Urban Markets: Tricky, But Lucrative

By Lawrence Anderson
Globe St. Retail
Feb. 7, 2005

After decades of urban flight, people are moving back to the cities. Nowhere is this more apparent than in New Jersey, where the state government’s anti-sprawl measures have been a key factor in the heightened appeal of urban areas. Suddenly, older blue-collar towns, especially waterfront communities like Jersey City and Hoboken, have become crowded with upwardly mobile young singles and families.

Of course, major retailers want to join in this expanding urban focus to take advantage of the condensed consumer populations. However, those looking to plant their large, prototypical footprints in downtown and first-tier suburban locations are faced with extraordinary challenges. Skyrocketing costs, lack of available product and in some cases, public opposition, are forcing retailers to embrace flexibility and non-traditional opportunities.

As high demand for housing continues to grow in New Jersey’s crowded markets, a great deal of vertical development is taking place on sites with limited footprints. These new apartment blocks often include first-story retail, a trend that bodes well for smaller retailers like shoe stores, clothing boutiques, banks, pharmacies and other “street retail” tenants. But as these new neighborhoods take shape, they hold little opportunity for larger retail users.

Supermarkets are a case in point. One of the most actively expanding retail sectors, they’re struggling to find opportunities in urban areas and well-populated suburbs. Clearly, a new store can generate the most sales in densely populated areas, but rising property values are making it difficult to achieve necessary hurdle rates. Also, a typical American supermarket today averages 44,000 sf, and many are two or three times that size. The chains are forced to pass by the most lucrative neighborhoods because there is no adequate space for them. Thus, consumers in many such markets must travel great distances to shop for food.

Megastores also want to expand in urban markets. These 100,000-sf-plus giants offer the greatest economies of scale for retailers and are competing successfully against suburban neighborhood shopping centers. Yet in addition to the economic and physical constraints felt by supermarkets, megastores face the growing challenge of public opposition.

The trend in New Jersey, which mirrors other states across the country, is to control the size of these biggest boxes. Today, many towns have zoning laws that ban new stores exceeding 100,000 sf. Research also shows that nearly half of the consumer population is unhappy with the experience of shopping in large stores, although sales volumes remain high.

So is there an answer for larger retailers and retail developers looking to take advantage of the urban craze? Adaptive reuse is the most viable, if not the only, solution. Renovating old structures into something new and different, assembling smaller retail units into larger ones, or finding old industrial space that has served its useful life effectively creates new retail space in markets where no space is available.

While such sites are relatively easy to find, successful adaptations require cooperation on part of the municipality and may necessitate a different mindset for the retailer. The good news is that local governments are recognizing the need for retail to support their growing residential populations, while at the same time adding to the tax rolls. In many densely populated northern New Jersey towns, master plans are being revisited and adjusted with new zoning based on usage and demand.

Again, waterfront communities are leading this transformation. They’re recapturing their empty, polluted former industrial land and transforming it into extremely viable development areas. Hoboken and Jersey City succeeded in doing this in the 1990s, reflecting that “highest and best use” is still the mantra of real estate. In just one example out of many, ShopRite has opened a location on a former industrial property in Jersey City. The store is doing phenomenal business because the area surrounding the property now offers a growing and wealthy residential population.

New product created by adaptive reuse can effectively create retail spaces large enough for substantial supermarkets or even megastores. Still, the push to control or even outlaw the big box is growing. This is prompting retailers to rethink their traditional prototypes. Some megastore operators have come up with a 99,000-sf concept in response to local legislation banning stores of 100,000 sf or more, and Wal-Mart has even come up with a 66,000-sf design that can be applied to urban markets.

Others, like Home Depot, are becoming even more creative. Across the river in Manhattan’s Chelsea/Flatiron District, the company has opened a multi-level store. The cost to create this store was greater than building in the suburbs, but with a population of 547,092 and an average household income of $101,947 within two miles, the return promises to be equally great. Home Depot's commitment to securing market share in Manhattan has been punctuated by a second, similar location now open on Third Avenue, across from Bloomingdale’s in the upper Fifties.

The bottom line is that retailers are being forced to adapt as much as they can. In addition to the physical concessions, they must also pay attention to consumer preference. They must play to the desire for a more intimate shopping experience by creating an atmosphere and customer care approach that reflects specialized, personal service—even in an uncomfortably large store.