Northeastern Exposure

Density and diversity. The two D’s. That, in short, is what sums up the Northeast market for retailers. It’s the place where chains with national expansion plans or new formats to test need to be.

“In the Northeast you have some of the highest incomes and highest education levels, but you also have a diverse melting pot population,” said Greg Goldberg, RPAI’s VP, leasing director, eastern division. “You have dense clusters of suburban offices and residential areas that provide an abundance of buying power and different types of customers.”

Of course, Goldberg said, doing business in the Northeast is more expensive in just about every aspect of retailing than anywhere else in the country, but the two D’s make it worthwhile.

“What’s nice about the Northeast area is that once you gain entry and have your distribution and infrastructure set up, you have lots of stores and doors in a relatively small area,” he said.

Another enduring dynamic of America’s tightly packed upper-right-hand corner is that high-barrier-to-entry markets make new development challenging. Once a chain establishes profitable beachheads in specific markets there, then it often pays to stay put.

“The Northeast is filled with communities that retailers crave, often dense markets with well-educated consumers and stable employment,” PREIT CEO Joe Coradino said. “Well-positioned properties there can continue to be reinvented as the dynamics of consumer preferences continue to cause shifts in the retail environment and tenant lineups.”

Joe Schlosser, senior vice president, portfolio manager, for Phillips Edison & Company, a strong owner and operator of grocery-anchored shopping centers, agrees that his company’s goal in the Northeast is not to develop, but to aggressively acquire in order to create profitable environments for its centers’ tenants.

“Well-capitalized real estate companies with strong operating platforms have an advantage as we’re often able to acquire shopping centers at a discount to replacement cost and leverage our platform to create incremental value on existing assets,” he explained.

Levin Management president Matt Harding said grocery-anchored centers remain a fertile environment due to a healthy infusion of anchors: “Following the recent A&P bankruptcy and liquidation, a growing diversification in grocery tenants has taken place in the Northeast. After several years with only a handful of expanding operators, we are seeing significant growth among chains like ShopRite, Acme, Trader Joe’s and other specialty and ethnic grocers.”

Established centers in the region have slowly but steadily evolved into lifestyle centers, augmented by entertainment, fitness and dining options that have become part of the typical merchandising plans of the large mixed-use developments rising up in more expansive areas of the country. Mixed-use projects do get built in the Northeast, but vertically.

“In Towson, Md., we’re taking an old shopping center and building retail around a 14-story residential tower,” Goldberg said.

“Entertainment offerings are moving beyond movie theaters to also include bowling alleys and miniature golf,” Coradino said. “At Plymouth Meeting Mall north of Philadelphia, we are opening a Legoland Discovery Center which will appeal to families with younger children, and at the same mall we find Dave & Buster’s, a full-service restaurant and modern gaming arcade, to be popular among young adults and families with teenagers.”

Schlosser added: “The rationale is to generate additional foot traffic by creating a social destination. And, we’ve done some of this across our portfolio.”

Fitness centers, especially, have become a highly active category over the last 24 months, according to Harding.

“We have secured seven fitness chain leases totaling 113,000 sq. ft. in our Northeast portfolio over that two-year time frame,” Harding said. “In a sense, the rise of gym tenants at retail properties was a precursor to a larger trend. Today, many shopping centers are transitioning from places where consumers go simply to buy goods and services. Now they visit to enjoy recreational opportunities and engage in community.”

And that trend, in turn, has spawned a co-tenancy trend of retailers whose offerings mesh with healthy lifestyles, if not merely with the demographic groups that are seeking them out.

“Things are now going almost in reverse,” Goldberg said. “In the past, it was soft goods driving everything else. But now we find gyms and specialty fitness centers like yoga and Pilates studios leading the lifestyle themes of centers, followed by the soft goods retailers that want to be near them.”

Because fitness centers tend to draw a younger crowd, especially during evening hours, on-trend dining and entertainment concepts are among the categories seeking adjacency to them.

“Both millennials and baby boomer empty nesters are interested in more culturally relevant experiences,” said Ken Marshall, head of retail at Olshan Properties. “We are seeing a diverse group of tenants that combine both dining and entertainment becoming a greater driver of traffic at many of our venues.”

“Theater chains like Alamo Drafthouse and iPic are leading this movement, but Dave & Busters and Top Golf have business models that take advantage of this trend too. Most, if not all, of these tenants are working on their Northeast expansion strategies,” he said.

As with new, redeveloped centers across the land, the socialization movement is a reaction to heavy competition from internet retailers.

“Retailers in the Northeast are competing in an environment marked by slowing demand at bricks-and-mortar stores as increased competition from online shopping continues to advance,” Marshall said. “For our portfolio of nearly 3.4 million sq. ft. in the region, we continually evaluate tenant mix and redevelopment opportunities to provide a retail environment that remains relevant to retailers, restaurants and the consumer in these evolutionary times.”

In Levin Management’s mid-year tenant poll, nearly 40% of participants indicated they have adapted their business models in response to e-commerce growth. Many say they are adding in-store services and incentives, incorporating in-store pickup and return options for purchases made online and increasing coordination with their online operations. Others are altering store inventory, introducing experiential aspects, or changing their store prototypes.

And in a region containing four of the top 10 U.S. markets and known for retail innovation, first-to-market tenants are being courted by developers. In lower Manhattan, at Howard Hughes Corporation’s redevelopment of the Seaport District, that means recruiting retailers from abroad.

“We’re working to create a Seaport District with a diverse set of offerings for all demographics,” Howard Hughes executive VP Saul Scherl said. “We are welcoming retailers that are entering the U.S. market for the first time and continue to seek out new brands with a unique retail perspective. This includes 10 Corso Como, a Milan-based lifestyle brand with outposts in Shanghai, Seoul and Beijing, which will open a 13,000-sq.-ft. store in this historic neighborhood.”

Apparently, it’s not difficult to find global retailers looking to expand in the U.S. market and plant their flags in the most densely populated, compactly sized region.

“Demand for prime space in the