The ADRR

NDM: I like this question because so many of the downtown leaders and stakeholders I’ve encountered over the past 48 years believe that retail is the basic driver of their district’s economic well-being. This is especially true for those in suburban and rural independent cities. But how often have you heard retail experts say that retail follows roofs, or auto or pedestrian traffic? Furthermore, the really effective, important group of people for most downtown retailers is its daytime population that is composed of those working in and near the downtown, and those visiting it, as well as adults with school age children, school children, and retired seniors living nearby. The size and spending power of the daytime population will be influenced by an array of economic, social, and even medical forces. In many very important ways, retail is not the driver of the downtown’s economy but its strengths or weaknesses reflect the power of a wide array of other forces.

Since these other forces can and do vary in strength one might reasonably expect that will be reflected across our downtowns that in turn vary in size, density, and demographic characteristics.

All of the above said, retail can be an important factor for attracting customer traffic downtown, and for also attracting other ancillary businesses that can benefit from such a flow of customers. As our recent experience during the pandemic showed, closed retail shops are not conducive to strong pedestrian flows.

So, I think that retail is best seen primarily as a very important indicator of a downtown’s economic health, rather than a key driver of its economy.

MJB: The prevalence of this belief is not too surprising.  Since ground-floor retail is the one and often the only use that visitors, prospective investors, would-be homebuyers and others see in a mixed-use Downtown, it becomes the basis, fairly or unfairly, for their perceptions of and conclusions about the community as a whole.  It can also carry symbolic importance for existing residents and boosters, as a Rorschach Test of sorts for how they see themselves and want to be seen by others.

I would agree with you that to a large extent, retail follows rooftops.  Or, more to the point, retail is more effect than cause; it is “downstream” of other forces and variables.  That said, retail — particularly food and beverage — can play a catalytic role, especially in neglected urban settings.  It can help to create the “there, there” that people then want to live in or near.  In such cases, the rooftops actually follow the retail.  Indeed, when I hear a leasing professional utter the ”retail follow rooftops” proverb as if it’s as certain as the law of gravity, I respect him/her less, as it betrays a certain level of ignorance about how Downtown or neighborhood revitalization can “happen.”

Speaking of daytime populations, I have long felt that the impact of office workers on retail spend is grossly overstated.  The workday does not allow for many opportunities for serious shopping.  Rather, their expenditures tend to be  concentrated in food and beverage, mostly of the quick-service variety, as well as select conveniences like pharmacies, barber shops, dental clinics, etc.  Which is not in any way to minimize these categories — for some Downtowns, they account for much of the retail mix — but they are generally not going to give rise to a larger destination.  That is far more likely to come with a sizable numbers of captive visitors and/or an underserved residential trade area.

NDM: I’m glad you mentioned food and beverage operations – I am among those who do not consider eateries and drinking holes as retail – since they are so instrumental in the development of a downtown’s Central Social Functions (CSFs), and they usually develop well before a district’s comparison shopping operations appear in our smaller communities, and as an essential partner of them in our larger downtowns. We don’t have the space for getting into CSFs and CSDs here, but more can be learned about them here

I could not agree more that these days estimates of office worker spending are out of whack, based on puffing research.

The office worker topic is good one to help get us more directly focused on the question of can  retail drive the recovery of our larger downtowns, where remote work has significantly reduced the presence of these workers, and that has forced many of the food, beverage, retail and service operations that were very dependent on them to either close or reduce their operations. Yet, these office workers are not the major patrons of the large numbers of upscale retailers that are to be found in our largest downtowns, e.g., in Manhattan, Chicago, Philadelphia, Boston. Though large numbers of well off residents live within about a 15-minute Uber ride of these luxe retailers, in pre-pandemic years, many of them had become dependent on tourist shoppers, especially those from abroad. The high spending Chinese tourists are unlikely to return at prior visitation levels, and while Placer data do indicate a resurgence of domestic tourists in our major downtowns, the level of returning foreign tourism remains in doubt. During the pandemic these luxe retailers reportedly, by necessity, shifted their attention back to the well to do residents in their 15- minute neighborhoods. These affluent households came through the pandemic financially sound and the recent inflation has not reduced their spending levels. Right now, I don’t know either how much these luxe merchants have tried or succeeded in repositioning their marketing efforts towards 15 minute residents. Mike, what’s your sense of this  wealthy tourist—local wealthy resident situation?

