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5.0 EDSR 03-09-2009ITEM ~ 5. Ci .ver MEMORANDUM TO: Economic Development Authority CC: EDA Marketing Committee FROM: Catherine Mehelich, Director of Economic Development DATE: March 9, 2009 SUBJECT: Update on EDA Marketing Committee Meeting Attachment • Article: "Filling Vacant Retail Boxes Requires Thinking Outside the Box", Costar Group Real Estate Information, March 4, 2009. • Staff report and related attachments to EDA Marketing Committee, Feb. 23, 2009. Background At its January 2009 meeting, the EDA directed the Marketing Committee to discuss the inventory of Commercial/Industrial vacancies in Elk River and advise the EDA of any marketing options, particular for retail space. Committee Suggestions The Marketing Committee met on February 23, 2009 to review the attached information and presentations by staff on various marketing tools. The meeting was attended by Committee members: Mark Urista, Gary Santwire and Jerry Gumphrey (Council rep). Members Jim Barthel, Dan Tveite and Chris Carlson were not able to attend. The Committee concluded their discussion with the following 3 suggestions for the EDA: 1. Improve exposure of Elk River property listings - • Property owners/managers/brokers could take better advantage of listing resources available through MN Commercial Association of Realtors and MetroMSP. Staff's research indicated less than 50% of Elk River's available space is actively listed on these most comprehensive listings for the Metro Area and St. Cloud. Consider hosting a property manager/broker open house to inform listing agents about the S:\EDA\Marketing\Marketing Committee\2009\3.9.09 eda update.doc MNCAR/MetroMSP options and continue to share results of the Retail Trade Analysis. • Improve link access to "Available Sites" from the City's Home Page on the city website «~~-w.ci.elk-river.nm.us • Revisit and evaluate Elk River's marketing message and who we're targeting for business recruitment. Does it need to be changed? 2. Consider wavs to encourageTospective tenants to choose Elk River - • Consider expanding the EDA Micro Loan program to include retail/service businesses anywhere in the city to be eligible to access the funds, particularly for leasehold improvements. • Conduct research on "cost of doing business" how Elk River's tax and utility rates compare with other cities. 3. Retain/maintain what we have - • Conduct aggressive Business Retention & Expansion program for manufacturing base. • Encourage the Chamber of Commerce to conduct Business Retention & Expansion program for the retail/service base. The EDA may wish to take the Committee's suggestions under consideration as part of the Economic Development Strategic Planning work session for April. S:\EDA\Marketing\Marketing Committee\2009\3.9.09 eda update.doc COS~R News: National Rie~l Estate Ixtflsan March 04, 2009 Written by Sasha M Pardy (spardy@costar Filling Vacant Retail Boxes Requires Thinking t~utside The Box Retail Property Experts Discuss Alternative Tenant Uses and Strategies; Identify Active Traditional and Non-Traditional Retailers that Continue To Sign New Leases "Enough already!" We know that's what a lot of our readers are thinking when, day after day, they read about store closings and bankruptcies. You know stores are closing. What you really want to know is, who can fill these dark spaces?! For answers, we turned this week to several leading industry executives who offered insight on retail tenant trends, and checked recent activity in Costar Tenant. John Bemis, director of leasing for ]ones Lang LaSalle Retail, which specializes in the management and leasing of regional malls across the country (including several receiverships often involving high vacancy) said that over the last six months, landlords' willingness to consider alternative or non-traditional uses has increased. "Because of the nature of the disposition business in general, we're dealing with second generation space that usually was an underperforming store -- the nature of this requires a creative solution, so this isn't new to us," said AI Williams, principal with Excess Space Retail Services. "But, because the economy is shifting and most retailers have stopped expanding, we're seeing more and more non-traditional leasing. It has required brokers and landlords to become more creative and flexible in what types of deals and leases they're willing to maintain. The larger the space, the more creative. We're absolutely seeing more and more of it." "In secondary and tertiary retail markets, where the local economies are more self-contained and stable than the overall national market, there seems to be a trend developing: Smaller, local and regional retailers of all categories with solid sales performance are striving to take advantage of opportunities to lease prime retail space traditionally taken by large national retailers. Also, we have seen aggressiveness by a short list of non credit-rated department stores, with strong cash positions, in shopping for bargain lease rates out of retailer bankruptcies," said Harold Fry, VP of leasing for Hauck Holdings, the owner of shopping centers in 10 states. "There are only a handful of 15,000 to 20,000-square-foot traditional tenants active in the marketplace and most of those are discounters who won't pay more than $12.00 NNN. In a growing number of markets, you'll have five to 10 shopping