Retailers race toward city locations and smaller stores

Last September, the upscale grocer Whole Foods opened a two-story outlet in a 13-story building at the edge of the George Washington University campus, just steps from the Washington Metro system’s Foggy Bottom subway station.

In the street level of the 36,000 sq. ft. store, customers find prepared foods, a café, bakery, and flowers. Take the escalator, stairs, or elevator to the basement level and they reach the other half of the operation: groceries, produce, meats, poultry, fish, cheese, wine, and beer.

A two-story food store? This is a prime example what Robert Gibbs says about retailers these days: They’re heading to the cities and they’re often willing to break all the rules they had previously imposed on their operations.

Multi-story layouts. Smaller footprints. Parking on the roof or in the basement. Lower ceilings (when using certain older buildings). Those are all possibilities. The store in Foggy Bottom—in a building containing 335 apartments above, offers free parking for 90 minutes, in an underground garage. Many of the customers don’t need it; they arrive on foot or bike or public transit. 

The collapse of American homebuilding that began in 2007, and the global financial crisis of 2008, have impelled retailers to look for different ways of expanding their business.

Gibbs, leader of Gibbs Planning Group in Birmingham, Michigan, says that for years, developers of retail outlets “would build at the edge of sprawl, a little ahead of the market”—confident that as new residential subdivisions filled up, there would be enough customers to support the stores.

But in many outlying places, says Gibbs, “after 2007, those homes never got built. Retailers were left with a large number of underperforming stores.”

Publicly traded retail companies typically need to open new stores continually, to demonstrate growth and keep their stock price up. With the distant suburbs having languished for five straight years, Gibbs says a chief way of growing, in current conditions, is to “open where people are [already] living—in city centers and first- or second-ring suburbs.” The fact that population is rising in many downtowns and favorably situated urban neighborhoods further encourages retailers to enter the cities. 

Advertising Age reported in March that Target “will open a series of smaller-format, supermarket-size City Targets in an effort to expand into urban centers such as San Francisco, Seattle and New York.” The CEO of Rona, a Canadian home improvement chain, told The Globe and Mail in February that the big-box store “is not the right concept for the future. ... Now the customers demand something different.”

Kohl’s, a discount department store operator, has switched mainly to stores with of about 60,000 square feet—one-third smaller than its previous typical size. Walmart is rolling out “neighborhood” grocery stores with 35,000 to 40,000 square feet and “a lot of glass,” Gibbs says. “Discount retailers that would pay 7 to 8 percent of gross sales as rent are [now] willing to pay more,” he observes. “The metrics have changed.”

“My gut feeling,” says Gibbs, “is that it’s likely that more than half of the new stores in the next five years will be in urban centers or inner-ring suburbs.” That would amount to a major shift. Prior to the economic crisis, he estimates that probably no more than five percent of new stores in the US opened in cities and close-in suburbs.

Calculating the market

To validate their urban strategies, some retailers are using a broadened set of methods to determine the size and pocketbook of the market. There are efforts to estimate how much various kinds of workers—from lawyers to government employees—spend. “In most cases, each downtown daytime office worker spends about $8,000 per year on retail and restaurants,” Gibbs says. “That equates to each office worker supporting about 25 square feet of retail/restaurants. Each university student spends $4,000 per year on goods, services, restaurants. That’s a lot of money.”

In many cities, and especially in poor or minority neighborhoods, the US Census is thought to have undercounted the population. To overcome that, Social Compact, a 22-year-old nonprofit organization based in Washington, conducts research—and helps others carry out research—aimed at confirming the power of the urban market.

In more than 400 urban communities across the US, Social Compact claims, as of May 2011, to have “quantified more than $16 billion in informal economic income and identified 1.25 million more residents than estimated by traditional sources.”

The organization has produced “DrillDown” reports evaluating the wealth and potential of markets in Detroit, Washington, and elsewhere. One DrillDown report found: “Income density in Detroit exceeds that of the greater metro area.” In other words, although Detroiters may be poorer than suburbanites per capita, the city exceeds the suburbs in income per square mile.

A DrillDown analysis found “sizable unmet demand for retail services in Detroit.“ Grocery “leakage” to the suburbs was estimated to be $200 million—enough spending to support 583,000 additional square feet of grocery stores in the city. The finding helped entice Whole Foods to a building site in Midtown Detroit recently. “The stigma attached to urban markets has changed,” says Alyssa Lee, Social Compact’s president and CEO.

