Starboard Commercial Real Estate

Hans Hansson | February 8, 2018

Common etiquette, at least what I have learned and practiced, has certainly evolved in ways that are very different today. “Please” and “thank you” have been replaced with “Can you” or just silence.

 

“Please” and “thank you” used to communicate civility. It was a request for help and a response for acknowledging help received.

 

Manners

The lack of these manners has also changed how we communicate in the workplace.  As a commercial real estate broker, I am in a unique business where my competitors are my rivals one day, and my ally the next.  Just like in any partnership, communication is critical to make sure both sides are moving forward to ultimately close a business transaction. Our job is to figure out the right strategy, communicate, and negotiate with one another until hopefully we come to an agreement.

 

However, common practice of the past is no longer the way business is handled. Fellow brokers today no longer update one another on deals, nor for that matter show any regard for their fellow brokers’ time and effort.  

 

 

Respect

For example, a typical property tour used to comprise of a broker calling several days ahead to schedule a walk-through of a space. Today, we oftentimes hear from a broker with an hour or two of when they’d like to see the property.  We do our best to accommodate, but frequently end up getting no-shows, extremely late showings, or cancellations to the showing. This ends up being a huge waste of time– and time is money.

 

The broker is not necessarily the problem here.  Many times, a client today has little sensitivity or respect for a broker’s schedule and has expectations for the broker to work around their schedule.

 

Communication

After accommodating a last-minute scheduling to show off the space, we rarely receive a follow up from the broker to update us on interest from their clients. We will call, email, text– but rarely do we get a response. If a broker’s client is interested, we won’t hear from them until the offer is sent. Earlier in my career, business was handled between brokers and we would discuss what it would take on both ends of the deal to close. We may discuss terms of the buildout, term rate expectations, etc.

 

We have also experienced deals where brokers on both sides simply go radio silent.  If you ask for an update, you can expect no response.  Recently, I was involved in deal where a broker represented his client and took us through interest, an official offer, and even space-planning. Shortly after planning, they disappeared from the transaction only to reappear, and disappear again. Our obvious conclusion was that they were negotiating with another party.

 

I ask myself – “When did common courtesy get thrown out the door?” They say to receive respect, you must earn/show respect. If each of us practices gestures of etiquette, even the smallest actions, every day (particularly with strangers), one would hope to see a domino effect spread, making life–and business– much more pleasant for all of us.

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Hans Hansson | January 7, 2018

The ongoing tradition of making a list of positive changes you want to implement in your life in a new year can actually be productive.  A number of people will sign up for fitness classes, perhaps give up drinking, or cut back on unhealthy foods. Others may decide to make changes in their professional careers, make financial commitments to save more, or make a bucket list of places to travel.  

 

New Years is a time to reflect and see the possibilities of the brand new year ahead.  It’s a time to look forward, not backward.  Unfortunately, most of us that make these potential life changing resolutions don’t stick with them long-term.  Overtime, the motivation for change often weathers away.  

 

The reality is: change is difficult.  It’s difficult to actually start making changes and it’s even harder to maintain over a long period of time.  As human beings, we like stability– regardless of if we are in a good stable place or bad stable place. Change takes us out of our comfort zone and brings us into the unknown, which can be very scary for most.

 

Although we may mean well to seek out positive change, we almost always feel obligated to simply because it’s a new year.  But like any change, it doesn’t come easy and we rarely see it through.

 

What makes uncertainty such a challenge? Perhaps because it means nothing will ever be the same. A new job may not provide greener pastures as you had thought. Starting your own business could quickly go sideways and make your current circumstances a hundred times worse than they were.

 

Chip and Joanna Gaines, stars of the hit HDTV television show “Fixer Upper”, wrote a book called “The Magnolia Story” that explores how Chip is a constant believer in change, while his wife is a constant believer in stability.  Chip believes that once you have reached stability and feel comfortable– change is necessary. Although his wife believes in the opposite, she supports Chip when a decision is made and jumps in to make the next change in their lives work.  Chip feels that growth occurs only through uncertainty. Uncertainty requires you to be creative, open, and willing to deal with uncertainty head on. In turn, this creates growth.

