The retail industry finds itself at a crossroads of many diverging influences.
While the economy is growing and consumer confidence remains high, retailers must fend off challenges from e-commerce and find ways to differentiate themselves in an intensely competitive market. As well, developers face challenges in identifying retail concepts with staying power given the pace of change in the industry, all while making the financials work in an environment of escalating construction costs.
Those were some of the insights from a panel of retail and real estate industry executives MiBiz convened last month for a roundtable discussion. Participating in the conversation were:
- Melissa Collar, partner at Warner Norcross + Judd LLP in Grand Rapids
- Chris Lampen-Crowell, co-founder of Gazelle Sports, an active lifestyle retailer with locations in Kalamazoo, Grand Rapids, Holland, Northville and Birmingham
- Joe Marogil, principal at Green Cane Property LLC, a commercial real estate developer in Grand Rapids
- Chris Prins, senior associate in Grand Rapids at Colliers International, the brokerage that sponsored the roundtable
Here are some highlights of the discussion.
What is your high-level perspective on the state of the retail industry in West Michigan?
Prins: What I see in the retail market is just lack of inventory in those main retail corridors. We don’t necessarily have another mall popping up, like a RiverTown or a Woodland Mall. That’s no hidden secret. At the end of the day, the big boxes are adapting and changing at times.
Marogil: It’s really tight right now. It’s pretty easy for us to find tenants when we’re looking, but it’s also extremely expensive to build right now, so it doesn’t always make sense. There’s also a conflict. … Although we find tenants who can fill our real estate, sometimes we price them out of business, frankly, and so it’s difficult to make them sustainable. They come in and they want to be in there, but they might not last.
Lampen-Crowell: I’ve been in business for 34 years. From the 30,000-foot view, retail’s definitely undergoing a major transformation … over the last 10 years. It had accelerated in the last five years for a lot of reasons. Number one reason, obviously, is just online, Amazon’s reach and consumers’ behavior, and then the changing generations of what people expect with technology and retail experience.
Collar: We’re in a time of transition and creating a new framework for what retail looks like in today’s market. We still need the land. It doesn’t matter whether it’s the actual retail space or it’s the distribution system. Finding that correct balance between those two is one of the great challenges that retailers are seeing.
What’s has been changing the business models for retailers in the last few years?
Lampen-Crowell: Almost all retail has to be looking at a brick and mortar experience as very important. You have e-retailers like the Warby Parkers and even Amazon coming into the brick-and-mortar experiential marketplace. But then you have brick and mortar that needs to move into online. … Retailers primarily love product and love a category of selling something they love, and that was their experience. You still want to go into a store where people love what they do and love the products that they’re selling, but now (the store) needs a whole I.T. department.
Collar: At least from my observations when I’m doing deals, I hear retailers say, ‘I’ve got to have a presence in this geographic area.’ Not because that’s where I’m making all my money, but it lends credibility to the e-commerce piece by having the brick and mortar here. I may not be making money on the actual sales within the brick and mortar of the space, but that is what’s giving me the brand, it’s giving me the credibility, and it’s giving me the service-oriented (approach) that people are looking for when they’re making a purchase, even if it’s online.
Marogil: I think the experiential part to retail is what sustains it because now it’s very easy to find any widget anyplace online. But when you have a place like Gazelle, the experience is the expertise in that particular case. That makes it sustainable.
How does the rising importance of e-commerce affect space needs for retailers?
Prins: I’ve seen a lot of developers go smaller in square footage. You look at even the big guys, like Meijer and Gordon Foods: When we have an urban presence, we obviously can’t build our 150,000-square-foot stores in downtown Grand Rapids. We’ve got to go with a smaller footprint, figure out how to re-maneuver and reconfigure the store. I think retailers are just being creative, as well as the landlords. ‘OK, I don’t necessarily need to build.’ I don’t see many developers saying let’s go out and build a 15,000-square-foot stock building anymore. It’s not out there.
Lampen-Crowell: I would agree that retail is getting smaller, and it’s also getting simpler. You have to be in the niche that you’re in. Part of the consumer experience is not being confused with so much stuff. Even with the new REI, we’ll see a smaller-scale REI with much more slimmed-down inventory than you would have five years ago and certainly 10 or 15 years ago, where they would come in with a massive flagship and put all this inventory in front of people. You’d want this huge inventory statement. Now it’s slimmed down, focused. I want simplicity; I want to understand where I’m at and quickly get to a decision on a product.
Prins: Do you think that partially has to do with just our overload of information? I mean, we have a computer in our hands constantly. I’m already ADD enough. Just get me focused.
