is desired by close by customers.

A more organic approach will also help defuse some of the tensions we see developing between lifestyle centers and downtown shopping districts. It is to no one’s advantage if the lifestyle center is perceived as the same devouring colossus as the regional malls or power centers once were.

The Consumer Dynamic: A Mercedes Pulls Up to Subway

Anyone doing a parking lot survey or checking zip codes at the cash register had an inkling. However, a survey sponsored by WWD and reported in Spring, 2004, “Lifestyles of the Super Wealthy,” is still creating a buzz with retail analysts, developers and major tenants. Of folks with average annual income of $359,000, their Top Three most frequently shopped stores were Target, Home Depot and Costco. Nordstrom was #4, the Gap #5, but cost-consciousness resumed quickly with Bed, Bath & Beyond, Best Buy and Wal-Mart right behind. Saks Fifth Avenue closed out the Top Fifteen.

“Every study we’ve done in the last five years indicates that the super wealthy are not much different than the bottom 90 percent of the population,” said Howard Waddel of the study’s author, the American Affluence Research Center, as reported by WWD.

Consumers are educating the retail real estate community. They will shop where it is convenient and be selective about value, at both high and low purchase point ends of the scale. Retailers and their development partners must understand their customers, markets, populations, demographics and psychographics—no two retailers have exactly the same audience; then choose the format and merchandise selection that best satisfies the consumer, not the other way around. And, yes, I have seen plenty of people driving a Mercedes pull up to a Subway for a healthy, value-conscious and stylish lunch or take-out dinner.

By adapting a targeted, customized hybrid center mentality, the retail economy and related real estate will show more profits and greater long-term value. We will continue to create retail experiences that don’t wear out their welcome so quickly, while possessing the capability to evolve in interesting, even unexpected, ways.

Jeff Green is President and CEO of Mill Valley, California-based Jeff Green Partners. Jeff Green Partners provides consultation to real estate developers and retailers both nationally and internationally. Green has long been considered one of the industry’s leaders in market research techniques and strategic planning, as well as comprehensive understanding of retail in each major market.