 

My first grandchild was born in December.  She is entering a world that will see changes like no other period in history.  My granddaughter will probably never drive a car. Most of the products she’ll use will be manufactured through robotics. Commercial space travel and humans living on Mars may be the new norm. All of these items today bring a tremendous amount of uncertainty in our lives.  The thought that we would not have control of our automobiles scares a lot of people. The thought that you would live on another planet and be able to travel to space is beyond uncertainty for most.

 

Every invention – from the light bulb to the computer, and the world tech giants like Amazon have created has ushered uncertainty into the marketplace and within our lives. Yet, we begin to accept these changes and adapt.

 

The world does not come to an end for most; rather we evolve. As the New Year begins, if you truly want to grow– jump into the pool of change. It might appear cold at first, but you will begin to swim. And who knows? It might put you in a better place than you are now.

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Hans Hansson | January 7, 2018

Having been in the commercial real estate business since 1984, I have experienced three boom and bust cycles throughout my career.  The beginning of the first cycle was marked by the 1989 earthquake in San Francisco, which preceded a deep national recession. That was followed by the Dot.com boom and bust of 1997 through 2001. And then the worst of them all– the stock market crash of 2008.

 

The current economic boom cycle started in 2010 and is now entering its eighth year. During this cycle, commercial rents have increased 60 percent on average, yet conventional business growth (excluding the tech sector) have seen business gains of less than five percent per year on average.

 

Historically, commercial tenants needed to pay a maximum of eight percent of their gross revenue on rent. Today, several businesses are pushing rent to 12 percent or higher.  With other costs like payroll, benefits and additional regulations, businesses are being nickel and dimed. Many retailers, both local, national and international, have called it quits because profit margins have been lowered so dramatically.

 

That being said, the tech sector has clearly driven this current boom. However, venture capitalists have reduced startup funding, hoping to stabilize existing investments before engaging in new major rounds of funding. In commercial real estate, tech tenants are typically short-term tenants (under 3 years), that means any cutback on funding could eventually start creating vacancy issues.

 

Banks are starting to be more cautious too. Bank of America recently tightened their lending requirements for commercial lending in anticipation that the current cycle will end soon.

 

Yet with all the signs showing that we may be at the top of the cycle, growth continues to occur.

With the passage of the tax reform, we can predict that more businesses will benefit and therefore continue to see growth in the coming year.

 

This current cycle is so similar, yet so different from past cycles I’ve witnessed that I frankly can’t predict what will actually happen. But my gut is telling me that 2018 will be a good year.

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Hans Hansson | December 20, 2017

In a new book by Enrico Moretti, “The New Geography of Jobs,” Moretti provides a deep dive where job opportunities are and why that is the case. He explains how job hubs are created and why certain cities may never recover their past glory. Interestingly enough, some of today’s hottest markets came to fruition by complete accident.  For instance, Bill Hewlett and Dave Packard created hardware components out of their garage in Palo Alto, California and created a domino effect for other tech founders. Around that time, Palo Alto’s economy was supported primarily by agriculture. HP forever changed Silicon Valley.

 

Paul Allen called his friend Bill Gates to New Mexico where they had worked on an early version of Microsoft. When their business grew to 50 people, Paul became homesick and decided to move the company headquarters back home to Seattle– which later became today’s tech hub of the great northwest.  

 

Moretti noted in his book that most major business hubs would strategically choose a location near elite educational institutions in order to attract bright new talent to the area. However, some of the best schools in the country struggled with graduating students returning to their hometowns to start their careers. The University of Michigan is a prime example of an elite school that touts itself as one of the best universities in the country, yet the state has one the the lowest retention rates of its local graduates.

