A superb panel of New York City retail real estate mavens spoke to an engaged group of WCNY members in the real estate profession. Nick Petkoff, WG’02, president of ANG investment partners, and Vice Chair of the Wharton Real Estate Investment Group (WREI), organized the event held this Autumn in midtown Manhattan. David Robinov, ENG’86, W’86, moderated the panel. David is Managing Director of investment sales at Ackman Ziff, and has sold or financed such high-profile properties as the Westchester, Stamford Town Center and Bergdorf Goodman’s flagship store in New York City.
The panelists represented the three key players in a retail real estate transaction:
• Broker — Chase Welles, Partner at SCG Retail, represents Whole Foods Market, Kohl’s and LA Fitness, but also leases close to a million square feet of retail space.
• Landlord — Scott Auster, Managing Director at Grid Properties, developed Harlem Square in Manhattan and is now planning Boulevard, a 230,000-squarefoot retail destination in downtown White Plains, New York.
• Tenant — Dan Shallit, Director of Store Development of Starbucks Coffee Co., has opened over 100 Starbucks locations, and a variety of Starbucks concepts. The questions and answers delved into key issues faced by retailers and developers today.
In Manhattan, where retail rates can be astronomical, say $2,000 per square foot, do retailers write off high rents as a marketing expense?
Chase: I’ve never heard a retailer say that it doesn’t need to make money on its location. But when you have 35 million, 53 million people going through a subway stop and they’re all looking at your store, then I do try to convince them that they could allocate some of the dollars to marketing.
Scott: Tenants who come into our projects have to make money. You see brand value in certain particular locations, but I don’t think there’s a retail metric behind that.
Dan: We have a Starbucks in Times Square. When we make a decision to move forward with a site, we call it our decision logic — foremost, we look to see if it is profitable. So, as long as the store is making money, maybe it’s not going to make the same money as a project up in a regular suburban market, but we will accept the low return, understanding that there’s a secondary value — whether it is marketing or good community outreach. Also, we look at where we can tell a story for our company. We were the first major retailer to open at 125th Street, in Harlem, 15 years ago, and it sent a message. What’s funny is that, with Whole Foods opening directly across the street from Starbucks, in Harlem, we probably can’t afford to stay there, because the rents have gone so far up.
Who makes those secondary decisions?
Dan: The development manager provides the first analysis. In the hierarchy of things at Starbucks, there’s a director, which is my position, and there is a vice president who usually covers more than three major metropolitan areas. So my vice president covers Boston, Chicago and New York. We recently signed a lease on Rockefeller Center on 46th Street, between Fifth and Sixth Avenues. The development manager pointed to our sign on the building and said, “This sign is worth money, because it will be on the Today Show every morning.” I remember arguing in my head, with the inner accountant saying, “I can’t put that money in the bank,” and my director side jumping in and saying, “You’re right, but you’ve got to think about the company as a whole and understand that it benefits us to be on the Today Show every morning. And yes, while your store doesn’t benefit from it, the company does.”
Looking back, what have you guys missed? Do you ever say, “We should have built there”?
Scott: I think when we build large complicated urban retail projects, like the ones that we’ve had, there’s such a significant development risk associated with that, so you really have to know your market at a very micro level. And that’s hard to do over a bunch of different areas. In Harlem, for example, my boss, Jude Greenwald, when he took tenants around trying to convince them to locate in Harlem, he knew exactly which blocks with the brownstones to drive in on and which blocks, with the boarded-up buildings, to avoid. What I think you might miss in all that is that we should have acquired more assets in those markets. We spend a lot of time focused on getting this or that project built and realized later that it was going to improve the area around us. That’s something we are doing, going forward, even on our current projects.
Do you think that there will be significant appreciation in retail in that area?
Scott: It depends on the exact location. On the one side, there is an existing, very successful retail project. So we’re sort of taking what’s there already and trying to fill a hole in that type of retail that exists. On the other side, there is a lot of opportunity, because it’s sort of a forgotten area downtown, and we own a five-acre site. There are a lot of small commercial buildings across the street from us, some vacant and some underutilized buildings in either direction.
How do you know a market is saturated? Have you ever been to a Starbucks and not waited in line? When did you guys know that you had enough branches?
Dan: For us, it is a fine line. Coffee consumption in America has grown year over year since Starbucks has entered the market. So, premier coffee consumption has gone up each year. So where we could have been sort of maxed out on our capacity in 1996, fast forward five years, and the market is expanding. So the best example here in Manhattan is 53rd Street and Sixth Avenue. We had the opportunity to locate on the northeast corner and the southwest corner. Everybody in the company was making tons of jokes: “Don’t they know we are them?” But this was a big moment for us to take this chance. We negotiated the right to leave the first store if it didn’t work out, and just keep the second store. Behold, we opened up the first store, and we opened up the second location and beat annual projections within six months.
Wasn’t there cannibalization?
Dan: There was some. However, demand is great enough that we lose more because people don’t want to wait in line. Whole Foods developed another concept called ‘365’, that is supposed to be a slightly lower-price version. Is the company doing that so there won’t be too many Whole Foods stores out there? Is there room for competition in the market?
Chase: 365 is designed to appeal to a younger customer than the typical Whole Foods customer. It’s a smaller footprint; the product is displayed much more informally; there is less prepared food; and the design of the stores is uniform, with half the development costs per square foot.
Interestingly, if Whole Foods has excess property, it can sublease that to Trader Joe’s, and it won’t have a material effect on Whole Foods’ sales.
There seem to be more alternatives to Starbucks — Blue Bottle Coffee, Café Grumpy, Juice. Is it just that people are buying much more coffee?
Dan: There’s room for competition in any market that we’re in. Starbucks was the premier coffee provider, so everybody used to think of it as the $5 cup of coffee. Now other retailers are saying, “Well, Starbucks is becoming ubiquitous. We can open up in any city and be more premier than Starbucks. Most of them are more expensive than Starbucks on a per-cup-of-coffee basis. They’ve tried to take that premier market share. People don’t want to shop at Starbucks every day. So these companies you’ve mentioned have filled that void.
With retail sales continuing to migrate online and the demise of stores, how do you respond as a developer?
Scott: Our biggest concern is designing a project that’s flexible because we are now aware that these tenants are evolving through that. Does that mean they’re going to stay that way? Does that mean five, 10 years from now, they’re going to be totally online? But while there is still demand, we’re trying to be very careful about developing projects so that they can be reconfigured. If you have a store that is 350-feet deep, and that store goes out of business, even if you have tenants that want to have small stores there, you can’t reconfigure that box. So, flexibility of design is essential.
Retailers are beginning to say, “I used to have a store in this mall that made $5 million in sales. Now, $2 million in sales occur online in this trade area.” Now, when I’m negotiating with that tenant, and that tenant says, “I do only $3 million in this store, so I can pay you only this much in rent,” which is a lot less than the rent I got when that tenant was making $5 million in sales. Then I say, “If you close this store, you’re going to lose the $2 million you’re making online in this trade area, because customers won’t see you when they drive by on their way home, or they won’t be able to pick it up at your store. So, I need to get rent on some of that $2 million as well.” That’s a bridge we’re going to have to cross because I can’t make the net I need, at the volume that their stores are producing.