Over the next 20 years, the United States will experience tremendous population growth, as an estimated 60 million people are expected to be born or immigrate here. To accommodate this vast influx, cities and communities must take advantage of existing infrastructure and recognize that “smart growth” is a critical economic and social strategy.

Simply expanding further onto undeveloped land and managing growth through increasing suburban sprawl is not a viable option. We cannot afford the necessary infrastructure and environmental costs, nor the lower quality of life that would result from increased commute times, choked roads and reduced open green space.

For this reason, the greatest challenge — and opportunity — that the retail and real estate development sectors will face in the next decade and beyond is the continued renewal of existing urban areas and the creation of new ones where expanding populations will cluster: near transit lines, in urban centers, and in often overlooked yet highly dense neighborhoods that are poised for growth. Consumers will increasingly live in denser communities — not just downtown — but in the suburbs as well.

We will continue to have traditional suburban retail growth, but urban retail will become a significant fact of life and a material part of most retailers' growth strategies — or even more so for the companies that already rely on urban markets. The economic incentive is real. According to the Initiative for a Competitive Inner City, America's inner cities represent $85 billion in retail spending each year. Retail demand per inner-city square mile is often two to six times greater than each metro area square mile. Of course, what we define as “inner city” doesn't encompass all urban land, such as downtown areas, so these numbers are only a fraction of the real “urban” opportunity.

Ethnic micromarkets

The next greatest challenge and opportunity affecting the retail sector is the evolving face of the consumer. A majority of the new population growth will come from minorities, particularly Hispanics. The face of the consumer will continue to evolve: We don't look the same, nor do we shop the same way. (For more on the changing face of retail, see February Shopping Center World.)

As the country's ethnic population rapidly expands, ethnic or cultural demands will impact the retail experience. Retailers will have to learn to address their concerns, fears and misconceptions about minorities, the inner city and other urban markets. The need for growth will necessitate this change.

Retailers will need to become more adept at merchandising for the micromarket that a particular store serves, and merchandising will vary substantially by micromarket, based on that location's demographic makeup. Some mainstream retailers will not be successful in meeting the needs of these diverse communities, and local and specialty retailers will have the opportunity to fill the gap.

At your doorstep

People will increasingly live, work and play in the same community as more mixed-use properties combining residential, office and retail space are developed, particularly in urban areas. These developments offer residents an easy, convenient lifestyle in which their world is literally right outside their door.

In addition to filling the traditional retail role of providing basic goods and services, mixed-use developments must also provide places for people to interact, entertain and be entertained. The trend toward building and opening more restaurants, community facilities and movie theaters in or near these developments will expand. Because of all of these offerings, the average length of shoppers' stays at these complexes will increase and they will spend more money.

An example of a mixed-use project we're developing is Bay Street, located in Emeryville, Calif. An adaptive reuse of a heavy industrial site, Bay Street is a 1 million-square-foot urban village that opened in November, encompassing 65 shops, nine restaurants and a 16-screen movie theater. When completed in 2004, the residential component's 284 apartments and 82 town-houses (20 percent of which will be “affordable”) will bring much-needed housing, located near mass transit, to the San Francisco Bay Area. (MacFarlane also is buying The Shops at AOL Time Warner Center under construction in New York.)

Bay Street will take a while, but it is inevitable that urban retail will be a significant part of retail's future. To illustrate the need to “think urban,” University of California-San Diego Professor Steven Eirie, recently wrote:

“By the year 2020, the five-county Los Angeles region will absorb 5.2 million new residents, for a total population of 22.1 million. This amount of growth is equivalent to adding two Chicago's, or a Los Angeles and San Diego combined… Adding more than 5 million new residents may generate 2.7 million new automobiles on the roads. If each car requires five to seven parking spaces, the region would need more than 150 square miles of paved parking lots. That is equivalent to paving over the San Fernando Valley.”

We simply do not have the land for a different reality, and retail will reflect this fact.

In my view, our population growth, coupled with demographic change, is leading retailers and retail real estate developers to a positive place. As in Europe and in some United States cities, people are shopping where they live, work, play and interact with others. It is smart growth, and our future depends on it.

Who Victor MacFarlane
Founder and managing principal of San Francisco-based MacFarlane Partners, the leading minority-owned real estate investment manager and developer of urban real estate projects across the United States