One of the reasons I think the luxe merchants gave higher priority to tourists over residents is that the core areas of these downtowns lacked significant numbers of affluent residents.

Many of our largest downtowns also have strong retail corridors focused on shoppers with more modest incomes, such as 34th St in Manhattan, State St in Chicago, and Chestnut St in Philadelphia. Formerly often dominated by department stores, they now are often transitioning to value retail operations.  While the Federal government provided a lot of money to keep the households of these shoppers financially viable during the pandemic, I think many are significantly stressed, and that has been exacerbated by the recent bout of inflation. Retail rents in these corridors are often also relatively high, if not as high as pre-pandemic. The combination of high rents and reduced customer traffic would mean these corridors are likely badly stressed.

MJB: Yeah, I, too, have long been skeptical of the ICSC projections of office-worker expenditure – it does not align with the actual tenant mixes one encounters in office-dominant districts, nor with common-sense understanding of what employees have time or inclination to do during the workday.  I do think there is a conversation to be had about the true spin-off from food and beverage establishments, especially ones most active at night – I’m not sure that the synergies with comparison shopping are as clear as the industry assumes…

The historic emphasis on tourist shoppers in large Downtowns actually makes sense, inasmuch as this submarket  is  effectively captive.  We are all familiar with how much more freely we are willing to part with our money while on vacation.  Our brains are simply in a different place.  Not only do we buy more on impulse, but also, we’re far less likely to head to a nearby competitor (like, say, a shopping mall or an online marketplace) for something better or cheaper – we’ll readily take what’s right in front of us, even if it’s mediocre or overpriced.  Nearby residents, on the other hand, are behaving (more) like rational consumers, deciding where to spend on the basis of the conventional variables, like quality, value, selection, convenience, etc.

What’s interesting, though, is that amidst this prolonged decline in international tourism and longer-term uncertainty about Chinese visitors, the luxury fashion houses have actually been doubling down on the U.S. market, opening new locations in the kinds of second-tier metros that they never would have considered in the past.  And they’ve also been recommitting to larger Downtowns, even the ones struggling the most.  While the national media could not stop bashing San Francisco, brands likes Bottega Veneta, Yves St. Laurent, Omega and Van Cleef & Arpels have been opening or expanding stores as well as buying real estate in Union Square.  They’re playing the long game, figuring that the international tourism will ultimately return, which I suspect has always been a more critical submarket for them than nearby residents.

As for those more mid-market shopping streets, yeah, that’s where today’s inflation might be more impactful.  Even there, though, retailers probably have a much different time horizon.  When times are good, these corridors tend to sport very low vacancy rates, so space is not something that tenants give away easily, unless under duress (e.g. a Chapter 11 filing).  And when times are not good, other brands might get greedy while others are fearful, just like the luxe labels in Union Square.  Sometimes, I think, we need to zoom out and pay less attention to macro factors (e.g., inflation, the stock market, etc.) which, within the course of decades-long leases, represent just a speck of time.

NDM: I am very ambivalent about the impacts of tourists on our downtowns, and have written about the growth of over-tourism in Europe and here in the US. The economic impacts of tourists, especially the larger spending foreigners, can be significant. But by their sheer numbers and often unacceptable behaviors they can ruin local attractions and quality of life. In Paris, Barcelona and many other major European cities, overtourism has become a major issue. Here in the US, cities like Charleston, Key West, Miami Beach and Palm Springs have all dealt with it. I think NYC pre-crisis was being choked by them, while it made a lot of money from them.

I really don’t see any major US retailer who can rival the huge retail conglomerates that have been formed in Europe ( e.g., LVMH, Kering, Hermes, Richemont, Prada) especially in France and Italy. At best, our retailers are good at “mass luxury,“ not real luxury. And when they are really good, they often are bought out by the Europeans.  I think the continued penetration of European luxury chains in the US is a sign of the weakness of our luxe brands. Also, your comments about their entry into 2nd tier downtowns both confirmed for me their seeing American competitors as weak, and a signal that the market they are going after is not foreign tourists, but very affluent local residents and possibly very affluent domestic tourists. My reasoning is that these 2nd tier towns do not attract a lot of foreign tourists, and often not that many domestic ones. But, they all have a lot of very affluent households living in and near them filled with potential luxe shoppers.