centers competing for one retailer. Landlords have no choice but to be creative and think of alternative uses," said Matt Hammond, senior leasing associate for Coreland Companies. Patricia Palumbo, director of leasing and marketing for Metropolitan Management in Owning Mills, MD said she hasn't seen such a spike in her market yet, "The users I am working with are typical for strip center space. We are not doing anything non-traditional at this point." "There has not been that much of the alternative users of space taking over traditional retail space. I think all segments of the economy are being battered and no one really wants to take on additional fixed costs at this point, said Matthew Bordwin, managing director of Keen Consultants, the real estate division of KPMG Corporate Finance. Consulting Costar Tenant, we conducted a national search for retail tenants that signed new leases 1,000 square feet or larger over the last six months to open new stores at retail properties 10,000 square feet or Copyright (c) 2009 Costar Realty Information, Inc. All rights reserved. CONTINUED: Filling Vacant Retail Boxes Requires Thinking Outside The Box larger. This search yielded more than 11,500 new leases totaling nearly 55 million square feet -- definitely enough transactions to identify trends on what tenant types, as well as some stand-out tenants, are signing new leases these days. NON-TRADITIONAL, ALTERNATIVE TENANTS GOVERNMENT USES Examples: Department of Motor Vehicles, City Halls, Military Recruitment Centers, Libraries Jones Lang Lasalle retail's Bemis said there's a "fairly large trend" of government entities opening in malls. Costar has recorded at least 100 leases to government entities at retail centers over the last six months. "While they're not ideal for upscale malls, they are willing to lease those difficult spaces -- usually in mall wings that are close to the parking lot," he added. Robert Thatcher, general manager and director of leasing for Triyar Cannon Group's Concord Mall in Elkhart, IN said, "I think government offices should be considered depending on the type of and center and its location within the community, with further consideration of things like availability of public transportation and perhaps a major (likely enclosed) shopping center's traditional role as a community focal point and/or meeting place [does it appropriately match the particular government agency, etc.]. Government offices are typically willing to make a long term commitment to a five or 10-year Lease, but insist on a one year kick-out provision in the event funding for the office is impaired or terminated. Thus, funding tenant improvements for these projects must also be evaluated in view of not just the "quality" of the income stream, but the "durability." EDUCATIONAL USES Examples: Satellite Colleges and Universities, Massage /Beauty Schools, Daycares, Youth Private Schools With the population of those laid-off from their jobs incessantly on the rise, many people choose to "go back to school" during this down economic period. That said, schools are a good candidate to backfill vacant junior anchor or anchor spaces at shopping centers. Costar has recorded at least 60 university/college/vocational school leases over the last six months, as well as countless preschools/day care centers. At malls, Bemis said, they'll even consider taking a block of combined small-shop spaces. "They're great traffic to have; wonderful for food uses and service businesses in the center and are accretive to sales," said Bemis. Hammond said Coreland is currently marketing a 20,000-square-foot space in a center anchored by Food 4 Less, CVs, and Big Lots. "Within the first sixty days marketing the center, we received one offer -- a regional vocational school. While it's not our ideal tenant for the center from a synergy standpoint, they have strong financials...we are pursuing them," he said. CHURCHES While those interviewed cited a few examples of churches signing leases as an example of alternative retail tenants, the consensus among those we consulted was that it's not a widespread trend. Costar recorded at least 80 leases signed by churches at retail centers over the last six months. "I have been doing church deals periodically for 10+ years with great success," said Triyar Cannon Group's Thatcher. "They clearly generate mall traffic for retailers and food court businesses. Churches usually start smaller, and as they outgrow the space they're in, they move out into the community and either partner with other smaller congregations or acquire traditional church real estate on their own - even across town if necessary. In both of those instances, they have continued to grow dramatically," said Thatcher. Thatcher cited the example of Fresh Start, a new church that recently opened at the Concord Mall in a former KB Toy store that required little retrofit -- an attractive store front helps it blend in with other mall (c) 2009 Costar Realty Information, Inc. All rights reserved. CONTINUED: Filling Vacant Retail Boxes Requires Thinking Outside The Box tenants. Nail Scarred Hands," another congregation, worships in free-standing, 11,297-square-foot former twin screen movie theater next to the mall that has served as church incubator, hosting three churches over the last 12 years that ended up outgrowing their space and relocating. One former tenant, Voice Ministries, recently took