Commercial Retail Development -- Think Big, Go Small

Think Big – Go Small
The value of small format development in an evolving retail and mixed-use environment.

By John Lateulere, AICP

For some time now, commercial development has been dominated by large format retail centers, which have largely evolved from the enclosed malls of the late 20th Century into the mixed-use lifestyle and town-center developments of today. Traditionally, the “Bigger is Better” theory has driven that more than 10 acres of land are required in order to secure the critical mass needed to make a retail project successful. However, the “bigger is better” paradigm is proving to no longer always be the case. Changing economic, social and development realities are helping to spur increased interest in a newer and potentially exciting development concept: small format retail. These smaller scale developments are frequently redevelopments, infill projects that transform an old corner gas station or dilapidated dry cleaners into a vibrant new space. Simply put, the industry is quickly evolving to realize that big presents are sometimes “smaller than a bread-box.”

The growing appeal of small format retail development can be attributed to a number of influences, not least of all the unpredictable nature of what has become, in some markets, a very challenging real estate and residential development outlook. In questionable economic times, financing has become both more difficult and more complex; large land parcels and big-money loans are harder to come by and generally represent a much more significant investment of risk.

Small format retail has previously been viewed as a niche concept, with a number of potentially troublesome logistical, procedural, financial and design headaches that many developers viewed as simply “too much trouble.” The projects themselves, like the perceived potential profit margins, were seen as too small to be worthwhile. Challenging national economic circumstances and a competitive commercial real estate market have helped refocus attention on the exciting potential of these kinds of spaces, and many developers are discovering that these neighborhood centers frequently present a range of situational advantages for developers, retailers, and consumers alike.

A thoughtfully designed neighborhood center is able to offer great amenities and a desirable location, a compelling design, and a convenient level of accessibility for retailers and guests, all with a degree of financing and development flexibility that is appealing to developers. Small format retail might indeed be a niche offering, but that niche is proving that it can occupy a valuable and important space in the development landscape.

retail store front
Defining Small Format Retail
What exactly is small format retail? The label is not so much a formal category of development as it is a catch-all phrase that can be used to describe any small or mid-scale retail development that brings some of the same appealing amenities, spatial relationships, and architectural detail of larger mixed-use projects into a redevelopment context, all on a scale that fits naturally within the community context of the site. These infill projects can be anything from a single-tenant enterprise to a multi-tenant neighborhood center that provides a diversified investment profile and a broader range of attractive retail, dining or service options. Instead of traditional big box anchor tenants, the “anchor” of a neighborhood center might be a coffee shop, bookstore, specialty market, or other small-to-mid-level retailer.

Infill redevelopment on this scale typically consists of a small assemblage of land – generally no more than 2 acres or so – that must be razed and rebuilt with a facility that meets modern retailer standards. Assemblage can present its own issues and complexities, but it can also represent a high reward – synergy; high quality infill development is structured such that the value of the assembled parcel is greater than the sum of its parts.

Unlike larger retail projects, which are frequently dependent on a large number of outside factors and uncertain variables and therefore present an inherently more unpredictable development process, neighborhood centers have the advantage of presenting somewhat of a known quantity. The traditional “chicken or the egg” retail/residential conundrum faced by so many developers when assessing a site’s potential – that homes will not sell in an area where there are no conveniences, and commercial options will not go where there are no rooftops – is a non-factor. The number of rooftops (a key indicator for value of tenancy) is already known and present, and speculation as to the potential positive or negative impact of future adjacent development is minimized.

These neighborhood centers are not only positioned within a known and quantifiable existing market space, but they also offer a highly customizable product that lends itself to a more diverse and flexible development approach. For developers, the advantage to that kind of flexibility is twofold. Smaller projects are easier to position, and possess a design and leasing flexibility that facilitates their ability to slide into a select market niche. There are only so many mega-retailers that a region can support, but there is always room for a neighborhood-level resource that satisfies a local or regional market demand. And from a practical standpoint, the diversity of these projects is an attractive financial proposition for developers who might balk at the idea of putting all their capital into one market segment.

Additionally, commercial redevelopment in these infill locations typically supports an increase in residential land values, ultimately magnifying the “value added” nature of the property assemblage. There are additional public relations benefits and opportunities that can stem from these kinds of projects, as well. Developers who work to form productive partnerships with communities to upgrade or eliminate blighted properties can sometimes benefit from relaxed development standards or possible public/private partnership financing.

From a design and functionality perspective, infill development on this scale confers a range of advantages over strip malls, which can look and feel somewhat outdated over time. These projects are architecturally more flexible, and can fit in a wide range of parcel configurations and layouts. Smaller buildings can provide for a higher percentage of tenants to offer drive-through services; they allow the center to be closer to the street, providing greater visibility and marketing potential; and they provide greater individual identity for each tenant. Thoughtfully designed small box retail is generally more accessible to visitors, providing multiple points of vehicular access and a high degree of walkability.

For all of its potential appeal, small box retail and infill redevelopment (particularly in aged urban areas and first-ring suburbs) presents a handful of potentially complicating factors. The tradeoff for building in what can be superb locations is sometimes dealing with properties that carry a lot of baggage. From aging infrastructure to environmental and political unknowns, infill development sometimes must overcome its own set of unique challenges. Older zoning codes sometimes have no provision for modern advancements, such as drive-through layouts and 360-degree building signage, and sometimes fail to account for the presence of mass transit and issues like stormwater management. Connecting with and relating to existing infrastructure can also be a hurdle, if existing roads, intersections, adjacent properties and traffic patterns are not updated, or the site presents existing cross-access easement obstacles.

big box store
Small Boxes To The Back
Until recently, many developers have adopted a mentality that the approval requirements, design process, and leasing initiatives needed to get a large project off the ground were equally complex and required a similar amount of effort as those needed to make a smaller project successful. With larger projects also generally cheaper to build on a per-square-foot basis, and typically carrying a higher public profile (and therefore greater potential for the developer to secure enhanced notoriety) small box retail and infill development has traditionally taken a backseat.

For all of their “headline” potential, however, larger projects have their own obstacles to overcome. They require dealing with larger, typically more demanding tenants, demand larger amounts of capital (sometimes a deal-breaker in the current climate), and ultimately, generally yield a smaller return on overall development. Savvy developers are learning how to be more flexible and are no longer turning up their noses at the chance to explore new opportunities and market segments. The industry as a whole is becoming more aware of the potential of neighborhood centers, and these niche opportunities are booming.

The logistics and coordination necessary for the successful design and development of larger numbers of small projects deviates greatly from that required to develop a handful of larger projects. For developers who wish to incorporate neighborhood centers into their development portfolio, it makes sense to assemble a team of experienced experts; development consultants and partners who understand the nuances of infill development and have experience meeting the needs of small format retail tenants. Assembling the right team can enable developers to efficiently and profitably negotiate the gauntlet of issues facing infill redevelopment, spur potential for public/private financial partnerships, and successfully transform neglected or underutilized spaces into vibrant new neighborhood destinations.

John Lateulere, AICP, serves as project manager of Land Development Services for Atwell-Hicks and can be reached at 440.349.2000 or Atwell-Hicks is an award-winning land development consulting firm provided services for residential and commercial real estate developments. With more than 400 employees in 15 offices throughout the United States and Asia, Atwell-Hicks focuses on provided real estate and development solutions via land planning; civil engineering; land surveying; environmental consulting; and water resource services.

This article originally appeared in Shopping Center Business, May 2008. ©2008 France Publications, Inc.

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