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Key to Successful Retail? Know your Community, Says InterFace San Diego Panel

SDRetail-Brokers-panel

The San Diego Retail Real Estate Brokerage panel included expertise from (left to right) Shauna Smith, Chicago Title; Stephen Avoyer, Flocke & Avoyer; Bill Shrader, Colliers International; Mike Spilky, Location Matters; Reg Kobzi, CBRE; Pete Bethea, Newmark Knight Frank and Craig Killman, JLL.

Being in tune with one’s self is always a positive thing — and San Diego seems to thrive at this. The county has such a keen sense of awareness that it even boasts a Self-Realization Center up in Encinitas. Knowing one’s identity extends beyond the spiritual world in this part of California, however. It is also a prudent retail strategy, as panelists at InterFace Conference Group’s San Diego Retail Conference, held March 19 at the Sheraton Hotel & Marina, attested.

For retailers and shopping center owners, self-realization centers around your brand’s message. What’s your history? What are your core values? What story are you trying to tell, and what lifestyle are you trying to sell? These answers are important, as they will likely determine your physical location and potential success with that San Diego consumer. This, naturally, also means that retailers and shopping center owners must be just as knowledgeable about their consumer and submarkets as the consumers are about themselves.

“We have to go back to the fundamentals that every property is different, every submarket is different,” said Pat Donahue, chairman and CEO of Donahue Schriber and a developer panelist. “We’re in a world where mall operators wanted to do what was efficient — some might say easy — and they made everything look the same. They really screwed it up. Retail has been unfairly painted with the whole brush.”

Donahue pointed to Del Mar Highlands, an open-air, multi-level shopping center in Del Mar, as an example of this.

“What I’d do at Del Mar Highlands isn’t necessarily what I would do at any other property,” he said. “Sky Deck is not something I would do at any of our other properties. It wouldn’t work. It works for Del Mar because of the demographics.”

Sky Deck is a restaurant collective — not a food court or a food hall, according to Donahue, as each restaurant has its own seating. It will contain eight to 10 concepts, in addition to a central cocktail bar and outdoor beer garden. The collective is part of a $120 million renovation at the center, which will include 120,000 square feet of new retail space and an expansion of existing grocer Jimbo’s, which will relocate from 14,000 to 25,000 square feet.

Fellow panelist Adam Corti, senior vice president of leasing for URW, noted he had a similar experience when it came time to renovate and expand Westfield UTC in the nearby submarket of University Town Center (UTC).

“UTC has been quite the journey,” he said. “Our challenge was having to redefine what the mall experience should be. There was an antiquated, formulaic approach being applied where many of the same stores were being stamped across centers in a rampant manner. Our biggest challenge was shift the approach and look at it as to say, ‘let’s not compete with the existing market, but see how we can differentiate and complement.’”

URW differentiated by honing in on the who, what and where aspects of its company, its products and its communities.

“We thought about all the people in the area — the Class A office employees, neighborhood residents, UCSD students — the strong segments of our market we weren’t capturing,” Corti continued. “We took the approach of how does this community live? What are the lifestyles of this community and how can we mirror them within our center? We focused on reconceptualization and created a retail-meets-resort environment.”

The $600 million renovation has been opening new doors since October 2017 when a new two-story Nordstrom and about 90 other stores premiered. With office workers, residents and students nearby, Corti’s focus remains on meeting area needs. In a submarket just north of La Jolla, that includes a luxury component as well.

“We’re introducing new categories and we’re mindful of oversaturation,” he continued. “We were oversaturated from a ready-to-wear standpoint and underserved in the arenas such as food and beverage and health and wellness for example. The piece I really embrace about this next phase is that it’s composed of no more than 15 new shops. We’re introducing a luxury aspect. Hermès opens later this month.”

Restaurant row?
Oversaturation was a key topic of conversation when it came to food and beverage. A natural darling of shopping centers due to its inherent internet-resistant model, many San Diego experts nevertheless wondered just how much of a good thing is too much of a good thing.