While the pre-pandemic media blitz about our retail Armageddon might suggest that all retail chains are weak, I don’t think that is the case with many of the large luxe conglomerates that are so prevalent in our large downtowns. The same is true for value retailers that are increasingly dominating the old middle market retail corridors of these downtowns. Many are coming out of the crisis in relatively good financial shape. Importantly, they are also managed/owned by merchants, not bean counters. Moreover, I think that most of these retailers are committed to staying and getting through the crisis, and they have the financial strength to do so.  These are powerful, not weak players in the game of economic survival.

Consequently, I think most of our large downtowns will continue to have lots of strong, attractive retail shops for downtown visitors and residents to shop in.

MJB: I can understand the ambivalence towards tourists — I wasn’t so much making a normative statement as an analytical one.  That said, one of my worries about a Downtown paradigm skewing more towards residential is that it creates a constituency that can start making unreasonable demands and ultimately become a roadblock to change.

That can happen when residents  feel like the Downtown should cater primarily to them.  And I’m not just talking about the buyer of a new condo in a “24-7” Downtown who then complains about all of the evening noise.  I have recently  worked in two tourist-heavy Downtowns  where the process was driven largely by residents who insisted that the retail strategy focus on their needs and preferences.  Never mind that their size as a submarket was overwhelmed in both cases by a visitor contingent numbering in the tens of millions, and that rejiggering the market for retail space to their benefit might be a fool’s errand.  Talk about the horse(s) having left the barn!

I think that the French and Italian luxury fashion houses have generally been better at crafting and maintaining perceptions of scarcity and exclusivity, whereas  U.S.-based “accessible luxury” labels like Coach and Michael Kors offer textbook examples of how to dilute one’s brand through overexposure.  I agree with you that the former are opening branches in these second-tier metros primarily for the (affluent) residents – but as part of a two-pronged strategy that also includes larger, showier flagships in the tourist-heavy city centers, which they increasingly own.  It’s not either-or.

NDM: Mike, I think we need to sum things up. While we agree that our large downtowns have and will continue to have a lot of very strong and magnetic retailers, and that the flow of affluent shoppers will be robust, it seems we have significantly different views about the tourist and residential markets. I am much more inclined to see affluent residents becoming again important to the luxe merchants, while I think you see these merchants still making affluent tourists their primary target market segment. Where we differ even more strongly is about how residential concerns should be treated vs over tourism and other potentially residential unfriendly downtown growth possibilities. That’s a topic that also spills over into our current housing and gentrification problems. It would be a great subject for another column…or two. Moreover, if there is a growing trend toward much more housing in our downtown core areas, it is a type of conflict we will be seeing much more frequently in the future. In turn, this will be reflecting a kind of macro change in these downtowns from being mainly business oriented to be being much more people living and playing oriented.

Yes, residents can create roadblocks to needed change. But I bet we both can cite chapter and verse about local landlords, developers, and merchants being strong impediments to change in downtowns across the nation. Even worse, has been when their investment choices have worked out far from optimally.

Since I had the first words, you have the last ones.

MJB: Let me be clear: I agree with you that affluent residents are most likely the primary driver of luxury’s push into second-tier metros, while at the same time maintaining that international tourists are probably more relevant in many of their city-center locations.  I also agree with you that tourist-heavy Downtowns can sometimes cross the line on quality-of-life grounds. What I don’t believe is that residents in such settings deserve a veto on what kinds of projects and tenants can exist there.  Unless they somehow arrived before the existence of the district, they knew – or should have known – what they were moving to: not just a busy area but also, a critical economic engine, cultural crossroads and symbolic heart of a larger community. Yes, Downtowns are residential neighborhoods – and might have to evolve even more in this direction going forward – but that’s not all they are: they must also respond to other imperatives.  Part of the problem is that only existing residents vote (and participate in planning processes), not the residents who have yet to materialize.  Developers and landlords might be just as guilty of self-interest, but they necessarily have to think a little bit more about, and speak on behalf of, where things are heading tomorrow, not just where they are today (or, for that matter, where they were yesterday).