 

The same is seen in Philadelphia– a town loaded with exceptional universities, yet it continues to see graduates move back to New York or other surrounding hometowns rather than set down roots in Philadelphia.

 

My son attended Saint Joseph’s University in Philadelphia and graduated in 2009. My wife and I had visited numerous times over the five years he lived there. We found the historical aspects of the city beautiful, however the city itself seemed tired. Grand historic buildings were abandoned or underutilized, leaving parts of the city feeling like a ghost town. We’d see construction of new buildings take place, but overall the city appeared to be locked in a time warp.

 

In the last decade however, things began to change– all thanks to one local restaurateur by the name of Steven Starr. In 1995, Starr began opening unique restaurants in old abandoned buildings in downtown Philadelphia. This was highly risky, as downtown had the reputation of being very dangerous. But, one by one, each restaurant over time slowly took off and became wildly successful, changing the scene downtown.

 

 

Soon, local building owners would seek out Starr in hopes of forming a partnership to open new restaurants in their buildings. Today, Starr has opened 20 restaurants alone in downtown Philadelphia and brings in thousands of customers a day to the downtown area.

 

 

He not only gave new life to old, vintage buildings, but has ignited the transformation of a once rundown section of the city. Starr’s high-end restaurants attracted clientele of a particular demographic. Luxury retail shops soon caught on and moved their stores to downtown. Wanting their piece of the pie, more restaurateurs, coffee shops, and convenience stores started to open new locations downtown. In addition, the housing market started to take off. Like most major cities, millennial residents want to live in Center City, Philadelphia.

 

 

Remodels are seen underway of older office buildings, converting them into beautiful brand-new luxury residential properties.

 

Since the transformation of downtown, Philadelphia is attracting many young residents from New York seeking lower housing costs and a less crowded lifestyle.  Co-working facilities are also cropping up as headquarters for new tech startups, mostly founded by local university graduates.

 

After all these years, Philadelphia got its spark back–  all thanks to one successful restauranteur who took a huge risk and changed the city’s course for the better.

 

Cities around the world should take note– this is a textbook example of pure entrepreneurship, not city-planning or state-funded directives that sparked this change. Moretti’s book shares examples from around the world where attempts to change the direction of a city and it went nowhere, even though there were good intentions by city officials. Luck is most often the reason for major urban growth.

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Hans Hansson | November 29, 2017

One of the most active industrial markets in the country can be found in Chicago.  Commercial Real Estate properties there can easily make $300,000 - $400,000 a year selling and leasing industrial space. Yet, commercial firms are having an ever increasingly tough time finding new agents.

 

No Longer a Go-To Career Choice

Real estate is not an attractive occupation to today’s generation. An industrial agent in Chicago needs to expect to have to own a car and drive on average 25,000 miles per year to cover their marketplace. Today’s generation does not want to own a car, let alone drive around all day for work. In addition, you need to put in several years of hard work with little pay to build your book of business to achieve these higher income levels. This generation wants an immediate payday.  

 

The biggest challenge is that most younger professionals want to live in the cities that they work in and don’t typically find suburban life appealing after college.  This frankly doesn’t only affect potential talent in commercial real estate, but also most traditional businesses.  From manufacturing to the trades– traditional businesses are struggling to recruit while millennials seek roles at new startups in both nonprofit and non-traditional marketplaces.  

 

Talent Wars

Today, the average worker in trade work is 46 years old and are struggling to recruit, counting more and more on veterans rather than graduating high school or college students to fill these positions.

 

The big question is – what happens if you can’t find workers and compensation is not the driving recruitment tool?  What happens when manufacturing or the trades pay well enough to attract and it does not work?  An example is an electrician in the Bay Area can make $140,000 to $175,000 a year including pensions and full benefits far better than most jobs, yet they are struggling to find talent.