over a 60,000-square-foot former K-Mart after making extensive improvements to the former big box facility. "We recently sold a mall in Memphis that had been hit by a tornado to a church that was interested in occupying half of it and keeping the other half retail," added Bemis. "We'll keep a couple anchors and the balance will be the churches' community services." RECREATIONAL /FAMILY FUN USES This category can get interesting. Bingo Halls or Bridge Clubs are not uncommon. Indoor children /family fun centers are also popular as replacement tenants -- think bouncy houses, indoor mini-golf, roller skating, bowling, play structures and ball pits, arcades, laser-tag arena, birthday party centers and the like. These tenants are candidates for small spaces all the way up big box spaces. Costar recorded at least 30 leases in this category over the last six months. In a recent article on The Infrastructurist.com, Oberlin College professor Julia Christensen said, "When I give speeches, audiences always love to hear about the Spam museum, which is in a renovated Kmart building in Austin, Minnesota and also the story of the RPM Indoor Raceway, which is a go-kart track in a renovated Wal-Mart in Round Rock, Texas." . FITNESS USES Examples While often downplayed by brokers and store owners as "non-ideal", fitness tenants have become a much more common fixture at shopping centers than in the past, said our experts. This category is widespread, from national and regional chains taking over vacant big box spaces, to local and franchise users opening up specialized fitness instruction spaces (dance, martial arts, personal trainers, and yoga are examples) and weight loss clinics. Costar has recorded nearly 350 leases in this category over the last six months "For those considering a fitness center, I caution them to take a hard look at the financial stability of the company," said Bemis, who said it is not uncommon to see such tenants turnover more frequently than others. In one example, Bemis said, "We took a dark Steve & Barry's at Town Mall in Westminster, MD and cut it up. We put a Gold's Gym in the back and saved the mall frontage and main road visibility to do small shops. I think that's a trend that will continue." SECOND-HAND /OVERSTOCK Examples: Thrift Stores, Consignment Stores, Second-Run Cinemas, Used Furniture, Used Books/CDs/Video Games, Antiques, used sports equipment, Bakery Outlets, "Scratch-n-Dent" /Overstock item Retailers, Pawn Shops With tightened pockets, consumers are much more willing to sell, trade, or buy their "gently-used" items; they still want to go to the movies, but are willing to view films that have been out for a while already, sit in older seats, and deal with below-par picture and sound; and being they're on the lookout fora "great deal", they don't mind buying dented cans of food or "irregular" merchandise. "I've heard that business is booming at Plato's Closet," said Bemis, referring to a popular teen clothing consignment store. Costar recorded at least 30 consignment store leases over the last six months, as well as at least 20 thrift shop leases, plus 32 leases signed by Goodwill alone, and another 15+ antique store leases. Pawnshops, while often considered among the least desirable tenants, continue to sign leases -- our search yielded at least 15 signed in the last six months. SEASONAL/TEMPORARY Examples: Mall Kiosks, Holiday Goods Retailers, Annual Inventory Liquidators With vacancy on the rise, landlords have become more willing to consider signing temporary tenants, as Copyright (c) 2009 Costar Realty Information, Inc. All rights reserved. CONTINUED: Filling Vacant Retail Boxes Requires Thinking Outside The Box they look to generate at least some income while they continue to search for a permanent tenant. However, the number of potential tenants in this category continue to be limited, said our experts. "At malls, this is called 'specialty leasing', and often these tenants can help lead to growth as they're converted into permanent tenants. However, the specialty leasing world has been hit with the rest of the leasing world in the scramble to find appropriate retailers for space," said Bemis. Williams said that in some very short-term temporary leasing situations, landlords are willing to take a straight percentage of sales in lieu of rent. In the holiday goods category, he said Excess Space does about 50 Halloween store leases every year. TRADITIONAL TENANTS Surprisingly, there are still a few traditional tenants expanding, the deals are just fewer and farther between. Some categories continue to plug along with expansion, however. Discounters are the standout across the board named by all interviewees. Dollar stores (this category is widespread from small shop local and franchised stores to the likes of Dollar Tree, Dollar General and Family Dollar), discount grocers (Aldi, Save-A-Lot, etc), big-box discounters (Target, Wal-Mart), wholesale clubs (Costco, BJ's, Sam's Club), and off-price brand retailers (T] Maxx, Marshalls, Ross Dress for Less, etc) were identified. Other common uses continuing to sign leases over the last six months include wireless phone/mobile device retailers (at least 350 leases in the last six months), video game retailers (at least 150 leases over the last six months), quick service restaurants (at least 800 leases signed in the last six months), drug stores, wine/liquor/cigar shops (38, 42, and 29 leases in the last six months, respectively), tax preparers, insurance (at least 150 leases over the last six months), real estate/construction (yes that's right, at least 85 leases were signed in the last six months), doctor's offices/clinics (at least 120 leases over the last six months), medical supply retailers, hobby/craft retailers (approx. 