The suburbs are familiar turf for developers, but an outfit run by NBA Hall of Famer Earvin “Magic” Johnson mostly works the other end of the court — inner-city neighborhoods.
Johnson Development Corp., (JDC) of Beverly Hills, Calif., has over the years partnered with Loews Cineplex Entertainment, Starbucks Coffee Co. and Carlson Restaurants Worldwide Inc. to open their branded locations in urban areas. It also administers the Canyon-Johnson Urban Fund, which targets “underserved” densely populated areas with more than 40 percent minorities.
Now, 10 years after Magic Johnson first partnered with Loews, his development company's imprint can be seen in the inner city and even some minority enclaves in the suburbs. Old Navy, H&M, MAC cosmetics and others followed Johnson into Harlem after he opened a Starbucks in 1999 and a Magic Johnson Theatres cinema in 2000.
“You are officially a neighborhood when you get a Starbucks,” Chicago alderman Leslie Hairston told the Chicago Tribune of Starbucks' move into the South Side. She hopes retailers such as Target, Best Buy and Kinko's also consider setting up shop in the mostly African-American neighborhood.
JDC is proving that developers and retailers can be shortsighted in ignoring inner-city hubs, says Jack Kyser, chief economist at the nonprofit Los Angeles County Economic Development Corp. “They really didn't do their homework,” he says.
If they had, they might realize that Hispanics, Asians, African-Americans and other ethnic groups represent 30 percent of the U.S. population — and 82 percent live in city cores, reports the Initiative for a Competitive Inner City (ICIC). The U.S. ethnic population is growing at seven times the rate of overall population, according to Canyon-Johnson Realty Advisors LLC.
What's more, the average salary for inner-city jobs is $38,500, not that far under the $41,000 for cities and more than the $35,000 for complete metropolitan areas, reveals ICIC. Fifteen percent of inner-city residents earn $35,000 to $50,000 a year — comparing favorably with the 17 percent of all U.S. households in that middle-income category. And anything these areas lack in affluence may be offset by sheer numbers: Population density can reach 600,000 within three miles of a site.
Johnson's success has shown other retailers that setting up shop in minority neighborhoods isn't social work — it's just good business. (Starbucks, for example, is able to charge the same high prices for its medium decaf espresso in Harlem as in Greenwich Village.) Johnson's outfit still is a partner in 70 Starbucks locations, six theaters and one of Carlson's TGI Fridays. Only three underperforming Starbucks and one TGI Fridays have closed over the years. A private company, JDC doesn't disclose revenues.
The firm's track record “in itself would cause the development community to stand up and take notice,” says G. Lamont Blackstone, a Mount Vernon, N.Y. consultant and developer who helped add a JDC Starbucks to City Heights Urban Retail Village in San Diego.
Johnson's celebrity has other advantages, too, says Blackstone. For one thing, it often stirs up public sector help. “It serves as a signal that that particular neighborhood is going to have support from the public sector as well as elected officials,” he says.
New Turf
But what motivates a firm like Starbucks to open stores in poorer neighborhoods? Simple. It's new turf. “Starbucks and JDC both recognized there was a segment of the market that could support further economic development of major high-end retailers,” says Wendy Beckman, director of Urban Coffee Opportunities, the JDC-Starbucks venture. What JDC adds to the mix, she says, is “great knowledge of real estate in key metropolitan markets and relationships in local communities.”
That means learning the neighborhood — walking it, driving it, meeting with community leaders. “You have to push and go beyond the computer-data due diligence,” says Kimberley Thompson, JDC executive vice president. “The demographics are there, the income levels are there,” says Thompson. “I think it would be crazy for developers to turn their backs on communities like that.” (For more on Thompson, see our cover story beginning on page 82.)
How do retailers and developers get to know if a neighborhood could support their business? Talk to the banks and retailers. Look beyond U.S. census data for siting decisions, says Nik Theodore, director of the Center for Urban Economic Development at the University of Illinois at Chicago. “The census is badly undercounting residents in these areas,” he says.
Urban development is complex, to be sure. You may have to acquire land from a dozen or more owners and then demolish buildings. Logistics are expensive. Staging is an adventure. “Where are you going to put all the construction materials when there's no vacant land anywhere?” asks Michael McCarty, senior vice president for research and corporate communications with Simon Property Group, which has both suburban and urban malls.