Figures such as utility use—natural gas consumption, for example—are among the unusual data sometimes used to extrapolate how many people live in an urban area. Social Compact’s fundamental goal is to break down barriers to private investment in inner-city neighborhoods. Over a year ago, the organization established a “pre-development investment fund” to spur supermarket development in underserved areas.

In partnership with State Farm, Social Compact assembled $1 million for pre-development loans, with the aim of getting 10 grocery stores opened. “Pre-development is the riskiest capital,” Lee explains. The idea is that the pre-development loan will be paid back when a construction loan is obtained.
The roles of

Government and CNU

Retailers have found that “it takes an additional one to three years to get approved in a city rather than in a suburb or on a farm,” Gibbs says. He worries that many cities are too picky. “A lot of cities are still saying they don’t want anything larger than 5,000 to 10,000 square feet,” he says. “Most cities we run across do not want large department stores unless they’re highbrow, like Nordstrom’s.”

He sees a role for the Congress for New Urbanism: demonstrating that the design and placement of the building are important. CNU could set store size standards for urban retail and then help retailers gain municipal approval by following the standards, Gibbs says. He has been asked to help organize a CNU urban retail task force.

What should municipal governments do? Brent Toderian, former planning director of Vancouver, British Columbia, says that even in his city, which is known for its attention to design and which has 110,000 people living on the downtown peninsula, retailers have often wanted to build stores too large for their settings. “Vancouver’s line,” he says, “is that if you’re not willing to build an urban store, you’re not welcome.” The size should not be overwhelming, and the store should be in “an urban building type.”

As a result of the city’s stance, many stores have been integrated into mixed-use developments, often with housing about retail. Toderian is especially proud of “The Rise,” an infill project by developer Grosvenor Americas on 2.3 acres formerly occupied by a car dealership. The 300,000 sq. ft. development includes 212,000 square feet of retail, ranging from a Home Depot to small shops.
It has “frontage that looks like a main street,” Toderian says, and on top of the retail podium sit 92 live-work condominium apartments. “All of its parking is underground and it’s next to a Canada Line [subway] station,” Toderian emphasizes. “It’s integrated into the urban pattern.”
Encouraging

Corner stores

Another thing that governments can do is help neighborhood-scale retail. As part of an overhaul of Washington’s zoning code, the DC Office of Planning is proposing to allow corner stores of up to 1,200 square feet, and a limited set of other nonresidential uses, in rowhouse zones. The stores would be allowed by right, says Dan Emerine in the Office of Planning, but the city would impose certain conditions—limiting the number of businesses, their size, and their impact on neighbors.

The idea, Emerine says, is to encourage “convenience retail—the small corner grocery where a person can pick up a gallon of milk and some vegetables on the way home.” Convenience retail would also include shoe repair shops and pickup and drop-off locations for dry cleaners. The concept would apply particularly to the interior of residential portions of neighborhoods (the T-4 urban Transect zone).

In some neighborhoods, corner stores “have survived as nonconforming uses for 50 years or more” and are “very popular amenities,” Emerine observes, but if they go out of business and their space remains vacant for three years, they could not be restarted under current zoning rules.

Roughly 37 percent of Washington households have no car. If corner stores proliferate, they would make life better for zero-car or one-car households and they would add to the appeal of the neighborhoods, he says.

The conditions that have been proposed include:

• The store is not within 500 feet of a mixed-use zone (to avoid competing directly with main streets and commercial centers).

• No more than three similar uses are allowed within 500 feet.

• Preference for corner lots. If the store is to be on an interior lot, it must not be new construction and must have been built originally for commercial purposes.

• No commercial uses extending above the ground floor.

• Limited signs.

• Limits on floor area devoted to sale of alcohol.

• No on-site consumption of liquor.

• No cooking or grease traps. Food assembly and reheating would be allowed, as for a deli or coffee shop, but restaurants and fast-food establishments would be excluded.

“We are also proposing a similar set of rules for our apartment zones,” Emerine notes.

“However, in that case, the approach that we’re taking is to allow them by special exception (but without the concentration limitation or the preference for corner lots). In those contexts, it makes more sense to us to have fewer restrictions as to location, but to retain review over individual establishments, due to the potential for greater physical change to the streetscape.”

It’s hoped that hearings on the new zoning code will begin after January 2013, and that the regulations will take effect in early 2014.