50 leases over last six months), pet care/supplies (at least 60 leases over the last six months), salons/spas (at least 375 leases signed over the last six months), massage/ acupuncture (at least 80 leases over the last six months), financial services (at least 75 leases over the last six months), beauty supply (at least 80 leases over the last six months), copy/ship, sign makers, rental centers (at least 60 leases over the last six months), and more. For more guidance on specific retailer names,please refer to the table at the end of this story listing tenants that have signed at least four or more leases over the last six months, and the average square footage they leased. ISSUES IN ALTERNATIVE TENANTING / BACKFILLING SPACE EXCLUSIVE USE / CO-TENANCY RESTRICTIONS "For the most part, when you approach department stores to discuss use issues, they tend to be realistic about what's going on. They want a big traffic generator and don't want ahalf-vacant mall," explained Bemis. That said, restrictions can -- and do-- apply. Consignment or other second-hand stores are usually ruled out and off-price brand retailers are sometimes ruled out at malls because department stores won't give in on lease prohibitions against the sale of such products. Most of the experts we interviewed said exclusive-use issues almost always arise when a center is anchored by a grocery store that protests the sale of grocery items by a discounter or dollar store tenant, for example. "Co-tenancy is a problem," confirms the Coreland Companies' Hammond. "Most anchor tenants have clauses in the lease that state either (i) only a certain amount of square footage can be non-traditional retail in the center or (ii) it has to be a certain distance from their premises. This is largely due to the tenant wanting to have strong co-tenants (i.e. other retailers who help their sales) and to prevent a gym or school opening next door that could impact their parking," he added. Copyright (c) 2009 Costar Realty Information, Inc. All rights reserved. CONTINUED: Filling Vacant Retail Boxes Requires Thinking Outside The Box PARKING Hammond also said that Coreland is currently negotiating with a fitness center to open at the space of a former Jo-Ann Fabrics. "We have to get the existing grocery store (which has parking provisions against schools and gyms), as well as the city, to give us permission. We're having to perform a parking study to show there is enough parking to accommodate the additional traffic," he said. He added that its not uncommon for the same issues to arise when trying to sign a lease for a school or church. NEGOTIATING THE RIGHT LEASE TERM In many of these alternative-tenanting situations, a landlord is often "settling" for the tenant type, opting for the rental income over the ideal tenant. In that case, should a landlord negotiate shorter team leases in the hopes that the economy turns around and a more ideal tenant could be brought in? Both Hammond and Bemis said anchor spaces are typically signed for traditional five to 10-year terms. "With smaller tenants, we try and limit the terms to one to three years," said Hammond. "We're seeing a lot more willingness to accept shorter terms, kick-out clauses, etc," said Williams. PRACTICALITY OF CUTTING UP ANCHOR SPACES Gary Ralston, president of Florida Retail Development said, "Unfortunately, many large spaces are not easily divisible or conducive to being subdivided to meet the needs of the smaller retailer." He explained that vacant anchor spaces are often too long to be subdivided, and added that the likelihood of creating small shops in the front and getting a user for the back that doesn't require frontage is often times low. Supporting this challenge, Palumbo said a vacant anchor space at a shopping center she leases may need to be split up to lease part of the space to a national retailer, the balance of the space would then be limited in its traditional retail use, she's thinking medical use is a possibility. THINK OUTSIDE THE BOX "Creativity is very important now," stressed Bemis. As an example, Bemis cited JLL Retail's work on the Crestwood Court mall just outside of St. Louis. "Half of this center is getting redeveloped in a few years, but in the interim, about half of the space was vacant. We approached the arts community and were successful in turning that vacant space into an artisan community," said Bemis. At ArtSpace, local artisans rent space for studios where they can work on, display and sell their works; space for art classes, as well as live theatre is also on the premises. While ArtSpace was originally planned as a temporary use, Bemis said it's caught on in the community and is "keeping the mall very vital and interesting" and as a result, might be considered as part of the Crestwood's redevelopment plan. Ralston takes an analytic approach. "I suggest exploring the detailed demographic reports available. Take a look at the NAICS codes for retail and restaurant use and scrutinize each trade and its subsets in order to identify tenants. Then cross-reference