Reg Kobzi, brokerage panelist and senior vice president at CBRE, foresaw a “serious restaurant fallout in six months,” while fellow panelist Craig Killman, executive vice president of JLL’s retail brokerage, believed “so many existing restaurants are going to be absorbed like Pac-Man.”

San Diego’s restaurant industry is facing a problem the retail sector has long been tackling, noted fellow panelist Mike Spilky, president and principal at Location Matters.

“Large-footprint restaurants are going to sit there for a while,” he said. “If you have a 5,000- to 10,000-square-foot space, you should cut it up. If you have 4,500 square feet, you should hedge your risk — 2,000 to 2,500 square feet is where you want to be.”

Local landlords seem to be heeding this advice. Corti noted Westfield UTC aims to keep a healthy mix of food and beverage presence, which is likely around 25 to 30 percent of the center’s overall offerings today. Spaces at the Sky Deck in Del Mar Highlands, meanwhile, will range between 500 and 3,000 square feet.

“Anything above 3,500 square feet is really dicey and tough for the restaurant operator, too,” Donahue added. “It’s all about everybody’s risk. The tenant has to make some money, and we have to put them in a place where they can be successful.”

Stephen Avoyer, broker panelist and president and founder of Flock & Avoyer, also believed that early success in one San Diego submarket may provide premature confidence to restauranteurs and landlords that this concept will work countywide.

“There is a gap between urban and suburban here,” he said. “I’m seeing attempts from developers and landlords to bring Little Italy to the suburbs. It’s a fantastic goal, but a lot of times these operators aren’t ready to go into the suburbs and serve a market like they serve downtown, with thousands of people passing their front doors. There are a lot of failures. Outside of La Jolla, North Park and maybe El Camino Real [in Carmel Valley], it’s pretty tough to find a celebrity chef who’s going to succeed in east Alpine.”

The question of who will succeed and who fill fail is weighing on the minds of many who have relied on food and beverage as a way to mitigate e-commerce. Still, with great locations and ocean views, many restauranteurs are eager to get a piece of the action.

“The demand for restaurant space is still high,” Spilky explained. “If you have a space and a restaurant guy gets kicked out, there will be a line out the door to sign a lease pretty quickly. Coastal real estate is still where everyone wants to be and that can’t be replicated. But now, markets like Del Mar have lacked competition. All that’s out the window.”

Del Mar Highlands may be expanding, but it’s not the only game in town as Kilroy’s One Paseo quietly rolls out its 96,000 square feet of retail and restaurant space right across the street. Concepts like Urban Beach House, Shop Good, Soulcycle, Shake Shack, Tocaya and Susie Cakes began opening their doors in mid-March. They’ll soon be joined by other eateries, including the Butchery, Salt & Straw, North Italia, International Smoke, Tender Greens, Sweetfin, Ways & Means, Parakeet Café and more.

“When you look at the number of restaurants both properties are bringing online, including the restaurant collective and what’s already there, I’ve done the math — every single tenant needs to do $1,000 per square foot or more to keep a healthy ratio,” Killman said. “It will be interesting to see if they can all survive. Carmel Valley is there because it’s the best school district in San Diego. Residents pay a premium for that. Are they going to go to North Italia two to three times a week?”

Making waves down south
One strategy Spilky believed would benefit landlords and retailers was being the new guy in town.

“The smaller, emerging and first-to-market brands are the desirable ones in San Diego,” he said. “The first restaurant in a San Diego metro — like Shake Shack at UTC — is the winner. It’s easy to hedge your risk with these. The days of trying to have a credit tenant or national chain that signs a corporate lease isn’t necessarily as strong as having a personal guarantee with a restaurant driving traffic.”

For this reason, Donahue likes to keep it local.

“I want the best of San Diego,” he said. “I don’t want someone from LA. I want the best guy in San Diego. It’s the idea that this is a community. How do we go and get that tenant that’s connected within the community?”

Of course, once again, the community aspect that comes with local purveyors and mom-and-pops varies by region. Corti noted that UTC’s new tenant roster is composed of about 50 percent local and regional concepts and 50 percent national and global companies. The national and global presence inches higher, however, in the more densely populated suburbs. He admitted that ratio was much higher in national/global concepts compared to local at Plaza Bonita in National City, Westfield North County in Escondido and Westfield Mission Valley in Mission Valley however the similar approach of embracing the community’s best and bringing in more local concepts is being taken for those centers also.

