Retail is an essential component of vibrant urban environments, and for much of the past decade, retailers and retail investors have ridden an urbanization wave to reach shoppers in the city centers where they live, work and play. Now, high asking prices and premium rents in these fully developed communities constitute barriers to entry for many retailers and investors. As an alternative, some secondary markets are just beginning to densify, creating lower-cost opportunities with strong growth potential.
Suburbs and secondary markets need physical and social infrastructure if they are going to develop into urban hubs with a thriving retail component. Look for these indicators to help identify neighborhoods on track to capture that downtown feel and become the next live/work/play communities.
- Accessibility. Proximity to commuter lines or major freeways connecting residents to employment centers can be the lynchpin of an urban hub.
- Density. More people means more potential shoppers, diners and entertainment customers to support retailers and other businesses.
- Walking appeal. Pedestrian-friendly streets and sidewalks draw people out of their homes, workplaces and transit stations to shop, dine, seek entertainment and explore the area, supporting local retailers and other businesses in the process.
- Experiences. Communities that organize festivals, live music, movies in the park and similar group activities nurture the sense of community that draws crowds to local businesses.
- Infrastructure and safety. A town or district intent upon urbanization will invest in good lighting and well-maintained streets and walkways, making residents and visitors feel safe enjoying the community well into the evening hours.
- Enterprise zones, public/private partnerships. Great things can happen when state or local governments meet businesses part way. The availability of tax breaks, expedited permit review, tax increment reinvestment programs that generate funds for community improvements, and similar programs can accelerate growth and help new businesses make a strong start.
Suburban examples of urbanization dot the map from coast to coast. The population is growing rapidly in downtown Bethesda, Maryland, the Washington suburb where Marriott International is building a $600 million headquarters. Downtown Philadelphia, known as Center City, draws crowds to several retail areas and offers hundreds of dining options. The Short North neighborhood north of downtown Columbus, Ohio, has emerged as a hip mix of specialty retail shops, pubs and nightclubs as well as residential and office uses.
As hubs mature, rising rents and pass-through property taxes can squeeze profit margins for the restaurants, ground-floor stores and entertainment venues that round out 24/7 neighborhoods. At the same time, real estate asking prices escalate rapidly once an urban submarket has caught-on with residents, employers and merchants that fill available spaces and add population density. The low capitalization rates associated with high-occupancy submarkets leave little room for further value appreciation, particularly for investors who arrive late to the party.
A tale of several cities
A look at New Jersey communities gives an idea of how urbanization affects costs. In Morristown, New Jersey, restaurants and retail energize a town center that has enjoyed a decade of redevelopment, creating an attractive mix of stores, apartments, luxury condominiums and parking around a historic park. Occupancy costs reflect the area’s transformation, and along Morristown’s South Street, a retailer can expect to pay around $45 per square foot triple net in monthly rent.
By contrast, a retailer setting up shop in Pompton Lakes, just 20 miles to the north, can expect to pay about $10 per square foot to rent a downtown storefront – less than a quarter of the Morristown side-street average. Commercial buildings in Pompton Lakes typically sell for a quarter to one-third the price of comparable properties in downtown Morristown.
Starting on the ground floor
How can retailers and investors identify communities poised to experience the next urban renaissance? Following development news is a good start.
Returning to the New Jersey examples, in July, policy development nonprofit New Jersey Future recognized seven municipalities for innovative revitalization programs, according to news reports. One of those is Somerville, a borough that has redeveloped its West Main Street into a mix of retail, restaurants and apartments within walking distance of the NJ Transit Somerville station.
In Somerville’s East Central Business District, formerly dominated by older industrial and residential structures, redevelopment projects are introducing new housing options and commercial space, also within walking distance of the transit station. Borough leaders are now collaborating with NJ Transit and Somerset Development to complete more than 30 acres of parkland and another mixed-use development on the south side of the train station. The borough is on a growth track like the path Morristown followed, but hasn’t yet attained the degree of buildout necessary to command Morristown’s rental rates or elevated real estate pricing.
Similar stories are unfolding throughout the nation, not only in central business districts but also in suburban population centers with the necessary ingredients of transportation access, walkable streets and mixed-use activity.
Growth plans that call for offices, residential and other multistory buildings create the ground-floor retail opportunities that give communities their identity. Vibrancy comes from retail, and communities rediscovering their urban natures need retailers and retail investors to make their redevelopments succeed. The challenge, both for communities and for retail businesses and investors, is to find the right match.