On Space
September 18, 2020
Happy September! It feels like Autumn already in Atlanta, with acorns on the ground and temperatures in the mid-70s. My daughters are back in school and busy playing softball and lacrosse. Slowly and hesitantly, life seems to be somewhere on the long road back to normal.
You might remember that I’m a Dallas Texas native. The musician Steve Miller is too, and since his birthday is in a couple of weeks I thought we’d focus this fungibility note on space in honor of the original Space Cowboy*
* I have a complicated relationship with Steve Miller. It involves high school and my first car and getting engaged and a lot of destroyed personal property. It’s too long a story to write about here but I’ll tell you about it the next time I see you.
I went back to 1987 to talk about credit. I referenced a 1995 Arthur C Clarke documentary in the note on time. Today let’s go back to 1980 but with a quick detour first to Memorial Day, 1977. Book Of Dreams was the #1 album in the country. The Rouse Company held an attendance-shattering summer kickoff event at their new Quincy Festival Market. And the two biggest movies of the year premiered: Star Wars and Smokey & The Bandit.
As hard as it is to get your head around lightsabers and Jedis, did you ever wonder why it was so difficult for Snowman and the Bandit to drive from Atlanta to Texarkana and back again in 24 hours? Sure you gotta leave time to get gas and load all that Coors. My friend Philip Hight would tell you the trip isn’t complete without a Diablo Sandwich and a Dr Pepper. But even at 55 mph, driving 1,320 miles in 24 hours isn’t that hard. Unless, of course, it happens to be a federal crime for a non-union independent truck driver to make an single shipment of beer across state lines to a non-registered recipient. Which, in 1977, it actually was.
But in 1980 Jimmy Carter signed the Motor Carrier Regulatory Reform and Modernization Act. This largely forgotten legislation was one of the most important achievements in the decades-long effort to deregulate the American economy. It eliminated price fixing in long-haul trucking, curtailed the Teamsters and removed minimum haulage contracts. Supply chains got more efficient and consumer prices dropped dramatically.
Laissez Faire Hall Of Fame
The impact on retail was revolutionary. Grocery stores doubled in size. Big boxes multiplied and grew. “Superstores,” “warehouse clubs,” and “category killers,” entered the retail vocabulary. Wal-Mart didn’t kill Main Street: the Motor Carrier Act did.
Prior to this retail development had largely been about both convenience and experience. Department stores were downtown because that’s where the streetcars went. Malls were built to be both engaging and efficient. But as tenants got bigger and more numerous the retail development world began to split into two camps: Experience and Expedience. Expedience-based development had the benefit of being highly replicable. It was prefabricated, process-oriented and most of all quantifiable: parking counts and lease durations and credit ratings and vehicles per day. Power Centers became a thing, the hyper-efficient spawn of “credit” and time and space.
In response arose developers who focused more on qualities than quantities, the OG of which was James Rouse with those Festival Marketplaces (ahh, saltwater taffy). Lifestyle centers, entertainment districts and High Street retail were the Festivals’ subsequent offshoots. But even though those developers were charting a new path of unique and enjoyable retail places they were being forced to play the same numbers game of the Expedience finance regime: big anchors and “credit” tenants. Williamses Sonoma and Bananas Republic.
Experiential
Now covid and Amazon are doing to big national retailers what the Motor Carrier Act did to small local ones. We’ve been saying for twenty years we’ve got too much retail space but the more intractable problem is that most of the individual spaces we’ve got are way too big. The big retailers are dying and the ones that survive are going to drastically reduce their store counts, and I haven’t seen a simple solution for what to do with the many boxes they’re leaving behind [insert Sorry emoji here].
Food halls exploded over the last few years in part because they were one answer. They can fail on a number of fronts but when done right they are a shining example of Fungible Retail, which instead of being based on permanence is actually based on impermanence. Why do you care who the hamburger guy is if he does $1,500 a foot in sales? Better yet, if he retires to The Villages on his burger wealth there will be a dozen good operators lined up to take his place, and most will pay you more in rent to do so.
Experience-based retail should aspire to be truly interchangeable. Experience needs constant tinkering. This means shorter leases, smaller spaces, no TI, no credit, constantly rotating tenant lineups, and lots of events. Experience-based retail is like a shark. To the plus side, sharks are badass. On the negative side of the ledger, if they stop swimming they die. But constant swimming is what you sign up for when you make the move to place making. Think about what great shape you’ll be in.
There’s a reason it’s Shark Week and not Supermarket Sweep Week
Small spaces, short leases, turnkey build-outs and Taco Tuesdays . . . Fungible Retail sounds a lot like apartments. In the next note I’ll tell you why the apartment and hotel guys ought to be kicking all of our butts in the brave new world of retail.
The Rules of Fungible Retail: I’d love your comments and ideas here. This is by no means an exhaustive list— and Fungible Retail is not a panacea— but in the years to come I don’t see many better options.
The first step is admitting we have a problem with credit. There is no such thing as retail tenant credit. Turns out there never was.
Make room for events that last a day or two and for pop-ups that last between two days and three months.
Make the rest of your leases one to five years, and of varying lengths.
Be critical: if something isn’t working, you need to switch it out. If something is tired, even if it’s still profitable: change it. Patrons are going to lose interest if your tenant lineup doesn’t evolve.
Find ways to share space: a breakfast-lunch restaurant can be turned over to a bar after 5p. In pre-covid New York we saw dinner restaurants serve as daytime office space.
Shorter leases mean more upfront landlord costs. But they should also mean more income: lean heavily on percentage-rent deals, sponsorships, and swag.
Make your spaces small. Many should be less than 1,000 sf.
Smaller spaces mean you can cram more of them into one place, and a wider variety of stores is more appealing to the patron.
Projects still need anchors, but not 40,000 sf ones. A park can be an anchor. The Atlanta Beltline is one, and it’s just a fancy sidewalk.
No more than 1/3 of your tenants should be national chains.
We’ve got too much retail space in this country but paradoxically it’s hard to make a great place without a lot of it in one spot.
I HATE IT when people say that “technology is the answer” but in this case investing in tech (specifically, POS systems for retailers and insane amounts of wifi for patrons) is a must. It will help you swap out concepts and move them around with greater confidence.
What We’re Listening To: while we’re on the subject of Dallas rock musicians, let’s talk about the Old 97s. You may not know them, but you should. Their Twelfth Album dropped last week, and it is more of the rockabilly goodness they’ve been giving us for over twenty years. If you don’t like rockabilly. . . what’s wrong with you? Everybody like rockabilly. Try it out.
What We’re Cooking: I’m still not happy with my cheese enchiladas with red chili gravy, and at some point this summer I was bouncing around the interweb looking for help and discovered De Mi Rancho A Tu Cocina. Doña Angela is the abuelita you wish you had, and not just because she cooks everything with ease on a wood-fired griddle. The videos are subtitled, so even if your Spanish is rusty they’re easy to follow.
What We’re Watching: the second season of Taco Chronicles just debuted on Netflix. I defy you to find a food more perfect than a taco. This season they cover a lot of ground, from suadero to “American” tacos to goat birria, which used to be hard to find in the states but is now officially A Thing. If you like watching people who are passionate about food, you’ll love this show.
As always, thanks for reading! If you’ve enjoyed it please forward to a friend.
I run a retail development and consulting company in Atlanta, and write (semi-) regularly on issues facing the retail real estate industry. If you’re getting this for the first time and want to sign up, just click here.
If you’ve got a retail project that could use some new thinking, or just some thoughts on Fungible Retail, we’d love to hear from you.
Cheers,
G