The Welcome Wagons Roll
Steve McLinden/Shopping Centers Today
Retail pays the bills, municipalities are learning now, if they did not know before. This reality has never been more apparent to hundreds of municipalities emerging from the economic meltdown only to struggle with slimmer budgets in the face of closed stores and spending-shy consumers. Little wonder that economic development types are in hot pursuit of new retail blood to compensate, flocking to ICSC meetings and other deal-making venues in record numbers. “Municipalities are putting more emphasis on retail recruitment today because they know they need quality of place to make their communities more vibrant,” said Lacy Beasley, a municipalities consultant in the Nashville, Tenn., office of retail-advisory firm The Shopping Center Group. “They see it not only as a very necessary tax generator, but as a foundation for community growth.”
The municipalities section at RECon 2013 — the Cities of the World Pavilion — will host a record number of exhibitors this year who are coming to hold a sort of international-retailer “casting call.” This is the kind of thing that cities need to be doing, says Beasley. “Especially with retail being the fastest-changing and most dynamic of the sectors,” she said. She would know, having worked with 42 towns across four states, helping to enhance their retail rosters — and their tax rolls. Beasley’s efforts of late helped net some large mass-merchandisers now under construction in two towns with a population of about 7,000 people each: a Walmart Supercenter in Sweetwater, Tenn., and a Tractor Supply Company store in Philadelphia, Miss. Rural areas have been hit particularly hard by store closures and by online retail, she says, and they need brick-and-mortar retail to help recover lost tax revenue and to provide basic services.
The Philadelphia (Pa.) Retail Marketing Alliance works with local commerce and tourism groups to woo new tenants. The Center City District, Philadelphia’s oldest business improvement district, can lure prospects by dangling the spending power of some 179,000 people who live in or near that downtown Center City section. Aside from ICSC events, the Center City District uses press tours, trade ads and its newly enhanced website to deliver a detailed demographics and retail-friendly message, Beasley says. One of the alliance’s recurring tasks is to dispel the image that the city is outdated. “We’re more than a cheesesteak-and-pretzel town,” said Michelle Shannon, marketing vice president for the district.
Among Philadelphia’s downtown recruits last year were Intermix, Loft, Marshalls, a three-level Ulta flagship and some eateries, plus mixed-use developments like The Granary, with its 20,000 square feet of retail and 227 apartments. Several downtown office buildings are creating tens of thousands of square feet of additional retail space soon to go on the market. Sales tax is a prime revenue source, of course, but apparel sales in Pennsylvania are not taxed, which leaves a fiscal gap that has to be mitigated by other sorts of tenants, by tourism and by retail rents that spur higher property valuations, says Shannon. “On Walnut Street, where the majority of our national retailers are, rents are going through the roof, which means more-valuable properties and higher revenue,” Shannon said. The more diverse the downtown mix, the easier it is to sell employers on relocating there. “Those companies want the sizzle,” she said.
Successful retail recruitment spurs other community improvements, according to Keith Sellars, CEO of the Washington, DC Economic Partnership. “With the job market hit so heavily, cities are also looking to retail as a source of job creation,” Sellars said. “Retail positions are great entry-level jobs for citizens who may not have acquired other skill sets yet.” The partnership is credited with creating 8,000 jobs and some 3 million square feet of new retail, mixed-use and office occupancy, generating some $54 million per year in tax revenue. Roughly two dozen supermarkets have opened in the District of Columbia, most of them filling food deserts in poorer areas.
Like the Philadelphia Alliance, the DC Partnership has become an annual fixture at RECon and is looking this year to build on the momentum of February’s ICSC Mid-Atlantic Idea Exchange, where its representatives juggled 45 meetings. Competition for retail has grown acute, Sellars says. Recruiters “have definitely upped their game, so we really need to be prepared when we meet brokers and developers to give them value for their time,” he said.
