Exclusive Content: Retail Gateways
While the phrase gateway markets can be a little bit nebulous – and different people have different ideas about the exact list of cities that qualify – the term is well understood to refer to large mature cities with a track record of population growth, great demographics and a strong and diverse economic foundation.
Gateway markets frequently have thriving energy, technology or health care industries and always have great transportation networks. The most commonly cited gateway markets are New York, Los Angeles, Washington, D.C., Chicago, San Francisco and Houston, with cities like Boston, Philadelphia, Dallas, Phoenix, Atlanta, Miami and Seattle also making the list in the eyes of many real estate professionals.
While gateway cities have always occupied a place of prominence on the commercial development landscape, they have become even more significant in the wake of the recession in the late 2000s. Retail and mixed-use development in gateway communities has spiked, and prime opportunities have become more coveted, even as the cost of doing business in those cities has soared. In a sense, this focus on prime markets can be thought of as a response to the uncertainty and economic damage wrought by the recession: these are cities that are, to steal a phrase from the financial sector “too big and too strong to fail.” Everyone got hurt in the recession, but Gateway cities were comparatively resilient, managing to largely avoid the longer term challenges experienced in many secondary and fringe markets.
Are development efforts focused more on gateway markets because owners, investors, developers and retailers are less tolerant of risk? That is definitely a big part of it. But, on another level, good real estate is good real estate, and these are flourishing markets that are still experiencing continued economic growth. The strength and appeal of that growth is alluring enough to overcome the higher cost of entry and (often dramatically higher) property prices, rental rates and operational costs. It also affords developers and retailers the ability to deploy more creative solutions than they have in the past. The Related Group’s Whole Foods-anchored mixed-use development in downtown Atlanta, which includes a 70,000-sq.-ft. Whole Foods supermarket below 390 residential units, is an example of the kind of project that would have been a pipe dream ten years ago. Gateway Cities are allowing retailers and developers to be more creative, simply because the strong economics provide the necessary margins to support these efforts. To some extent, the vigorous and rapidly evolving mixed-use urban development trend – which includes some of the industry’s most ambitious and innovative new concepts – is the result of this industry-wide attraction to gateway cities.
For various reasons ranging from economic security to dynamic new opportunities, the gap between gateway cities and peripheral markets is perhaps larger than ever. People want to be in the action, and that does not just apply to retailers and real estate industry professionals: residential growth in the urban core is growing rapidly, as more and more people move back to the city.
So, what is the downstream industry impact of this pervasive preference for gateway markets? Certainly one place where the influence is being felt is in retailers’ willingness to experiment with new concepts and store formats. We are seeing a lot of non-traditional retailers making significant concessions and demonstrating a level of flexibility that was close to unheard of just a few years ago: home improvement stores are utilizing structured parking and general merchandisers are reducing their store sizes by up to 80%.
In terms of the big picture for retailers, it is clear that the industry is generally less Wall Street-driven, and is responding more to market-driven demand. With respect to growth, retailers are more focused on operations and locations and less confined by predetermined physical footprints — spending more time on how to make more money with fewer stores. The emphasis is not just on the next store, it is focused on finding the right opportunity in the right location. The structural and personnel dynamics have changed behind the scenes, as well. The head of real estate at large national retailers often wielded enormous influence in the early to mid 2000s. It was not unheard of for professionals in that space to report directly to the president of the company. Today, those same individuals are often further down in the pecking order. Real estate is not wagging the dog anymore: finance and merchandising are ascendant in this new retail mindset.
As a consequence, store performance is monitored much more carefully. Every retailer today looks very closely at same-store sales, and new opportunities and potential new stores are evaluated holistically – in the context of the impact they might have on existing locations. For brokers, agents and advisors, the changing retail environment and shifting priorities means that they need to be ahead of the game with regard to emerging trends. The most successful brokers are moving away from pure demographic formulas and have the insight and instincts needed to develop a much more nuanced view of the marketplace. They have a finger on the pulse of the industry, and they understand the economic and cultural forces shaping the market.
Gateway cities, of course, are not the only opportunities out there. There are some attractive and exciting plays in secondary and tertiary markets, as well. There is success to be realized for retailers and developers willing to be more creative and take a little more risk. But for now, and for the foreseeable future, gateway cities remain in a place of demand and prominence. These are resilient markets that may go up and down, but ultimately – even in the event of another recession – are not going anywhere.