Lampen-Crowell: I think that’s some of it. But also, I think it really is saying, ‘This is what I believe in.’ At Gazelle Sports, we’ve decreased our inventory and said, ‘These are the things we believe in,’ and we’re going to believe in them. On top of that, we are great partners with our manufacturers that were bringing these things in. That’s part of retail. The relationships on the back end are so important because you have to be partners with your manufacturers and your vendors.
Do you offer more inventory online than you do in the stores?
Lampen-Crowell: We do. We have more. Actually, we have a distribution center and a warehouse. We’ve increased our inventory there. Just to give you a number, our online sales at Gazelle Sports have gone from 2 percent to 14 percent of our overall sales in the last five years.
Collar: I think that’s a very common change as distribution and warehousing facilities are getting larger and the cost of land is lower, often, in those areas. Then you can spend more on a smaller (store) footprint. … If you can get great retailers in and they can take a smaller footprint, you can increase the rent — they can afford, hopefully, a little bit more. One of the changes is you’ve got retailers sometimes that can’t afford the space, and that’s a real problem because they’re not able to figure out what their sales are going to be comparatively to what the rental for the space is.
What makes the difference between failure and success for retailers?
Marogil: My experience is that there are a ton of people with ideas and a ton of people with energy. It can be the established retailers or it can be the Mom and Pops that are just starting up — which, frankly, are not typically Mom and Pop; it’s a single 20-something going for it. The difference between the ones that are successful and the ones that are not is just how they establish the differentiation and the experiential portion of their retail enterprise. For example, you will see people who are very active on social media, and they create an identity, and they create an experience that way. Whereas, you might see someone who you will think, in concept, is a better concept and a better product, but they might not be as adept at being able to transform that into an experience for a customer. And then they end up with no one walking through the door.
Lampen-Crowell: Experience is a big factor. If you’re a 20-something that is in an area that has multiple stores like you, you have to build your brand quickly on social and then people have to share and review and all that. Then all of a sudden, there’s buzz and people are going to be like, ‘I have to go there. I have to have that experience.’ There still are people wanting to go to brick and mortar to have experience, and so you have to be unique and authentic.
How are we seeing those experience-driven changes take shape in West Michigan?
Collar: Look at what we’re going to see at Studio C!, and how they’re bringing in a very heavy retail component, but it’s very focused on how you create that experience to draw people in that want to make that into an evening or an afternoon or whatever that particular occasion is. The other thing, though, is there are certain things that people still like to touch and feel and see. I haven’t seen much change in jewelry stores, little gift stores that have little things for those housewarming parties, the quick pick-ups that you can go in and browse.
Marogil: In my opinion, breweries in Grand Rapids are the best example. Ten years ago or maybe a little bit more, beer was not an experience. It has slowly evolved into an experience, and now you see it exploding. The occasional super beer snob aside, the average person goes to the breweries for the experience, not for the exact notes. I think that’s exemplary of how retail is changing. I’m not much of a beer snob myself, so I really don’t care about the difference between Brewery Vivant or Founders or whatever, but I go because it is an experience and everyone wants to go; it’s something interesting.
How do communities get a chance to shape what retail goes in around them?
Lampen-Crowell: You have to have a retail strategy around your community saying, ‘We want retail to be part of the mix.’ Then you have to find creative ways to finance that — creative ways to finance these new 20-somethings that are trying something for the first time. You’ve got to give them some sort of length of time to get going. Or if I’m in Kalamazoo and I want to have a place in Grand Rapids, it’s like, OK, find a creative way to help that person build a system to have success. … You have to have a way to say, ‘What do retailers need?’ Whether it’s financial support, I.T. support, lease support, whatever it is, you’re not going to have much retail if you just let it go organically, especially in downtowns.
Have you seen examples of those strategies locally?
Lampen-Crowell: I’ve seen where communities are actually buying space and leasing it at a much lower rate for a longer period of time — just incubating places. I think incubation is a good word for what happens in retail. I want to pay market rate because if I’m paying market rate, the landlord’s happy, the developers are happy, and we’re happy because we’re all moving in the same direction, so that’s good. But if I can’t pay market rate to begin with, and you want Gazelle Sports to come into your downtown, you’ve got to find a way that makes sense financially for me.
Marogil: I think Holland is an example of a community that decided we really want to incubate our retail downtown. I don’t think I’ve seen that in Grand Rapids, but Holland definitely made it a part of their strategy … and they incentivized it. In a place like Grand Rapids, the incubation frankly is just that there might not be a lot of vacancy at any given time, but there’s also a lot of turnover. And it puts (space) available.
