The Shift to Local Identification in Retail Real Estate
In cities around the country, growing numbers of developers are prioritizing the inclusion of local and independent boutique retail tenants in centers with more recognizable national chains.
At a time when the retail industry is undergoing some profound changes, it should not be surprising that we have seen a correspondingly significant shift in conventional wisdom about how to build a tenant roster. That shift is especially evident in adaptive reuse projects, and in retail and mixed-use developments located in more urban areas.
Consequently, we have some great real estate in the country being occupied by largely unproven brands and businesses. These local or up-and-coming retailers may not have extensive backgrounds or long and proven sales histories, but they do have the exclusive, authentic feel that developers — and communities — are looking for.
Projects like Heights Mercantile, a low-rise urban market district in Houston’s Heights neighborhood, are thriving through tenant rosters populated largely with chic and exclusive independent brands.
Even the small handful of national names at Heights Mercantile — Lululemon Athletica, Warby Parker, Marine Layer Inc. — are either exclusive to the region or have the kind of “cool” factor consumers are drawn to.
There are a number of reasons for this shift toward boutique brands and independent retailers. Understanding what those reasons are, why they are important and what developers are considering as they make leasing decisions can provide us some interesting insights into how the industry is evolving today — and where it’s headed next.
The increasing preference for independent boutique brands over national chains is driven in part by a desire for exclusivity: the sense that this is something (and, consequently, some place) special that can’t be found just anywhere.
This notion dovetails with the growing design and development trend toward creating retail and mixed-use destinations with distinctive architecture and unique and appealing spaces. These features aim to attract and keep consumers in large part due to the experience of the place itself. It’s the evolution of commerce from a transactional necessity to a social opportunity.
In conjunction with luxury brands and chic names like Warby Parker, owners and developers are looking to create a constellation of brands that will complement or enhance that experience. An exclusive, boutique, high-end feel for a center is increasingly viewed as a key differentiator.
Identity & Authenticity
It’s not just about exclusivity; it’s also about identity. Local and up-and-coming regional names evoke a sense of civic identity and community connection that is absent with national chains.
People who live in these areas feel as if they are a part of a larger local phenomenon. When done right, this establishes a memorable and enduring sense of place. With a cookie-cutter list of national brands, consumers could be anywhere. But with a list of unique and independent local names, they are unmistakably somewhere unique.
Palisades Village in Pacific Palisades, California, is an outstanding recent example of what that can look like. Its roster of more than 40 “uniquely curated” boutiques and eateries include eight first-to-brick-and-mortar names, and a long list of chic local concepts.
It’s not a coincidence that the project, designed with a mix of storefronts and an intimate inward-facing layout, markets itself as a “bespoke walkable village” and highlights its connection to “one of the nation’s most picturesque, welcoming and heritage-rich coastal communities.” When done right, that authenticity and sense of true community can be appealing and powerful draws.
Storytelling is an increasingly prominent part of that authenticity factor. Maybe it’s a local favorite food truck opening its first brick-and-mortar location, or a dining concept started by a hometown chef who won a James Beard award, or a fashion boutique founded by owners who got their start selling homemade wares at area pop-up shops.
Retail and restaurant concepts with a compelling story behind them are particularly popular, as they naturally feed into the narrative about a retail or mixed-use destination that has its own history and local connections.
It’s important to note that this phenomenon is clearly more evident in urban projects and environments. It’s becoming increasingly common for such projects to have a tenant roster with virtually no national chains. More familiar national brands and established regional chains are much more supported in the suburbs, however.
Developers used to be focused on controlling their properties, avoiding overspending on design features and bringing in tenants with strong credit. Those priorities have changed dramatically, however. Today, many successful developers would strongly prefer a chic local name over a national brand. They recognize and are more willing to invest in design and placemaking features — especially community spaces.
Developers are much more willing to sign a promising independent brand, even when that user may lack some of the traditional metrics used to assess the financial health and stability of a prospective tenant. Due diligence is still important, and no successful developer is going to proceed foolishly. But there is more of a general willingness to take a little bit of a risk to add charm and authenticity to a project.
Mixing It Up
Just because local and independent brands are preferred doesn’t mean the right mix of merchandising is any less important. A diverse tenant roster featuring users within key categories, such as apparel, fitness and a mix of dining options is almost always a priority. But this is perhaps even more important for projects where placemaking and experiential horsepower are an important part of the value equation.
The Great Outdoors
It’s noteworthy that a lot of the activation in this new generation of design- and experience-heavy, locally driven projects is taking place outside, even in environments that have traditionally been viewed as inhospitable to outdoor retail. Hiking and biking trails and outdoor attraction amenities are increasingly common, as are tenants that leverage those resources — things like outdoor dining options and bike rentals.
While retail and development trends are always evolving, one thing that doesn’t change is that developers have to adapt in order to cater to the current needs and demands of customers.
Everyone chuckles about the industry’s seemingly obsessive focus on millennials, but this is a demographic with enormous spending power. Their preferences for more activation, vibrant settings and unique and distinctive local brands are unmistakably influential.
At a time when there’s a large and growing distinction between winners and losers, developers following the same formulas that they did 20 years ago are falling by the wayside. Developers that are embracing projects and concepts with independent concepts and a strong sense of place are standing out from the crowd.
— By Lunden McGill and Ben Brown, tenant rep specialists, Baker Katz. This article first appeared in the May 2019 issue of Texas Real Estate Business magazine.