Two terms dominate retail development at the tail end of the 20th Century: Entertainment and Main Street. The prominence of the entertainment and Main Street retail trends overshadows almost everything else happening in the market today. Though the two concepts have been working their way into public and industry consciousness for at least two decades, over the past year to 18 months they have sprung forth with a vengeance.
Shopping centers across America have been adding entertainment tenants, entertainment wings and entertainment complexes, and the first full-scale entertainment centers have begun to appear. The Mills Corp's, Arlington, Va., Block at Orange in Orange, Calif., which officially opened at the beginning of the year, devotes less than 30% of its space to tenants selling conventional soft and hard goods. The bulk of the 811,000 sq. ft. center is given over to theaters, restaurants, interactive game centers and other tenants offering an experience rather than material products. Some so-called entertainment tenants - book and music stores, for example - admittedly sell hard merchandise, but their attraction has become freedom to sit and read or listen to music on site.
Not entirely coincidentally, The Block at Orange evinces the Main Street trend as well. The largely open-air project is designed to emulate a village center, with crossing pathways and shops opening to the "sidewalk." The very fact of calling it a block reveals the effort to associate it with traditional urban streetscapes.
Throughout North America retail projects are cropping up with names tying them to historic downtown and urban neighborhood shopping patterns. The list is long and varied, both in nomenclature and geography: Redmond Town Center in Redmond, Wash.; Main Street at Santa Teresa in San Jose, Calif.; The Marketplace at Augusta in Augusta, Me.; Downtown Silver Spring in Silver Spring, Md.; Waverly Place in Cary, N.C.; West Acres Commons in Flint, Ohio; Olathe Crossing in Kansas City, Kan.; Twin Creeks Village in Allen, Texas; The Streets of Woodfield in Schaumburg, Ill.; Scottsdale Waterfront in Scottsdale, Ariz.; Cityplace in West Palm Beach, Fla.; and Broadway at the Beach in Myrtle Beach, S.C.
In some cases the name is the only thing urban or village-like about the center, but by and large the projects incorporate traditional streetfront shopping patterns, with shops opening to an open-air design reminiscent of a city sidewalk or a car-free, pedestrian pathway.
Of course, conventional malls and shopping centers continue to be developed, but even they are being forced to acknowledge these unavoidable entertainment and Main Street trends. Sometimes it is only through the name, as in the case of Kravco Company's Court at the King of Prussia in King of Prussia, Pa. Other times it is through form and function. For example, the 1.7 million sq. ft. Mall of Georgia, in a suburb of Atlanta, includes an open-air retail/entertainment village that will have its own separate identity and name, Mall of Georgia Crossing. Where the main mall will include such tenants as Dillard's, JCPenney, Lord & Taylor and Bed Bath & Beyond, the outdoor village adjunct will include an amphitheater, nature park, 20-screen cinema and 7-story IMAX 3D complex.
Though there are many factors contributing to the spread of the above trends, they would be nowhere near as strong were it not for a solid economic underpinning for the entire industry at present. According to Chain Store Age, same-store sales were up 5.8% in 1998, the largest increase since 1992, and they continue to climb. The magazine reported a 9.9% rise for March, the eighth month in a row with an increase. Home goods, consumer electronics and drugstores reported the largest increases.
Dallas-based AMRESCO Research reported healthy occupancy numbers with the vacancy level for investment-grade retail properties in 1998 only 6.5%, the lowest rate since 1984. The report predicts continued health for the industry, stating, "Over the near term, the underlying supply-and-demand property fundamentals are expected to remain in balance."
According to the U.S. Department of Commerce, all regions report healthy economic and employment growth, though Sunbelt states, especially California and Florida, are particularly strong due to substantial population increases. The Federal Reserve Bank reports last year's positive consumer spending trends continued into January and February, with most districts posting substantially higher activity than a year earlier. In general, it says, inventories were balanced and in line with future sales expectations.
On a regional basis, the bank reports that Boston, New York, Cleveland, Chicago, and Dallas experienced faster-than-expected sales growth, while sales in Atlanta were flat or up only slightly. Philadelphia, Richmond, Va., Chicago, Kansas City, Cleveland, and San Francisco districts experienced strong post-holiday price sales. According to the Fed's end-of-year report for 1998, healthy housing markets supported strong demand for furniture and home products nationally, with Boston, Cleveland, Richmond, Atlanta, Chicago, and Dallas leading the way.