 

Part of the problem is that this generation has not experienced the need to fix their own things or service and assist others.  The age of “now” may be showing its negative effects on society as a whole.  Most of the trades attracted labor from the next generation. For example, a father who worked in the trades would likely have sons who ended up following their footsteps. Children used to work on cars themselves and learned the ins and outs of the mechanics. They would learn how to use tools at a young age, so choosing a career in the trades became a very natural choice. Today, children are working with computers– learning to code, build and design websites and software, therefore choosing a career in technology is now the new natural progression.

 

Business Continues to Change

 

Commercial Real estate agents typically were founded because their parents were in the business. Their parents were salespeople and the next generation understood what it took to be successful in sales and how to service clientele.  Today, sales are done not in-person, but via text messages, emails, and social media.  This has clearly caused an evolution that will eventually permanently change how we do business and how we create things.

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Hans Hansson | November 15, 2017

As a result of owning my own commercial real estate firm since 1991, I have seen what works and doesn’t work in the successful development of a real estate salesperson. The single biggest thing that causes most agents to not “make it” is their inability to create a disciplined approach to time management.

 

Time management is the key to success for any salesperson. It’s also part of organizational skills that most salespeople do not have as an innate trait. Most personality profile tests will support this understanding. A strong salesperson’s test results will look for strong driven skills and the ability to multitask and press forward, even when it looks like there is no business to secure. Yet, almost all of those tests will show lack of organizational skills. This typically would be found in people who are more analytical in nature.

 

Calendaring Your Day

I have thought for years about the importance of calendaring all of an agent’s necessary activities each day. Personally, I will calendar current business, new business, “big hour”, personal business, research, and education.

 

The current business includes all of my deal activity pipeline and things I need to do to push those forward. The new business activity includes business development. The “big hour” is working on deals that have low probability to close, but with high rewards if they do. Personal business is acknowledging that everyone has certain personal actions that need to be accomplished each day.

 

Each activity requires you to create tasks to complete each day, which I keep in a separate tasks file. When I have to do work on current business, I simply go down my list of tasks associated with each activity. If I don’t complete a task, I move it to the next day to complete.

 

Continuing to Learn

Research and education are the hardest activities to calendar into your schedule. These are also the hardest actions to perform each day. Although education does not produce immediate results, nor lead to any direct benefits for the foreseeable future– you will increase your likelihood of long-term success.  

 

As a commercial real estate broker, I recently attended the National Association of Realtors national convention. Most commercial brokers are not members of the NAR and most regard NAR as a service provider for residential realtors. However, NAR actually provides very strong tools, classes and networking opportunities that support commercial brokers both locally, nationally, and internationally.

 

I went to NAR to learn about new tools available to realtors. In the end, I learned new ways to leverage social media, new software tools available to improve how I do business while also lowering my costs, and I participated in classes that gave me inspiration to start implementing tactics with a new focus.

 

In terms of time management education, research is the most important daily activity you can do– and a daily calendar with scheduled time to educate yourself through listening to podcasts, reading books, mentoring, attending training classes or online webinars will help you grow as a salesperson instead of ultimately failing.

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Hans Hansson | September 15, 2017

Warehouse demand is at an all-time high and industrial vacancies are at their lowest point in nearly two decades at 5.3 percent, according to JOC.com's data hub. Yet, building of warehouse space throughout the country is not keeping up with this demand. Why?

 

Simply put, the costs to secure the land, build, and then find a tenant does not make economic sense in most markets. Rents for warehouse spaces have remained relatively flat throughout the country until recently.

 

E-commerce fulfillment is a big reason why the demand for warehouses and distribution centers has increased of late, representing 40 percent of leasing of industrial properties today, according to a recent report from Jones Lang LaSalle.

