BrainTrust Query: Filling in the Gaps

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Jun 29, 2010
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Commentary by Bill Emerson, President, Emerson Advisors

Through a special arrangement, presented here for discussion
is a summary from a current article from the Emerson Advisors blog.

After decades of adding retail selling space faster than the population was
growing, there is now over 46 square feet of selling space for every man, woman,
and child in America. This compares to an equivalent of about 2.5 feet/person
in Europe. Inevitably, this imbalance must return to equilibrium and it has
begun to do just that.

Over the last few years, several major retailers have closed, including Linens
n’ Things, Circuit City, Mervyns, and Hollywood Video, to name a few. Others
are filing Chapter 11, closing stores, and reorganizing. Entire regional malls
are closing and strip malls and downtown shopping centers everywhere are beginning
to look like smiles marred by missing teeth, even with rents going for 20-30
percent less than they were two years ago.

So the really big question is: What’s going to happen to all this vacant space?

A recent Dow Jones Newswire article gives one alternative – for-profit
colleges. The University of Phoenix has added over 120 properties to its training
and education portfolio over the last three years, bringing their total to
over 200 locations in 39 states. These locations focus on providing skills
to out-of-work adults in areas like health-care, automotive, and technical
trades.

There is also demographics to consider. There are over 70 million Baby Boomers
who are now entering retirement age. This spike of aging population is surely
going to require more health care, assisted living facilities, and who knows
what else.

How about good old American entrepreneurship? One recent phenomenon is the
growth of pop-up stores, which can be seasonal or marketing introductions.

But these are just the obvious ones. Nature abhors a vacuum and while a lot
of this real estate will simply be torn down, most of it will be turned into
something else.

Discussion Questions: What solutions do you see for the glut of real estate
at retail? What obvious and less-obvious non-retail solutions could replace
that space?

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13 Comments on "BrainTrust Query: Filling in the Gaps"


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Joel Warady
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Joel Warady
10 years 10 months ago

There is no question that we are over-retailed. Too many stores resulted in too many failed businesses, resulting in too many empty stores.

Yes, for-profit universities are one option, and pop-up stores are an option, although all that they will do is provide some income to the real estate owner, and not do too much for the community.

What if we look long term? What if we use the space to set up training centers that are sponsored by the retailer and funded by the government, and we use these centers to retrain the unemployed to be better prepared for the job market? The more people working, the more people shopping. The more people shopping, the more money to be spent in stores, and the more money the real estate owners will get as a percentage of sales.

We all win, but this is a very LONG-TERM program.

Dave Wendland
Guest
10 years 10 months ago
Certainly there are many empty storefronts and deserted auto dealers spotting our landscape. Some are on very high-traffic corners and will likely be snatched up in a hurry. They will likely become sites to support the burgeoning healthcare chasm in this country. I would envision many more walk-in clinics and home healthcare-oriented spaces emerging. What to do with some of the less attractive locations (such as those inside outmoded malls or strip centers)? A pop-up store is one solution. But I envision space for more “gently used” thrift shops and dollar stores. In addition a simple storefront to support some e-commerce operator could be an ideal click-and-mortar solution. Another solution, depending on the size of the space, could support children’s activities such as Jump!Zones and indoor mini golf (but these business models may be suspect based on demographics of the area and other competitive choices). This country is filled with smart entrepreneurs who will take advantage of this real estate glut and capitalize on the unbelievably attractive lease and purchase prices. I look at it… Read more »
Ian Percy
Guest
10 years 10 months ago
As a culture we’re always planning for yesterday’s needs, seldom looking at the circumstances coming. For example, we’ve known since the 1940s that we’re going to have a huge bubble of older citizens. Only now do we run around panicked over social security, health care costs, the absence of affordable senior care facilities, etc. Most organizations plan backwards. But I digress…. Two suggestions as to what you can do with your space. The first is to set up incubators for entrepreneurs. I’d love to see us make small investments in the entrepreneurial ideas that right now are housed in the extra bedroom or garage. There could be a series of small collaborative offices, work or manufacturing rooms and then a common retail location where this stuff is sold. I know there are lots of rent-an-office locations but that’s different, there’s no synergy there, usually. The second is to turn large box space into innovative charter schools and indoor play/arts/sports grounds. I’m connected to just such a group and there are plans for thousands of such… Read more »
Ben Sprecher
Guest
Ben Sprecher
10 years 10 months ago

“Location, location, location”: what happens to a given vacant storefront will largely be determined by *where* that storefront is.

Sure, there will be new ventures, for-profit universities, local health clinics, and other innovative uses of many of the cheap, vacant retail spaces that are located near population centers that can support those enterprises. And lower rents mean that new stores will be more spacious while older stores may be able to expand or upgrade more easily. But for many retail locations, the best solution will be to tear the building down.

