Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Thursday, November 19, 2015

Trends in retail rents for "globally-relevant" shopping districts

Time to ShopAP photo.

Retail rents came up recently with regard to the rehabilitation of the Takoma Theatre in DC, which was recently purchased by a property development company.

With regard to the theater building, they are seeking what I would call "high rents," at rates that are in line with other districts in the city, but not in Takoma where the retail trade area is smaller (e.g., 1/3 the size of Capitol Hill or 1/6 the size of Foggy Bottom or 14th Street) and therefore so is the revenue potential of the space.

(I have been thinking about this because some residents are "campaigning" for a Trader Joe's.  I said that's great, but given the realities of the retail trade area, why not expend your energies on something achievable, like the Streets upscale market.  They have one in Arlington and on 14th Street in DC, and recently they opened a store in Downtown Baltimore.  See "Streets Market & Cafe opens specialty grocer in downtown," Baltimore Sun.)

Economically justifiable rents are supposed to be based on the revenue generating capacity of the building.  The rule of thumb for retailers is that they should pay no more than 4% to 10% of their gross revenue in rent, although restauranteurs pay higher, up to 15% of gross revenue in rent, because of higher volume.

But for the most part, because the city's central business district and certain other submarkets (Georgetown, Chevy Chase) are part of the international-national property market, the city's commercial real estate is priced upward in all districts, even if they are not national or globally relevant submarkets, but decidedly local, with locally based property owners, businesses, and customers.

I have scads of entries on this general topic, such as:

-- Cleveland Park Retail: My Off-hand evaluation, the rents are too high (2009)
-- Commercial retail rents #2 (2009)
-- Problematic outcomes as real estate investment trusts buy more "high street" retail real estate (2015)
-- Dupont Circle's changing retail environment covered in today's Post (2006)
-- Globalization of the DC real estate market catches neighborhood commercial districts up in the wake (2006)
-- Retail Action Strategy (2007)
-- Franchises sucking the local flavor out of L.A. (2007)
-- Retail and authenticity: continued (2007)

Understanding comes down to understanding these issues at a variety of scales.  But the reason that places languish usually comes down to a disconnect or incongruence between property owners and likely tenants, as well as how the city's property tax assessment methodology overprices commercial real estate outside of the "global" submarkets.

Though increasingly, like in Cleveland Park, Dupont Circle, Chevy Chase, and elsewhere, national firms have entered those submarkets, which leads to a steady repricing upwards of the real estate.

To get a sense of the scale of the highest value commercial districts around the world, Cushman Wakefield's regular report on this market, Main Streets Across the World, is a good source of info.

Outside of New York City, the highest priced commercial districts are outside the US.  Within the US, outside of New York City, Boston, Chicago, Philadelphia, San Diego, San Francisco, Seattle, South Florida, and DC have the highest priced markets.

In DC, the highest priced retail space is in Penn Quarter, at $220/s.f., which surprised me, but I guess we have to admit that the Verizon Center as an anchor makes a big difference.

Dupont Circle, Georgetown, and Chevy Chase are the other submarkets rounding out the list.

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At 11:35 AM, Anonymous Anonymous said...

your contention in all of this is highly astute and shows the DC city government as incredibly negligent and basically working totally against all local interests by super taxing these outlier business areas - they are shooting themselves in the foot because they are losing revenue that lower taxes in these areas would bring instead they get abandoned or empty storefronts because of the greedy hands of the Ward 9 master controllers in the DC government who refuse to be flexible or to see this clearly as you have

At 9:19 AM, Anonymous charlie said...

Not sure how much the government can help here. Targeting tax cuts is a tricky business.

The mandate that financiers want national chains in new buildings isn't helping. I do think the government can do something about that.

I don't know if it is strong sub-market of local expertise, but JPB is doing a good job in North Shaw/U st on retail.

At 10:32 AM, Blogger Richard Layman said...

I have been meaning to write a piece on the post elections, and one of the elements would be Measure J in SF, where they voted in favor of supports, to both proprietors and property owners, for "long time retail businesses" in the face of rent escalation.

I am not really in favor of such a measure. I think the issue is to support retail generally, not only longevity. To wit, why shouldn't a retailer like the Willow boutique on Upshur St. NW be equally able to access such supports?

It's tough on all independent retailers, not just ones who started their business years ago.

Similarly, I wrote about Tommy Wells' screw up on this verysame point in testimony to the tax revision committee.

He made the problem very personalized, when there are some structural issues that should be addressed, to wit how small properties are valued for tax purposes, and how this leads to pricing retail space beyond economically reasonable rates.

2. But I can't claim to have universal solutions, other than that.

The other way would be to split off the retail spaces for tax purposes from the rest of a building, e.g., office buildings in the central business district are valued for the office space, and that results in overpricing of taxes and common area maintenance and other charges on the retail portion of the building.

And chains have other benefits, such as lodging their brand, logos and related intellectual property in a separate company, which each individual store "pays royalties to" in order to reduces their taxable income.

There is the REIT issue too, splitting off the property from the business, although in weaker economies this can destroy the retail business.

And chains can demand markdown support (this is the case for sellers of apparel), which typically isn't available to a single store, etc.

3. wrt JBG, I don't know what to say. You see developers at conferences saying that they have to treat retail differently than they used to, support individual businesses, etc., but other than what you're remarking on, and "market type buildings" like Union Market, I haven't seen much evidence of it by the big property firms.

Oh, Douglas Development is doing it with their Ivy City venture.

These are the exceptions that prove the rule that retailers shouldn't expect much in the way of support for independent ventures on the part of large property owners.

Generally, and I have been meaning to read a few books on "place management" and do a review, I argue that what drives it isn't helping the retailer but providing activation benefits for the property owner, and usually--the Douglas Development Ivy City venture is an exception--the retailers aren't getting much back from the property owner in terms of reduced rents, so they are expected to pay for the privilege of activating the space.

There are a couple of exceptions in Anaheim, that I haven't been to (well to some of their ventures, but not the signature ones), which have led at least one other property owner to do similar kinds of innovative support of independent retail in what would normally be a traditional retail setting. Hopefully, I'll get a chance to explore those ventures next month.

WRT Union Market, my understanding is that the average vendor isn't profitable, that they aren't getting rent reductions, although the property owner is proving to be flexible on rent payments (partial and/or late).

Probably the restaurants like Rappahannock are making money, but not many of the food vendors.

At 4:20 PM, Anonymous Anonymous said...

Question for Charlie and Richard:
Speaking of REITs, am I missing something with this proposal to refund ballpark fees for the below (don't know who the beneficiary is)?

Bill 21-359, the "Ballpark Fee Overpayment Act of 2015" would amend Chapter 27B of Title 47 of the District of Columbia Official Code to provide for the refund of overpaid ballpark fees by an entity that is directly or indirectly majority owned by a Real Estate Investment Trust.

At 11:40 AM, Blogger Richard Layman said...

wow. to answer this we need to know who the beneficiary is.

the problem with the ballpark tax is that certain businesses have high revenue but low profits. (E.g., when Curtis Chevrolet was still extant, they said that cars cost a lot and they'd have to pay a high tax on seemingly high revenue even though the actual net profits were comparatively low on such sales.)

... this is an issue with grocery stores too, which on average have a net profit of under 5% but high sales.

At 2:26 PM, Anonymous Anonymous said...

Answered my own question... turns out it is to ameliorate a situation of double taxation on the properties subject to the ballpark fee. Would be interesting to know what properties that includes.

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