 

In California, warehouse rents are doubling and in some cases tripling due to the legalization of marijuana. Warehouse spaces that used to sell at .50-.75 cents a square foot is now selling at $2.00 a square foot.  In markets like Santa Rosa, California landlords are advertising two prices –$1.25 for non-marijuana use and $2.00 a foot for marijuana use. According to a CBRE article, 4.2 million sq. ft. of Denver, Colorado’s industrial market in Q4 2016 was occupied by marijuana growers.

 

Of course, at $2.00 a foot, it would make sense to build warehouses. The challenge we’re really seeing is that marijuana remains illegal on a federal basis. As a result, non-conventional funding sources from banks to hand out loans used to build warehouses are not allowed to support buildings that house marijuana.

 

In addition, if a landlord decides to add a marijuana tenant in their building, even if they had no loan on that particular building, their banks could legally take away any other loans on other properties owned by that landlord since they have illegal use in one of their properties.

 

In California, the marijuana demand has made it far more expensive for true warehouse users to not only find space, but to keep the space they have.  In Santa Rosa, the Alhambra Water company will not have their lease renewed in favor of their current landlord wanting to add a marijuana cultivation operation in its place.

 

Unfortunately, the county is certainly not motivated to do anything but allow the expansion of marijuana.  The fee structures established for marijuana cultivation is adding millions to the city. Until there is financing available to build marijuana cultivation warehouses, rents will continue to skyrocket.

 

What happens to the cost of basic services if businesses have to find warehouses further and further away from their marketplace in order to store their products? They will have to commute farther to bring their products to their marketplaces, making the warehouse location not only a hassle, but more expensive for the business.

 

Amazon is looking to build “super warehouses” across the country in order to meet their expected demand for their online products and now food with the recent acquisition of Whole Foods.  As a result, there are different types of warehouse usages cropping up, such as indoor soccer fields, large gyms, and other sports facilities that are looking to reinvent their properties.

 

Local county and state planning is essential to provide quick decisions on warehouse development so that warehouse construction can happen and meet this demand. If not, the consumer in the end will be paying for it with much higher product costs and potentially face shortages in food and other basic product needs.

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Hans Hansson | July 28, 2017

Amazon recently announced the largest office lease signing this year in San Francisco– 180,000 square feet and occupying multiple floors at 525 Market Street. This deal presents a number of ramifications to both the current and future commercial leasing market.  Amazon released a statement saying that San Francisco’s current tech market is still booming and that firms still want to be here in the city.

 

With the Boom Comes Doom

This may be a not-so-positive outlook for conventional businesses who have lease renewals nearing. More likely than not, landlords will want to sign new leases with larger tech firms who have deeper pockets.

 

Today, most leases that are going to expire after five-year terms will be seeing rent increases of at least 40 percent. For most businesses, they will not be able to pay the increased rent and will be forced to move out. The challenge is that with a vacancy of less than six percent overall, businesses will be forced to not only move, but make some drastic decisions on how small of space they can occupy and where.

 

Other businesses will have to look at their overall profits and decide if and when they need to make cuts. They will also need to review current business operations and determine what changes can be made to reduce spending or reallocate budget. Some of these changes may be minor. For instance, I have a client that is considering eliminating his conference room altogether because he simply doesn’t use it. I know of others who are looking to eliminate private offices in favor of open plans in order to lower square footage needs and costs. Minor moves like these can actually have major consequences on not only day-to-day operations but long-term.

 

Supply Doesn’t Meet the Demand

The largest issue we have is the slow process of office space development. San Francisco needs to develop spaces sooner in order to meet the demand. This has been a real challenge as we continue to see building costs skyrocket and the beyond lengthy process it takes to acquire land and actually develop buildings in the city. For a developer, this means taking a tremendous risk with an upfront investment, not knowing if the site will even be approved for development.  

 

Old Laws With New Action Come Into Play

In addition, past city propositions, dating back to the 1980’s are now coming into action, along with potential delays on new measures to help enhance office development.  In the 1980’s San Francisco passed an office limitation ordinance known as Proposition M. This established an “under one million square foot” annual cap on office space growth. Each year, whatever annual square footage was allowed that wasn’t built could be placed on “reserve” for future years.