San Diego may be a global city, but it still has room to grow as it is generally considered a secondary retail market. This is good news for concepts like La Michoacana Premium and Raising Cane’s. The ice cream and chicken fingers (respectively) concepts are making a push to enter and expand within the county, something that isn’t always easy. Michael Reed, retailer panelist and senior vice president of Stater Bros. Markets, knows this firsthand.

“San Diego County is one of the most challenging and difficult markets of all to penetrate,” he said. “In a market like San Diego, there’s limited opportunity for growth. We’re challenged with understanding what the shopper wants because we need them to have a positive experience with us.”

Chris Walker, fellow panelist and real estate manager for Raising Cane’s, believed he could open up to 30 restaurants in the county…if he can just figure out how to get off the ground.

“What we’re finding out is it used to be you got an inspection, then a permit, then you get your space,” he said. “Now, you get an inspection, you can’t get a permit, you need an entitlement and the process just goes on. I think tenants and landlords need to work together. The tenant gets caught between a rock and a hard place with the city, and the landlord often penalizes the tenant because the city is taking too long.”

So far, Raising Cane’s has managed to open two locations in Vista and El Cajon. Kobzi, for one, believed concepts like this will continue to be popular with investors in today’s changing retail environment.

“Single-tenant activity in small strip centers has been healthy,” he said. “They’re at a much lower price point, the capital is easy and there’s a bigger pool of buyers. Most investors are looking at single-tenant, net-lease deals because the expense nature is being covered. Plus, they like anything Amazon-proof.”

Clearing the hurdles
Retailer panelist Richard Feinberg, vice president of real estate for the Club Pilates franchise, understands investor interest. He is, after all, in one of the most popular retail categories nowadays.

“If you want a sense of community at your center, bring in the boutique fitness world,” he said. “There is an experiential aspect to this where someone is coming to your center three or more times a week to go to CycleBar or what have you. These people are seeing each other in the community every day. They’re bonding over fitness. Yes, they come to the center to work out, but they’re there for the people, they see each other at the center all the time, and that’s really the underlying success of the sense of community you want to build.”

Like Stater Bros. and Raising Cane’s, Club Pilates has had to limber up and clear its fair share of hurdles within San Diego.

“The city of San Diego zoning and codes and how they decide on what a business is has not caught up with the world we live in,” he said. “Our studios are 1,300 square feet and we’re in the same category as Planet Fitness. We have to go through the same hoops they do when we don’t have the same impact on a center and its parking. We’re a boutique studio.”

Unfortunately for franchise concepts like Raising Cane’s, Club Pilates and La Michoacana Premium, these costs and delayed openings can become insurmountable to a smaller entity.

“The amount of hurdles you’re asking an 1,800-square-foot user to jump through for what should be a very simple, easy box to open is kind of ridiculous,” Feinberg continued. “It would make things a lot easier if the city updated the way it treats smaller boutique users as opposed to a big box user because everything you make us do is costing the franchisee money. This then delays them in making money, which delays revenue to the city, which delays rent to a landlord.”

Fellow panelist Nancy Johnston, president of Epsteen & Associates and San Diego real estate veteran, has seen this resistance to change for decades.

“I’ve been told by many retailers that this is the hardest place to build a network of stores anywhere in the U.S.,” she said. “It used to be because San Diego was split up by topography and income, but in the past 10 years or so the entitlements have become the difficulties for developers. In San Diego County, it takes at least five years to develop anything. The city and county have lost a lot of money over it, redevelopment has gone away and sometimes their mistakes cost developers.”
Still, for all the red tape, there are many concepts that would love to be a part of the action.

“The fundamentals of our business are as good as they’ve ever been,” Donahue said. “We are 96.5 percent leased [at Del Mar Highlands], with an 80 percent renewal rate and 13 percent return. San Diego is really strong, and the capital and desire to be here remains really strong.”

— Nellie Day

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