The DC Partnership has always sought national tenants, but now it pursues unique mom-and-pop retailers and local restaurants too, to help it distinguish itself from competing cities, according to Sellars. Over the past few years, the District of Columbia has brought in such nationals as Target and The Apple Store and locals like Georgetown Cupcake and Ben’s Chili Bowl to bolster the tax rolls. It is adding mixed-use projects, including CityMarket at O, a 1 million-square-foot downtown development with some 87,000 square feet of retail and roughly 600 residences.
Because mixed-use projects offer diversity and density, they have become the favored vessel for new retail construction in cities, which typically use public-private partnerships to get such deals done. “Municipalities are focused on creating urban mixed-use that can incorporate fresh new retail programs,” said Kevin Wayer, a Jones Lang LaSalle managing director who advises cities on these sorts of projects. Not only does this strategy help them mitigate real-estate-related revenue losses, it can help lift neighboring properties out of blight, he says.
Mixed-use urban projects represent the highest and best use of city tax-incentive money because they deliver far greater tax yields per acre than large greenfield deals, according to Joe Minicozzi, an Asheville, N.C.–based real estate consultant. “Downtowns serve as a major driver in helping cities overcome budgetary doldrums,” he said. California’s city of Modesto and county of Stanislaus pull in a combined $26,800 per acre in property taxes from a downtown building housing a sports pub and other businesses, Minicozzi says, versus $6,900 per acre from a local suburban mall called Vintage Faire. Minicozzi’s hometown of Asheville, meanwhile, enjoys an 800 percent greater tax yield on downtown mixed-use projects per acre than a large single-user development such as a Walmart Supercenter, he reports.
The Colony, Texas, a city northwest of Dallas with a population of about 42,000, might be an exception to that rule. The Colony netted one of the catches of the decade when Nebraska Furniture Mart agreed to anchor a 433-acre public-private project there called Grandscape. The 1.9 million-square-foot store and distribution center is set to be the largest home-furnishings complex in North America when it opens in 2015. Expectations are that it will generate some $600 million and draw about 8 million visits yearly. “The city was able to land Nebraska Furniture with a huge incentive package,” said Jeff Green, who owns an eponymous retail consulting firm in Phoenix. “They realized this was going to create millions in tax revenue for this small community and draw people from more than 100 miles away, plus create lots of income from ancillary retail. So they really got aggressive.”
But incentives are only part of it, says Green. “You also have to understand what’s supportable and where and how to make various districts commercially viable over the long haul,” he said. Some cities are starting to trade on historic neighborhoods to attract retail. Though this has long been a practice in large urban areas, most U.S. cities have yet to fully capitalize on the appeal of classic neighborhoods, says Green. Consultants are examining the historic Willo Historic District, in downtown Phoenix, known for its 1920s-era architectural styles, to determine the types of retail that would be supportable in the context of the district’s architecture and culture, says Green.
Oklahoma City, which has thoroughly redeveloped its downtown over the past 15 years, is pressed to recruit fresh retail because property tax there does not go into the city’s general fund. Recent recruits are Anthropologie, Dave & Buster’s, Whole Foods and a host of new-to-market stores housed in the Outlet Shoppes at Oklahoma City, already into its second expansion, having opened about a year and a half ago. Tax-increment financing and other incentive programs are offered, but on a merit basis, says Jessica Herrera, community redevelopment manager at the Oklahoma Chamber of Commerce.
Cities have seen a marked increase in the formation of public-private partnerships to grease deals in recent years. “Retailers’ margins have been squeezed, and they’re looking to municipalities to help them out,” said Beasley. But cities that want to grow their retail tax base need to create a business-friendly environment first, she says. “They need to understand the demand versus the constraints they have put on retailers.” If restrictions are too difficult, retailers often opt to locate a mile down the road in a different municipality, she says. “Cities that show a progressive effort toward planning development will ultimately increase their sales tax and their property values as part of a strong, overall gain in revenue,” said Beasley. “It’s a delicate balance.”