 

For most of the years since the passing of Proposition M, there has been little to no office development. But today, almost all of the reserve space has been occupied, which means that we have little expansion of office space left. There are numerous projects, including office development plans for the San Francisco Giants, as well as expansion around the Golden State Warriors’ new stadium site. In addition, there are major office developments throughout South of Market (SOMA) planned– all of which will be at risk with Proposition M.

 

In adding to the list of challenges– San Francisco’s SOMA plan, which would rezone buildings from 4th street to 7th street in order to create office, residential, and hotel development, is now facing new opposition. Current condo owners are concerned of the larger scale projects causing shadowing throughout their neighborhood.  All of which can be worked out, but will certainly cause delays.

 

Delays occurring within a boom market are not going to be good if our city cannot react to the needs of the marketplace in a timely manner. The city needs to be proactive in streamlining office development projects so we encourage growth, not delay it. With the city just passing the largest budget in its history at $10 billion, and with less than $50 million in available discretionary funds– any dip in business opportunities can have devastating effects on our city, our operating revenue, and jobs overall.

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Hans Hansson | July 15, 2017

San Francisco’s Mayor, Ed Lee, just announced a $10.1 billion city budget, with increased spending to address homelessness. The two-year budget proposal, which includes a $10 billion budget in the second year, will boost services by $30 million each year around homeless services.

 

Per resident, San Francisco spends more money than any other city in the United States. While the budget was announced, real estate assessment figures showed that property tax revenue will increase by 7.4 percent, due to higher real estate sales transactions paired with higher real estate values.

 

The city is over six months to a year behind in actual reassessments of properties that have sold. Therefore, the actual gain will be much higher when the city finalizes new reassessments.

 

San Francisco is experiencing an unprecedented boom in new income due to increased property values and will continue to do so over for the next two years at least, until all reassessments are complete. Given we are spending the most per resident in the country and given our unprecedented growth in income, are we as residents getting our money’s worth?

 

The Board of Supervisors struggled with approving this $10.1 billion budget because it still requires major cuts in services to obtain a balanced budget. The city continues to spend more money than it receives. How can this continue to be?

 

Discretionary available funds are actually at an all-time low. There are less than $50 million available funds to tackle new projects from infrastructure to assisting the homeless. Almost all the $10.1 billion budget is locked into city wages, benefits, and pension dues. The sad fact is that there is little that can be done about it.  

 

Illinois currently has no state budget because the state owes far more in outstanding bills than it has money to pay. The only difference between us and the state of Illinois is that we are experiencing a real estate boom. If this boom did not occur or eventually busts, our situation is going to be exactly the same as Illinois.

 

It doesn’t take an “eagle’s eye” to question whether we are getting our money’s worth out of this budget. As a native San Franciscan, I see that our streets are dirtier than ever before and are lined with even more homeless people. Countless streets are in desperate need of repair and there is absolutely no discussion amongst city officials to repair our underground infrastructure, namely our 100-year-old plus sewage system along with our electrical and water systems.  

 

So, what is the hold up? First, we have a political problem. We are a one-party town with no political opposition to create a system of checks and balances. Secondly, the very worker’s government, union, and the large corporations that control the city are our politicians, which created these massive financial “giveaways” in terms of wages, benefits and pensions. Therefore, without independent oversight or some political oppositional pressure, there’s no chance that anyone will truly tackle these cost overruns.  

 

Overregulation and inefficiencies are built into the fabric of how we run our government. Again, you don’t need an “eagle’s eye” to see this. Simply go down to San Francisco City Hall and try to pay your taxes, or go to the City Permit department and try to pull a permit for construction. There is no motivation to be efficient because if they were, they simply would not be needed. The sad reality is that we are overstocked with government workers. From the time of Mayor George Moscone to the end of Dianne Feinstein’s term in office as Mayor, the city increased its city worker count by four thousand.

