This year could set a record for retail store closures. Even Starbucks, the growth-oriented coffee chain, will reportedly close as many as 100 stores.
By all accounts, it’s a buyer’s market. But that factor alone doesn’t make selection of a retail site any easier. As a matter of fact, the state of the economy makes it even more crucial to select the right retail site to fit into expansion plans.
“Selecting such a new retail store site is entirely different from choosing a comparable site or property that will be used for office or industrial purposes,” says Michael Dee, Senior Vice President and National Director of Retail in Grubb & Ellis’s Dallas Office.
Smart Business talked to Dee about all the factors that make retail site selection more science than art.
What criteria go into choosing a retail site?
Retailers use a lot of criteria that other commercial users wouldn’t even consider. Factors like traffic counts, ingress, egress, store signage and demographics are critical to a retailer.
Sophisticated market research is necessary to assist in market planning and new-store site selection. There are varying degrees of sophistication, but the larger national retailers have virtually all the tools. They even have precise and accurate new-store sales projections, plus store sales volumes for local competitors and for complementary surrounding retailers.
When retailers assess a particular area for expansion, existing and proposed shopping centers and high-traffic retail corridors are absolutely critical because they provide instant validation and credibility to a market. That’s why you see a Burger King next to a McDonald’s or a Home Depot across from a Lowe’s Home Improvement.
Traffic counts have become more precise, and many large retailers have that information on their computers. Some retailers will have some, but often limited, information on projected highway and road improvements and on new commercial and residential developments.
The most important factor is trade-area population density. Most retailers are looking at a 10-year time frame when it comes to new stores. That’s the lease term they are willing to commit to. They feel confident that the location is probably going to be solid for 10 years, given the population, growth, income levels and surrounding retail. After the 10th year, it’s re-evaluation time.
What other demographic criteria are valuable?
Critical demographics include household size, trade-area population, average or median household income, and employment base factors that most retailers will look at first. In some cases, a simple lack of adequate population density will prevent the retailer from considering opening new stores.
Lifestyle characteristics are more sophisticated criteria, particularly income levels and type of employment base. For instance, when Starbucks first started expanding throughout the U.S., its first choice of new store locations was the upper- to middle-income demographic. Blue-collar areas were not even considered.
With all that technical help available, what can a real estate adviser add?
What a lot of the retailers don’t have is local market knowledge obtained on a daily basis. In other words, they might not know that the Kroger store across the street is planning to relocate two miles west. They are not privy to that kind of information. They might not be up to date on where the new residential housing is going up or whether the main highway is being widened and when. That is the kind of information that you can’t get unless you work the market, day in and day out.
A good real estate adviser also plays a vital role in negotiating with communities, developers and landlords. A prime example is Wal-Mart, which has found that cooperation and good will with local communities is absolutely essential to its new store expansion plans. In some areas, communities have prevented a Wal-Mart from being built, so proving the value of the store beyond sales tax is vitally important.
Cooperation from the community is also important to fast food and bank drive-throughs because so many see a drive-through as being nothing but a traffic nightmare and, in many cases, they are correct. Some of the fast-food companies have to hire traffic engineers or outside consultants to do traffic studies and determine the impact of the proposed drive-through.
Where does a company seeking to expand by leasing or purchasing additional property begin?
Real estate is not the core business of most retailers. Therefore, they need to consider outsourcing the real estate function to a firm whose expertise is real estate. In that manner, the two firms become partners, and that’s truly the way the industry has evolved.
MICHAEL DEE is Senior Vice President and National Director of Retail in Grubb & Ellis’s Dallas Office. Reach him at (972) 450-3245 or firstname.lastname@example.org.