that with demographic data on the categories where people spend their money [national per capita averages in comparison to the same in a certain radius of the subject property], to identify uses that are underserved in a certain geography." Meanwhile Williams said that calls coming in from their "for lease" signs are "down about 40% nationally, so now it's really important to use every avenue of advertising, as well as pounding the pavement and canvassing." To receive the full table, which includes over 200 retailers, email the editor, Sasha Pardy, at spardy@costar.com (Editor's Note: To keep up on happenings and trends in retail real estate, subscribe to Costar's Retail News Roundup, a weekly column covering retailer expansions and new concepts, store closings, bankruptcies, cutbacks, acquisition, mergers, sales. new shopping centers, personnel changes, and sustainability. Follow this link for access to back issues of the roundup. In addition to appearing every week in the national news and retail news sections of our web site, you may also receive the Retail News Roundup for free via email by requesting to lie added to the distribution list by contacting senior editor, Sasha Pardy at spardy@CoStar.com Also, click here to subscribe to Costar's dedicated Retail RSS Feed. Copyright (c) 2009 Costar Realty Information, Inc. All rights reserved. giver MEMORANDUM TO: EDA Marketing Committee FROM: Annie Deckert, Economic Development Assistant Catherine Mehelich, Director of Economic Development DATE: 23 February 2008 SUBJECT: Discuss Available Commercial & Industrial Space Attachments • Draft January 12t", 2009 EDA minutes • Star News article - "City marketing committee will inventory retail space", January 21, 2009 ~.%~-~• Property Availability Summary - MNCAR data as of February 2009 • NorthMarq -Commercial Real Estate Market Report, January 2009 Purpose At their January 12t", 2009 meeting, the EDA discussed goals and projects for 2009. One of the goals is to inventory available commercial/industrial (C/I) space in the City and market via the city's website. In addition, the EDA directed the EDA Marketing Committee to: • Discuss the inventory of C/I vacancies and conditions in Elk River • Evaluate current marketing efforts • Advise EDA of any additional marketing options, particularly retail space Background Available C/I Data for Elk River and Surroundin_ Cq ities On January 12t", 2009, the EDA discussed a concern about the amount of vacant retail/commercial space in Elk River. Attached you will find reports depicting available industrial, office and retail space available in Albertville, Big Lake, Coon Rapids, Elk River, Monticello, Ramsey and Rogers. Below is a chart summarizing the findings: City Office Space Retail Space Industrial Space Total Square Ft Rank Ro ers 55,483 163,887 1,443,770 1,663,140 1 Coon Ra ids 220,624 243,540 415,254 879,418 2 Elk River 63,158 153,051 445,432 661,641 3 Ramse 53,288 79,394 249,276 381,958 4 Albertville 41,247 320,075 15,640 376,962 5 Monticello 95,492 54,370 84,609 234,471 6 Bi Lake 8,000 38,889 18,800 65,689 7 Source: MNCAR Exchange as of 2-17-2009 A detailed report of the Elk River listings will be provided at the meeting, or in the interim, Committee members are encouraged to conduct their own test search for a listing of available properties by either going to the City of Elk River website at www.ci.elk-river.mn.us or www.metromsp.org and enter zip code "55330". Current Marketing Efforts At the meeting staff will provide an overview of current marketing efforts, including but not limited to the following activities: * Staff has linked www.metroMSP.org on the city's Economic Development Department webpage to connect the public with available C/I sites in Elk River. MetroMSP takes users to this GIS based site selector website, allowing them to search available properties in the 11 county metro area. This site data is supplied by licensed realtors who are members of MNCAR, and is updated daily. * On January 22, 2009, the EDA partnered with the Elk River Chamber of Commerce to hold a Retail Trade and Analysis Workshop (RTA) conducted by the University of MN Extension Service. An RTA report and workshop help a community evaluate the health of their retail sectors. It provides local sales data, comparing your community to others, which in turn helps assess strengths and opportunities for our local businesses. This data specifies the actual retail potential, identifying retail opportunities, as well as the types businesses that draw shoppers away from our community. Invites were distributed to area brokers, developers, realtors and business owners. This workshop was attended by over 40 people. This report is available on our website and is aired on the local cable channel. Issues for Discussion The EDA has requested the Marketing Committee to evaluate current marketing efforts of available space and advise the EDA of any additional marketing efforts that could be considered. The Committee's recommendations will be shared with the EDA at its March 9t" regular EDA meeting. • Is there additional information or resources needed by the Committee in order to respond to the EDA's request? • In the past the EDA's role in marketing space has been as a reference and resource about available properties in response to inquiries and prospects that contact the city. 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