Economy, online shopping changing the face of retail space

The slow economy has crimped retail space demand, as retailers have re-evaluated their commercial real estate needs.

The Biaggi's Italian restaurant chain, for example, suspended development of new restaurants for a few years after the 2008 recession, according to commercial real estate agent Scott Olson, a member of the Bloomington, Ill., chain's ownership group.

Rising taxes as well as land and construction costs were beginning to make new construction of free-standing buildings so costly that it would be hard for the restaurants to operate profitably, Olson said. So, as Biaggi's readies its first new stores since the building freeze, the chain has focused on leasing space on the ends of strip centers, known as end caps, that are in abundant supply after the recession and much more economical, he added.

The end caps tend to be on heavy traffic routes with good visibility, Olson noted. If the first end-cap strip center locations planned in Deerefield and Peoria, Ill., work out well, Olson said, strip centers could become standard locations for the chain.

Retail-space demand in the Corridor has slowed more than any other commercial real estate sector, Olson said. The biggest factor has been the shrinking demand from independent retailers, hammered by rising costs and tough price competition from online stores and national chains.

Olson took part in the decision to close Higley's on Second, the downtown ladies apparel store he co-owned, in 2008. He said the store had broken even or made a small profit most years, but retail margins had shrunk as competition from big retail chains intensified.

Nationwide, vacancy rates for all retail peaked at 7.6 percent in the first quarter of 2010. By first quarter 2011, it had dropped to 7.2 percent.

In fact, big-box retailers from Best Buy to Walmart are reducing the size of the new stores they build in many cases, according to David Drown, a principle in commercial real estate company Gibbs Lamb Drown in Cedar Rapids. Walmart is building new small-format stores in “second generation” buildings in large cities, and Best Buy has opened smaller venues with less inventory because customers can so easily purchase many of the items it carries online, Drown added.

One motivation of the retail giants is to integrate their stores with their online presence. If certain items are mainly purchased online, he says, it makes little sense to lease retail space to keep those items in inventory.

Both companies have adopted policies that let customers pick up online orders at stores.

While Westdale Mall in Cedar Rapids continues to struggle with high vacancy, the new Edgewood Station strip center built on former outlet parcels of the mall recently leased out, said co-developer Gerry Ambrose, a Realtor and broker.

Ambrose explained retailers have shifted to strip centers because those sites offer higher visibility, closer parking and lower maintenance costs. He bluntly describes malls as “dinosaurs” facing extinction.

But even strip centers have been affected by the slowdown. Olson said many strip centers have turned to service businesses to lease “second generation” spaces vacated by retailers, and for the first time more than half the space in new strip centers frequently is taken up by service businesses.

The service businesses aren't limited to hair stylists or nail salons, either. They include accountants, doctors' offices, and UPS Stores, Olson added.

Among them is William's Shoe Box.

Bill Ortgiesen opened William's Shoe Box at 3315 Williams Blvd. SW in the Williams Plaza strip mall about seven years ago, after his partner in Leslie's Shoes at Westdale Mall retired. He decided to get out of the enclosed mall because its rising vacancy rate was reducing store traffic.

William's Shoe Box is a independent local retailer, with personal advice and shoe fittings.

The Williams Plaza location played well to the store's needs, Ortgiesen said. It resulted in lower payroll costs - away from Westdale, he could reduce store's hours - and maintenance costs.

Visibility from Williams Boulevard is good, and the park-in-front arrangement worked well for older customers who don't like to walk far.

The number of retail stores in Williams Plaza has dwindled, however, to the point where William's Shoe Box is now in the retail minority. Ortgiesen wouldn't have preferred it that way but says he won't complain because the business is still growing.

Leasing interest at a new strip center under construction on the north side of Marion demonstrates that trend toward services.

Interest has been strong in the Stonefield strip center at Barrington Parkway and North 10th Street since 10th Street reopened after a reconstruction project, according to co-developer Dan Engle of Mooney-Engle Land Co.

Demand hasn't been affected by the national retail space glut, Engle said, because the center was designed to bring services and goods to an under-retailed residential area.

“We've heard from a coffee shops, a couple of hair stylists and a full-service restaurant,” Engle said.

A MAC Express fitness center already has committed to the center.

In addition, Engle said, an insurance agency and a dentist have been in discussions about joining the development, although they could be headed toward free-standing buildings on other parts of a 22-acre planned unit development nearby.

There are signs that malls have a future, but it may be quite different from their pasts. Malls have become more willing to lease space to service businesses and non-traditional anchors, such Costco, due to rising vacancies.

Temporary seasonal stores, dubbed “pop-up stores,” have

become a bigger part of the retail landscape, including malls.

As more strip center space has come back on the market, Olson said certain stores such as Hobby Lobby and Big Lots have moved in to take advantage of the second-generation retail space available at reasonable, and sometimes bargain, rates.

Ambrose said his strip center projects still see plenty of interest from coffee shops, delis and frozen yogurt franchise operators.