Moreover, community groups are well organized in old neighborhoods. If they dislike your project, it could mean trouble. Arturo Sneider, partner with Primestor Development Inc. of Los Angeles, says residents chafed at his firm's proposed “progressive” design for a San Fernando Valley center earlier this year. “They wanted something much more traditional, a Spanish type of architecture,” says Sneider. He changed the design. “They live there, they're going to be the customers,” he says. “They deserve to have a design they like.”
Offsetting urban difficulties are city governments anxious for urban renewal. They streamline permitting and seed development by planting police stations or social-service agencies in neighborhoods as anchors. Some community organizations even provide basic customer service training for locals.
Street Smarts
Of course, developers accustomed to the suburbs need to get some street smarts. Urban development “is a very plausible business proposition if you have the right businesses to meet the demands of the inner-city consumer,” says Craig L. Johnson, associate professor at Indiana University's School of Public and Environmental Affairs. Get to know hip-hop, especially the fashions. But supermarkets and drug stores, as well as traditional chains such as Old Navy, Gap and Starbucks fit the model, says ICIC co-executive director Anne Habiby.
Jackson Ward, principal with Gulfside Development Co. in Miami, finds he must school prospective retail tenants at his Downtown Dadeland project. It includes 125,000 square feet of retail under construction on a former auto lot across from Canyon-Johnson's Dadeland Mall in Miami (Infill space is at a premium in the inner city. Canyon-Johnson's Midtown Center in Milwaukee replaced an older mall.) The lineup includes Pier 1 Imports, Cargo Kids, Macaroni Grill, Chili's, Bombay, Men's Wearhouse, Blu Pizzaria, Bacio Gelato, Sprint, and Blue Moon Asian.
He has to teach tenants to live with space constraints, for example. “You don't have a dumpster sitting out back with a trash compactor and a big loading zone,” he says. “You need to think as if you're going into a downtown environment.” That means, you don't just haul trash at will to a dumpster out back. The center collects garbage twice a day and holds it within the facility for removal.
Security is tougher. ICIC suggests retailers form private sector partnerships to maintain the peace. Over time, creating jobs can help reduce crime.
Habiby says developers taking a long-term view must consider serving minorities.By 2050, she says, U.S. whites will be a minority — sooner if the government allows more immigration. “What's your business model?” she asks. Given the rapidly changing demographics, she says, targeting inner city buyers “becomes an economic imperative.”
LEADING THE PACK
PROBLEM
Pockets of overlooked demographics in inner cities are practically begging for better retail. But many developers and retailers don't understand the demographic or the market enough to notice.
SOLUTION
Johnson Development Corp. leads the way, sending its site experts in search of neighborhoods that can sustain new retail, investing in those neighborhoods and attracting other companies to open businesses and develop new projects.
DATA
Fifteen percent of inner-city residents earn $35,000-$50,000 per year. The average salary for inner-city jobs is $38,500, not that far under the $41,000 average for cities.
BUZZ
Starbucks stores in strong minority markets such as Harlem are able to sustain the same price points as stores in decidedly more upscale Greenwich Village.
Magic's Pipeline
The Canyon-Johnson Urban Fund is one arm of Magic Johnson's far-reaching real estate enterprise. The fund, a partnership between JDC and Canyon Capital Realty Advisors LLC, seeks out sites in underserved urban areas to reposition and redevelop. A list of some of Canyon-Johnson's ambitious projects follows:
Midtown Center, Milwaukee: A joint venture with Boulder Venture, a Milwaukee-based developer, to redevelop 606,000 square feet of retail space on 56 acres.
Sunset & Vine, Hollywood, Calif.: A joint venture with Bond Capital, a Santa Monica-based developer, to develop a 625,000-square-foot mixed-use project consisting of 300 loft-style apartments, 87,000 square feet of retail and a parking garage on a 3.4-acre site.
Park Place Condos, Brooklyn, N.Y.: A joint venture with Anderson Associates, a New York developer, to develop a mixed-use project with 47 market-rate condominiums, 4,500 square feet of ground-level retail space and a 25-stall underground parking structure in Brooklyn's Park Slope community.
State Place, Chicago: A joint venture with Mesirow Stein Realty, Northern Realty Group and Loewenberg Associates to redevelop former Police Department Headquarters into a mixed-use project consisting of 66,000 square feet of retail, 243 condo units and 406 parking stalls.
Downtown Dadeland, Miami: A joint venture with Gulfside Development, a Miami-based developer, to construct an urban village comprised of seven buildings. The project will include 416 condominium units, 127,000 square feet of ground floor retail, 890 underground parking spaces and 123 on-grade parking spaces.