Analysts are cautious about forecasts, but are mostly upbeat about the economy. The Conference Board in New York reports 96 months of economic expansion, the second-longest sustained period of growth in the nation's history. Only a 106-month run in the 1960s tops it. Should the trend continue through February 2000, we will have a new record. The Board forecasts general economic growth above 3% for the first half of 1999.
According to the Federal Reserve, labor markets remain taut with increased employment levels reported in nearly all districts in the early part of 1999. It says employers in the Chicago, Minneapolis, Kansas City, Mo., and Dallas districts continue to experience difficulty finding qualified workers. In particular, it says markets for retail labor remain tight across much of the nation and as a result ,wages are rising in most markets.
The labor situation presents something of a double-edged sword for retailers. Increased employment and higher wages mean increasing sales. But it also means retailers in some regions are experiencing a shortage of entry-level workers and finding it difficult to retain employees because of the competition of higher-paying jobs.
The Fed notes the industry faces another double-edged sword in terms of product costs. While low commodity prices reduce inventory costs, purchases, competition and consumer resistance remain the same. With both wages and rents rising, retailers' profits are being squeezed. The solution is to make operations more efficient and increase productivity without alienating customers or stressing workers.
We'll have fun, fun, fun These days, you don't need to worry if your daddy takes your T-bird away. With the number of entertainment and quasi-entertainment retailers out there, there is always something to do. This is the fastest-growing category of retailers, and there seems to be no end in sight of new concepts and companies getting into the game.
What is most amazing is the sheer number of entertainment activities that have found their way into shopping centers. Without question, the single most popular entertainment tenant today is a movie theater. Charles Hewlett, an analyst in the Chevy Chase, Md., office of Robert Charles Lesser & Co. (RCL), a Los Angeles-based consulting firm, calls them the key drivers of entertainment-based development with restaurants coming second.
Cinemas and restaurants represent only the tip of the iceberg. For example, not long ago, malls were ridding themselves of ice rinks because they were too expensive to operate. Now ice rinks - or rather ice centers, since they generally have at least two rinks, along with coaching rooms, cafes and shops selling skating equipment, clothing, books, tapes and memorabilia - are back, but this time as tenants rather than mall amenities.
Joining them are a number of other sports facilities including bowling alleys, centers for basketball, swimming, rock climbing, golf and tennis, and of course health and fitness clubs. In a related vein, health and beauty spas also are appearing in shopping centers. Other options include family entertainment centers, electronic game centers, music stores, bookstores, theme restaurants (and restaurants and cafes in general), nightclubs, entertainment memorabilia stores and, of course, cinemas.
Carole Sjolander, executive director of the International Association of Family Entertainment Centers in Hillsboro, N.H., says growth in her industry has been phenomenal. The organization is fairly new because the FEC concept itself is fairly new, but already it has grown to nearly 600 members, she reports. There is no precise definition of the term family entertainment center, she says, but generally it can be described as an operation that features a collection of activity nodes that can consist of playground equipment, amusement park rides, sports facilities and video arcade and carnival games.
Although new membership is slowing, says Sjolander, most member companies are themselves growing. For example, according to Len Hoppe, vice president of marketing for Jeepers!, Waltham, Mass., the company has 25 indoor family theme parks, with plans to open 24 more annually. Averaging 25,000 sq. ft., Jeepers! centers are targeted at four- to 12-year olds and combine a children's play area featuring tubes, tunnels, slides and other similar paraphernalia with five or six amusement park rides.
Michael Fischer, vice president of development for Sega GameWorks in Universal City, Calif., reports his company has five GameWorks facilities open, with plans to open five per year over the next few years. In addition, the company opened its first GameWorks Studio, a smaller version of the same concept, last May, with plans to have 20 open by the end of this year.
Some developers and retailers see entertainment primarily as relevant only to downtown projects and there is some truth to this. Fischer says GameWorks locations are designed primarily for downtown or freestanding sites in entertainment-oriented complexes. The company has facilities downtown in cities as diverse as Seattle, Las Vegas, Detroit and Schaumburg, Ill. Brian Spain, director of real estate for Dallas-based Dave & Buster's, an adult-oriented restaurant, bar and game center, says the company looks to place its operations in urban downtowns or centers with a significant entertainment orientation.