Collar: From a food standpoint with fresh food — which, food is a component of retail — we do have the Grand Rapids Downtown Market. Those spaces are intentionally small, and they have a lot of extra resources for those new businesses that allow them to build upon one another as they’re all down there; they have that exchange. They’ve got professional shops, they’ve got production kitchens for overflow, they’ve got a greenhouse, they’ve got catering facilities that allow those new food businesses to hopefully flourish through that as well. I think we have it but on such a small, limited basis — and it’s for food. We don’t necessarily have it for the other components of retail.
Prins: I’ve talked to a couple of these national retailers about downtown Grand Rapids, and they said, ‘Yeah, we absolutely love the city. It’s fantastic.’ But then the biggest knock is: ‘You guys have never had a defined retail corridor.’ … You’ve got Jimmy Johns on Monroe Center, you’ve got Panera Bread on Monroe, you’ve got Buffalo Wild Wings on Ionia. It’s all over the place, and these guys have to go put their head on the line, from a job perspective. I think it’d be great to have ‘this is going to be our defined retail corridor in West Michigan.’
Who could help encourage the creation of distinct retail districts?
Marogil: Honestly, I think the city could incentivize more of that. It does a little bit right now. They don’t actually provide incentives, but they twist your arm a little bit to say, ‘This is what we wanted to see.’ They don’t say it’s impossible to do otherwise, but they say, ‘Hey, we really would like to see more of this.’ Then there is brownfield funding. You will see the occasional developer — and I like to include myself in that — who uses that to subsidize someone who might not otherwise have a chance. Forty Acres (Soul Kitchen), they would have never started if we didn’t help them upfront with the brownfield money, and then support from nonprofits. Now they’re killing it and the community loves them. They really work on social enterprise as well.
Collar: Where you’re seeing a lot of successful retail is the mixed-use area. Look at all the construction that’s downtown: Almost all of them are mixed-use. So there’s retail components because people like retail. It’s a service. But also there’s housing, whether it’s market housing or low-income housing or some combination of that, together with office space. There’s certain spaces that can support a higher (rent) per square foot, and if you can get that combination to work with any incentives, and if you’ve got a developer that can work through that and create that more complex mixed-use development, that’s when those incentives become more important. In fact, they become critical to many projects.
The success of those mixed-use developments seems mixed given the number of vacant ground-floor storefronts in those new buildings. Is the cost of the new construction pricing people out of the market or is it a matter of demand?
Collar: In mixed-use developments, the developers are very selective in the user they put in. The expense can be significant to put somebody into that space and you have to believe in the retailer you’re putting in. You’ve got to believe they’re either completely passionate and they’re going to make it, or there’s something so unique to what they’re bringing. But to just put anybody in doesn’t work in these developments. When I look at downtown and you see some of these empty spaces, what you’re seeing is a developer that’s being selective and trying to make sure it’s the right fit with that community, in many cases.
Marogil: You’re 100-percent right. The most obvious example is the ground floor at 38 Commerce. It’s been empty ever since they redeveloped that. It’s not because no one wants to move in there. It’s because it’ll cost them $700,000 to put it into shape. In order to recoup that, they have to be very confident with whoever wants to rent it.
Collar: If in fact a retailer’s not successful, there’s two options. Leave, and now the landlord’s in a position of not being able to have any rent come in, or retailers have been known to go to their landlord and say, ‘Can you help me with some accommodations?’ Essentially, you’re partnering in a marriage. If you’re putting somebody in on a long-term basis, then you ride out the good times and you sometimes have to ride out the bad times. You have a lender, often, that is a big part of that decision. You have to have your lender on board and comfortable as well.
How is the talent shortage affecting the retail sector?
Prins: Trying to find employees for some of these retailers is a struggle. One of the retailers we represent, they opened on 28th Street and they had to close the dining room at night. They did drive-thru only, just because they didn’t have enough people to come clean the dining room. Retailers are going to have to figure out how do we get more employees, and it’s something Grand Rapids needs to figure out as well.
Lampen-Crowell: I’ve been in business 34 years, and it’s the most difficult it’s ever been finding and then keeping really good people. For us, it’s building a culture that people want to be in. ‘I’m with people that I like. I have a best friend here. I love the products. I get these great discounts. And the benefits are good.’ You have to build that all in. The communication is good. There’s a mission and vision that I believe in, so I’m here with my spirit not just to get a paycheck. … We have two stores in Southeast Michigan, and there it’s even more difficult than in West Michigan.
When Grand Rapids opted into the medical marijuana industry and drafted zoning rules for where the businesses could locate, it created a green rush within certain parts of the city. As the first companies go before the Planning Commission and the lottery process plays out, how do you see the industry affecting the availability and pricing of retail spaces?