Just think of the malls built in the Las Vegas exurbs to serve the anticipated populations of the massive housing developments that are now lying half-finished, deserted, and desolate. It will take years for the population to catch up with all of the speculative construction, and until it does, there will be little value to these empty storefronts.

David Dorf
Guest
10 years 10 months ago

If the empty space is in a prime location, it will be leased eventually. But the primary reason the former business failed may be because the location has lost its luster, and the “law of broken windows” says that once an empty trend starts, it will build upon itself. At least where I live (Austin, TX), there’s plenty of new, prime locations available for mainstream retail. The older locations that are no longer retail worthy are best re-purposed. For example, a nearby Shell station is now a RV leasing business, and a strip mall near my office has been turned into an alternative elementary school.

Gordon Arnold
Guest
10 years 10 months ago

The cost of reclamation with little or no likelihood of ROI is one of three economic barriers that will prohibit the reduction of selling space in the USA. Bank and landowner balance sheets are the second. Placing and maintaining unusable real estate in portfolios as an asset is common and used to falsely prop up company or property worth and borrowing limits. And most destructive is government assessments and tax levying on worthless properties that will never pay. This accounts for many billions of borrowed dollars that can never be paid back.

A study to determine the dollar amount of bad loans in existence and or in process loans supported by these forms of fraud would be most interesting. Even more fun to watch would be the true international ramifications if the findings were published in a single study, legitimately certified.

Ed Rosenbaum
Guest
10 years 10 months ago

I usually enjoy taking out my crystal ball and forecasting what the future has in store. Lately I have been off as the lotto numbers I select and those the lottery select are quite different.

We can all come up with well meaning and philanthropic uses for vacant retail space; but unless the property owner or the retailer–if still on the hook for the rent–agrees, the space will remain vacant. My crystal ball does tell me the vacated space would be well used for re-training facilities to assist those in need get back on their feet financially. We are at a point where the large number of unemployed will need a different skill set to become productive again. Yet, as I write this, I am thinking the existing school system locations would be a better and less expensive resource for this project; but only if classes were held in the evenings.

Maybe these properties could be taken over by local governments and utilized for athletic fields and green spaces?

Gene Detroyer
Guest
10 years 10 months ago

Once upon a time in Paramus, New Jersey, there was a lovely golf course. The golf course was turned into a very thriving shopping mall. The very thriving shopping mall now seems like a ghost town. Maybe we should have the golf course back.

Trying to reinvent much of this space is an exercise in business nonsense. The answer is knock them down. Once the land becomes a blank piece of paper then the correct economic decisions can be made.

This country has been knocking down and rebuilding forever. What is so sacred about shopping malls? They have had their time and now it is over.

Devangshu Dutta
Guest
Devangshu Dutta
10 years 10 months ago

I think defunct malls as incubation centers is a great idea. A closed mall is an albatross around a developer’s neck. Start-ups are forever hard-up for cash and can’t afford A-grade spaces. Governments need to spend money on stimulating the local economy. Rather than subsidizing businesses that are apparently “too-big-to-fail,” it may be better for them to provide funded spaces for new businesses that generate new jobs and keep the economy vibrant.

Lee Peterson
Guest
10 years 10 months ago

We should do more of what was done here in Columbus. City Center, a 3 level mall built in 1989 in downtown Columbus, went defunct in 2009, a mere 20 years later. With a vote here and an approval there, the city made a park out the property. Now, any citizen can attend concerts, gatherings or just enjoy a pleasant break from their day. Where once there was only ugly steel, glass, white tile and bad merchandise stacked up to 100 feet, there is now respite and green vibrancy. Brilliant!

Mark Johnson
Guest
Mark Johnson
10 years 10 months ago

You need better loyalty, fewer stores and better locations. If you do not qualify for this, you need to sell, sell, sell.

Rick Tannenbaum
Guest
Rick Tannenbaum
10 years 10 months ago

We’ve been plagued by vacancies in our tertiary markets with empty department stores and closed grocers. We wait for the other shoe to drop each time a lease comes up for renewal. We decided to take a long-term view and leave space empty (if need be) until the market picks up again.

We accept short-term tenants and pop-ups wherever we can place them. Getting into long-term leases in this tenants’ market is a recipe for long-term failure. Sure I can fill space for $2.00/sq. ft. gross, but why would I want to? If I take a tenant like that, I want to have a cancellation clause.

If not married to crushing debt, the best thing to do now is wait.

Ed Dennis
Guest
Ed Dennis
10 years 10 months ago

Can there possibly be too much competition? Won’t competition weed out the weakest links? With the growth of the internet, I do not think that any retailer can be insulated from competition. It is what our economy is based upon, it is what works.

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