Nonetheless, entertainment tenants are showing up everywhere from strip centers to super-regional malls. Hoppe reports Jeepers! has facilities in strip centers, power centers and enclosed malls and on freestanding sites. And Fischer says GameWorks Studios can go in community shopping centers, power centers and regional malls. Even Dave & Buster's is not glued to downtowns or entertainment centers, says Spain. As he puts it, "We don't look for the vehicle. We look for the place to park. If it looks like we'll do business, we'll go there."
According to Neil Haltrecht, vice president of real estate and development for Pacific Theatres Corp. in Los Angeles, an increasing number of retailers are willing to accept a movie theater or cluster of restaurants as a replacement for one traditional mall anchors. Sometimes they even demand a theater be present. Hewlett's colleague at RCL, Len Borograd, relates an instance where a national health foods supermarket refused to go into a shopping center unless it was going to have a movie theater.
It is easy to understand why theaters and restaurants are gaining in stature. Haltrecht points out that one of today's large multiplex theaters can attract 2.5 million customers a year, and even the lesser performers can bring in 1.5 million. With those kinds of numbers, a theater is bound to generate cross traffic. As for restaurants, John Ecklein, publisher of Entertainment Real Estate Report and Theme Restaurant Report based in Ignacio, Calif., notes that restaurants all across the country are full every night.
Hewlett says theater operators are becoming increasingly tough negotiators as a result of their improved status. As he puts it, "Movie theater operators have been beating up landlords and getting sweet deals."
Haltrecht acknowledges theaters usually pay somewhat less than other tenants of comparable size, but he says so many theater operators are competing for the better sites that landlords of well-located projects do not have to concede much.
Ecklein says two Simon projects - Mall of America outside Minneapolis and The Forum Shops at Caesars in Las Vegas - have had a particularly significant entertainment impact on the shopping center community.
The former, a 3 million sq. ft. behemoth, has all the elements of a standard regional mall, but it also has a full-size indoor amusement park. According to Ecklein, the property has become one of the most successful retail projects ever built, drawing some 40 million visitors per year. By contrast, he points out, "All of Las Vegas gets only 32 million visitors annually."
He says it is the Forum Shops, however, that really changed industry views. Not only is it highly themed, eclectic and anchorless, it is hugely profitable. "It has [annual] sales of $1,200 per sq. ft., while malls are lucky to get $300 [per sq. ft.]," he remarks.
Shopping center developers and owners are clearly responding to the new possibilities. A good example is Schostak Brothers Inc., of Southfield, Mich. The company recently completed a $10 million makeover of a full wing of the 862,000 sq. ft. Wonderland Mall in Livonia, Mich., that replaced conventional retailers with entertainment-oriented tenants such as Jeepers! and FYE (For Your Entertainment), a Rochester, N.Y.-based book, video and music retailer legally known as Record Town Inc. It also enlarged the food court by 40% and turned over its operation to Ogden Entertainment, a division of New York-based Ogden Corp. Rather than rely on the local food vendors who had populated the court, Ogden brought in national chains such as Barney's Coffee, Burger King, Sbarro, Steak Escape, Manchu Wok and Chili Peppers, a Mexican restaurant chain developed and owned by Ogden itself.
Since the makeover, says company co-president and CEO Robert I. Schostak, business at existing stores has picked up and new stores are doing extremely well. About 100,000 people visit the mall weekly, up about 20% from two years ago, and the number is increasing. Schostak projects the mall will exceed the goal of 15% to 20% boost in annual sales.
The shopping experience Ecklein says the number of entries on his on-line Entertainment Tenant Listing site runs into the thousands and is growing daily. While he acknowledges that many of the tenants qualify as entertainment-oriented only in that they emphasize snazzy environments or displays that let the customer "play" with the merchandise, he notes the distinction between entertainment and retail is blurring.
"What is entertainment?" he asks. "Anything that gives you immediate pleasure, I guess. And shopping seems to be something people are doing more and more for fun."
