Shopping Center Business

MAY 2017

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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SECONDARY MARKETS 328 • SHOPPING CENTER BUSINESS • May 2017 district draws guests from nearby Den- ver, and Blue Back Square in West Hartford, Connecticut, is a de facto sec- ond downtown for the state's capital. It isn't just Starwood Retail recognizing the growing impor- tance of sec- ondary markets. In Emerging Trends in Real Estate 2017, published by PwC and the Urban Land Institute, mar- kets including Austin, Denver, San Anto- nio, Charlotte and Nashville are forecast as having good prospects for investors for the year ahead. Called 18-hour cities, they are seeing significant job creation, as corporations find them less expensive to establish a business, and employees seek affordable homes and lifestyles. We know a few others from our own portfolio. Not exactly secondary, but often over- shadowed by Los Angeles, San Diego, home to our Parkway Plaza in El Cajon, California, is seeing strong job growth in the tech and medical industries, driving residential growth, the report says. While the cost of housing has risen, so have in- comes. The financial capital of the South and the largest city in North Carolina, Charlotte has seen job growth in a num- ber of industries. As a result, the city is expected to see a 2.2 percent population growth rate in 2017 over the previous year. The Virginia Beach/Norfolk, Virginia, population is expected to grow 0.6 per- cent over 2016. Most important, employ- ment growth in Virginia Beach/Norfolk is geared toward well-paying positions related to defense, and the expansion of the Panama Canal should result in increas- ing levels of activity in the Port of Virgin- ia. Other cities noted in the Emerging Trends report as up-and-coming 18-hour cities are Salt Lake City, Phoenix, Boise, Tucson and Columbus, Ohio. These markets appeal to investors for exactly the same reasons they can and do appeal to expanding retailers: a lower cost of living and doing business. Companies looking to open offices are attracted to lower rents. That in turn brings employ- ees who will find a lower cost of living – and thus have higher discretionary income and thus spend more on nones- sential goods, dining and entertainment. Rimrock's trade area boasts an average household income of nearly $70,000, in an affordable market. That's why many of its stores are first in the state. Another reason retailers are looking at smaller markets is that they have saturated the gateway cities, yet still need to grow. Put simply, after the post-recession expan- sion, they already have enough — some would say more than enough — stores in the major markets and the A-plus-plus centers in and near them. Now they are looking to smaller cities to serve those shoppers more conveniently. Before everyone starts flocking to secondary cities, one caveat: these small- er markets likely can only sustain one re- gional center — and one store for a chain. The key is to own the dominant center in these markets, ensure it's the right size and tenant it properly. Because you really will be the only game in town. Rimrock is 615,000 square feet, while Capital Mall in Olympia, Washington, is just shy of 1 million square feet. Gateway Mall in Lincoln, Nebraska, is 860,000 square feet. Just as retailers are right-siz- ing their stores, we also must gear our projects' sizes to the market potential for maximum value. Tenant mix is even more critical in these markets, and mostly should be geared to serving the entire family at mid- price points. Rimrock's anchors Dillard's, JC Penney and Herberger's are joined by a Wynnsong 10 theater, fast fashion, better apparel including Chico's, and familiar na- tional names. Capital Mall, which serves a growing and very eclectic market of out- door enthusiasts, legislators, fashionistas and students, has a diverse tenant mix of traditional department stores (Macy's, JC Penney), large niche players (Dick's Sport- ing Goods, Total Wine & More), fashion, dining and entertainment. Gateway, an- chored by Younkers, JCPenney, Sears and Dillard's, is the area's dominant fashion center, attracting first-in-market retailers such as H&M. For the most part, these are not luxury markets. There are exceptions to this general rule. Northlake Mall is technically in a secondary market in Charlotte, but the city's affluence and sophistication justifies a larger project (nearly 1.1 million square feet) and a more upscale mix including Michael Kors, Apple, and P.F. Chang's China Bistro to join anchors Macy's, Belk, Dillard's, Dick's Sporting Goods and AMC Theaters. The urban MacArthur Center in Norfolk, Virginia, is 1 million square feet, anchored by Nordstrom and Dillard's. In time, it's likely that these smaller cities will follow the path of Charlotte, attracting more and more affluent res- idents, and shopping centers will have to expand and adapt to their changing needs. Still, it's clear that even now, the secondary markets are alive, well and waiting to be served. SCB Scott Wolstein is CEO of Starwood Retail Partners, which owns 30 centers in 16 states. Scott Wolstein CEO Starwood Retail Partners These markets appeal to investors for exactly the same reasons they can and do appeal to expanding retailers: a lower cost of living and doing business.

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