Collar: Because they’re only allowed in designated areas, in those areas the rates are artificially high. But they’re also under options in most (cases) — they’re not all firm (deals). It is not as though all of these spaces are going to artificially increase. You’re going to have a couple here and there. You’re not going to have all these (options turn into deals), because they’re in a lottery. … By way of example, in my office, there’s one corridor where we have three different land owners that have three contracts with three potential (marijuana businesses).
Prins: I think you’re going to see a lot of buildings come back on the market. Some of these sellers and landlords are going to have to get realistic with their price and say, ‘This was a unique buyer, a unique situation. We’ve got to reduce our price and get a little bit more market rate.’
Collar: That’s the push and the pull. What is it really doing to the market? We don’t know yet. Until we actually see how the lottery process works and who the ultimate parties are that succeed, that’s what would really help us determine how the market is doing.
Parking is a perennial issue that comes up in surveys as a major concern in urban areas. Is parking really an issue in West Michigan or do businesses and customers just need to think differently?
Lampen-Crowell: Parking is a transitional issue. I’m a Baby Boomer. We’re used to finding easy parking, especially in West Michigan, on any surface lot. … To me, it’s more of a generational transformation than it is a hard issue that’s going to stay hard. What I think communities have to do and developers have to do and everybody needs to think about is connectivity. How do we connect different parts of our city with trails and waterways and stuff like that? … I think that’s important along with parking.
Marogil: It’s a chicken and an egg thing. You need density in order to make business survive without parking. If businesses don’t have parking right now, there’s not enough density, so they need the parking to survive. I think they complain a lot both ways. It doesn’t matter.
Prins: Especially from a developer’s standpoint, it’s so expensive to build a parking lot.
Marogil: I don’t want parking. I don’t want to build parking that I can’t rent.
Prins: Exactly, and you want to build some more apartments that you can get quite a bit more money from.
Marogil: Yeah, but at the same time, we hear complaints that if there’s not parking, then I’m not going to move in.
Collar: You look at some of the developments that are being done in downtown Grand Rapids right now, and those developers, to their credit, are thinking about, ‘All right, I will build the parking today because that’s what we need today. But I’m going to build it in a manner that I can convert this into a use that lets you have more housing, more retail, more office, whatever that need is.’ I think that is really smart on their part to do that.
What are some concerns about the region’s retail economy?
Marogil: One thing I was thinking about throughout this conversation is just the city is constantly hearing about affordable housing as an issue. How that plays into this discussion is Grand Rapids is an extremely cheap city for its size. What you end up having is retail that is still relatively cheap compared to other cities of comparable or larger size, and it’s still not affordable for retailers.
Part of the reason is just because wages aren’t very high in Grand Rapids. You end up seeing a cycle where everyone is still paying less than maybe they should in a city this size, which means that people are less likely to spend money because they have less disposable income, which means that rent can’t be as high.
It drives a feedback loop that lowers the ability of retailers to stay alive. … It cycles down, because if people aren’t getting good wages, they’re not willing to spend the extra $5 to buy something at Gazelle. Really, it’s just larger businesses have to lead in Grand Rapids and pay higher wages because that’s the city that we want to be.
Lampen-Crowell: The market is helping take care of that. Right now, the market is pushing wages up at a more substantial rate than it has in the past 10 years. But also back to urbanization, you have to have areas of your city that people of means want to live, instead of just out in the suburbs or farther and farther out. It’s an incredibly important piece, the scale of wages. It’s not all wealthy people or all middle income or all lower income. It is having that scale of people within your city limits. That helps retailers having people with those different abilities.
If we were having this conversation a year from now, what would we be talking about?
Marogil: I think that the businesses that do the best at creating an experiential retail methodology where they combine their identity and their expertise and what they’re selling in a way that gives people a feeling that it’s exciting to be there are the ones that are going to survive. If they’re just selling the next widget, then they’re in bad shape.
Collar: It just takes one. While I can’t predict what that one is, it’s amazing what one change in use one particular landowner can do and what a meaningful difference it can make to a community that completely changes the direction. That’s what I think makes our community so vibrant.
Lampen-Crowell: I think there needs to be a strong collaboration between developers, the city and brokers, because it’s not just a one-off. … If you want to infill or build neighborhoods or build downtowns or build cities, you have to have collaboration of all these things that we’re talking about. If one developer wins on one corner, the next two developers or the next two landlords, they’re going to win down the road. I think it’s having some less self-interest and some more collaboration, especially if you’re going to be building retail corridors. … You’re going to have to help find the right means to get those people in these buildings.
Prins: The nationals that I’m helping with in Grand Rapids are very bullish on the market. They said they make money and they like being here. They’re already looking to 2020 at this point and saying ‘I need stores’ and to get it going. They’re excited for our market.