Ecklein and others believe a significant change is occurring in consumer shopping patterns. Shopping is less and less about acquisition and more and more about experience, they say. For years, advertisers and marketers have been talking about the "shopping experience," but they typically considered it an adjunct to the purchase of goods. Improving the experience was seen as a marketing ploy. Today, some industry professionals suggest, the experience is an end in itself.
FECs, ice rinks, cinemas and game complexes are in the business of selling experience, and their success has led to the creation of retail centers such as The Block at Orange that rely more on entertainment than merchandise for their success. The number of such projects is expanding rapidly, and plans for some projects indicate we have only begun to see the possibilities of the concept.
In June, Los Angeles-based Sony Entertainment Corp., New York-based Millennium Corp. and San Francisco-based WDG Ventures will inaugurate Sony Metreon, a 400,000 sq. ft. project in San Francisco that will have half a dozen small retailers. The bulk of the project will be given over to a 15-screen Sony cinema, an IMAX theater, nine restaurants (six of them located together in the Streets of San Francisco section) and three "interactive environments" based on popular books: Maurice Sendak's, "Where the Wild Things Are" for younger children; David Macaulay's, "How Things Work" for older children through adults; and French graphic artist Moebius,' "Airtight Garage" for older teens and adults.
Saying there are only half a dozen retailers is a bit misleading, for the "environments" will sell merchandise related to the books featured. On the other hand, the two major stores - a Sony products store and the first Microsoft store - will emphasize use of the products. In fact, according to Sony senior vice president John MacLeod, the stores are designed to showcase Sony and Microsoft products rather than to sell them.
In Los Angeles, TrizecHahn Centers, San Diego, is developing Hollywood & Highland, a 600,000 sq. ft. project built around the historic Mann's Chinese Theater. In addition to the restored movie palace and an adjoining six-screen cinema complex, the project will include an auditorium similar to New York's Radio City Music Hall for live events (including the Academy Awards), and a mix of book, music and movie memorabilia stores and specialty restaurants. In addition, says David Malmuth, senior vice president for TrizecHahn, the developer plans to rent space to major movie studios for creation of movie-related activity centers.
Of course, the majority of retailers continue to sell merchandise, but even many of these concepts are turning into entertainment venues. NikeTown, the Disney Store and today's large-format book and music stores are all obvious examples of this trend. But U.S. retailers are constantly reaching beyond for new ideas. The new Recreational Equipment Inc. (REI) store in Seattle, for example, with its climbing walls, ski practice machines, children's caves and other entertainment- and amusement park-like features, is regarded by some analysts as a prototype for stores of the future.
Even supermarkets are getting in on the act. At the 40,000 sq. ft. Draeger's Marketplace in San Mateo, Calif., part of a small local grocery chain based in nearby Menlo Park, the main shopping area looks like a set from a Hollywood romance about Renaissance Italy. Palio banners hang overhead, goods are displayed with the level of care usually reserved for department store windows and there is a cafe at the front and an open kitchen at the back for preparation of take-home food. A second floor that overlooks the first from an open atrium includes a kitchenware shop, cooking school and first-class restaurant, all visible to shoppers.
David Word, a partner in San Francisco-based Word Meany Ventures LLC, sees experiential retail as the direction developers need to go to answer the coming challenge from the Internet.
"I believe the Internet is a big deal. I don't believe it's going to transform shopping overnight, but it will happen. The Internet will become the way we buy standard merchandise. So if people are going to go out and shop, they are going to want to spend that precious time in places that are comfortable and fun," he says.
Word also sees the quest for experience as a major factor in the rebirth of American downtowns and the revival of Main Street retailing. He and partner Chris Meany completed an 80,000 sq. ft. project in downtown Walnut Creek, Calif., called Broadway Pointe that replicates an early-20th Century retail block, with distinct buildings, individual storefronts and all shops opening to the street.
"I don't know if it's truly nostalgia because most shoppers are too young to have known old downtowns, but this desire to be in an open environment, a main street rather than an enclosed mall, seems to be what people want today," he says, adding, "The more sophisticated a market is, the more that idea resonates."
Ron Kaplan, a senior vice president and chief investment officer for Federal Investment Realty Trust in Rockville, Md., asserts the Main Street phenomenon is not a trend. "If anything, it's suburban shopping centers that are the trend," he argues. "You've had cities doing business for 2,000 years. Malls have only been around for 40 years and already people are growing tired of them."
Street retail began by buying groups of buildings in existing urban retail districts - it is the largest landlord on the Third Street Promenade in Santa Monica, Calif., and owns a large chunk of San Diego's Gaslamp Quarter - but today, says Guttman, the company primarily builds projects from the ground up. Urban retailing has become so popular, he explains, that most of the best existing urban properties have been bought or are now priced too high to make redevelopment feasible.
Federal currently has five major urban projects in development, including Bethesda Row in Bethesda, Md., Houston Street revitalization in San Antonio, Town & Country Shopping Center redevelopment in San Jose, Calif., and Pentagon Town Center and The Village at Shurlington in Arlington, Va. Despite being mostly new construction, all adhere to the traditional urban sidewalk-fronted blocks separated by public streets.
Harvey Miller, Federal's director of retail merchandising, emphasizes the company's projects are not urban entertainment centers. "We are not creating urban entertainment districts," he says, "but replicating environments that are entertaining because of ambience, the character of the tenants and the mix of functions."
Many developers now concentrate on this type of project or have created divisions that do. Beverly Hills-based Regent Properties Inc. calls itself a pioneer of the urban village retail concept, and Santa Monica-based Caruso Affiliated Holdings proclaims, "We don't build retail centers, we build the center of town." Each company has a half dozen such projects completed or in development.
Cousins Properties Inc., Atlanta, recently introduced a concept called the "Avenue" that it hopes to develop in multiple markets. The $41 million prototype venture, Avenue East Cobb in suburban Atlanta, is slated to open this summer. Work also has begun on the Avenue on the Peninsula in Rolling Hills Estates, Calif.
Retailers are responding to urban presentation, according to most respondents. "The street is a very powerful venue right now," asserts Chris Meany, the other partner in Word Meany Ventures. He reports business has been so good since Broadway Pointe opened in October 1998 that tenants such as Williams-Sonoma and Restoration Hardware regret they did not rent more space. He says the majority of tenants report sales are among their chains best.
According to Miller, retailers are clamoring to get into the street retail projects. "Retailer response is almost overwhelming," he declares. "Streets are becoming the most viable retail choice." Despite the shift to entertainment and urban-style centers, conventional centers continue to get built and thrive. Though few regional malls are being built, many are being redeveloped and expanded, in some cases into super-regional malls with 1.5 million sq. ft. and up.
There is still a need for new supermarket-anchored centers for the needs of the growing population. Many centers have grown outdated in terms of retailers' current formats. Older ones die or are converted to other uses as new ones are built to accommodate these changes.
Meany points out that retailers' changing formats are a big factor in the shift to Main Street retailing. With demands of 15,000 sq. ft. to 40,000 sq. ft., they are too large for most malls, but they fit well into two-story spaces that span the frontage of a typical urban building. Streetfront gives them individual identity and direct access.
California dreamin' Although analysts report strength on a regional basis, there are weaknesses in individual markets. California's vibrant economy is creating high population, job and wage growth. The bulk of this is in Southern California, where almost two-thirds of the state's residents live. In addition, Southern California communities tend to have less restrictive building regulations. Retailer demand for space is high in the Northern half of the state, especially the nine-county San Francisco Bay Area, but stringent growth controls make development very difficult. Consequently, rents are among the highest in the nation, with monthly rents of $2 per sq. ft. and up common for streetfront locations. In San Francisco's Union Square district, tenants are paying as much as $300 per sq. ft. annually.
As noted above, few observers are willing to make forecasts more than several months down the road, but clearly developers and retailers see opportunities. Unlike the late-1980s, they do not appear to be operating with a quick turnaround for huge profit mentality. Lenders, particularly since last summer's CMBS debacle, are generally prudent and want evidence of viability before dispensing money. (See our Retail Finance feature on page 56.)
Of course, today's world being what it is, no one can guarantee the future; the prospect of something unexpected looms ever-present. Some would argue this is a good thing because it stems unwarranted speculation. But presuming no unanticipated disaster lies around the corner, the retail market today appears sound - marked by a generous amount of excitement from entertainment and Main Street-style retail.