 

Here is an excerpt from a recent San Francisco Chronicle article on our budget.

 

“By far the biggest chunk goes to pay city employees. Almost half — $4.7 billion — is spent on the salaries and benefits of 30,626 city employees. How many workers is that? A little more than the population of Burlingame. Enough to provide one worker for every 28 San Francisco residents. Enough to fill three-quarters of the seats at AT&T Park, which — considering the way the Giants are playing — soon might be a great turnout.

The average San Francisco worker makes $108,774 in salary and $49,864 in benefits, including medical, dental and vision care and pension contributions. An income of $108,774 is just over 150 percent of the median salary in San Francisco.

Of course, San Francisco city salaries vary widely. A starting custodian makes $49,270, and a starting junior typist makes $44,798. That’s far less than the city’s top dogs, including the mayor ($302,400), fire chief ($311,194) and the police chief ($316,732). No wonder acting Police Chief Toney Chaplin wants the job full time.”

So, a city worker makes over 150 percent more than the average worker in the city? Yet, is the efficiency there? If not, can you reorganize these departments and can you create some mechanisms that tout servicing the citizens of the city first before worrying about job retention?

 

There is no way to fix this system if the politicians are controlled by the very workers and special interests that benefit from this budget.

 

Illinois is a very sad example that can easily happen here. We need government leaders with a backbone to see what is coming and find out a way to fix it before it’s too late.

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Hans Hansson | June 19, 2017

 

Asking our government to be proactive may seem like a long shot, but the City leaders across the country need to understand the impact of the changing retail landscape and start to plan ahead for their communities.

Retail buildings generate the highest tax base for cities that rely on property taxes. They also generate the most sales tax and gross receipts tax revenue. Retail is the largest supporting anchor to any city’s revitalization plans and without it, there is nothing to draw people to continue to visit, live, or support any other businesses in the city.

A revolution is taking place and the effects are becoming more noticeable by the day. Retail giants like Amazon have clearly become the first choice for purchasing almost anything at the determent of brick-and-mortar stores. Sears and JC Penny’s are on their last leg in the retail world, while Macy’s and Nordstrom are not far behind. The days of the large department stores are coming to an end and big box retailers could be next. 

Target and Wal-Mart are also clearly seeing online competition take its toll on their bottom line, but still strive to make changes in their offerings to adapt to the ecommerce world. Both retailers have been testing online food ordering this year as a way to stay in the game.  Food is still one of the least underdeveloped areas for e-commerce.

At the recent ICSC convention in Vegas, it’s apparent that the majority of shopping centers throughout the US in the next 15-years will be closed. Many shopping centers have already converted to large-scale food courts. However, food retail is also feeling the effect of the changing eating habits of the millennial. Customers under the age of 35 are no longer interested in high-end, sit-down restaurants, nor are they interested in the fast food chains like Applebee’s or Buffalo Wild Wings. Both are struggling to compete with the likes of Chipotle and Panera Breads, which are expanding while the rest of the competition are shutting down. Customers in this age group are more likely to order takeout or cook at home to eat.

This has already had a rippling effect particularly in shopping centers that have food chain anchors. Shopping centers like The Westfield Mall in San Francisco have seen the majority of surrounding high-end restaurants close while fast food joints like Panda Express have seen record numbers since they opened in the same mall.

Most shopping centers rely on anchors like Panda Express to feed foot traffic and sales to the smaller surrounding shops, who pay true market-rate rents to be there. anchor stores typically pay little to no rent since they help draw the bulk of customer traffic. As large anchors begin to fail, the entire shopping center will struggle, unless they can find an anchor replacement.

The challenge to communities is what to do with retail zoned buildings that fail. Zoning laws are next to impossible to change quickly and in a lot of cities restrictions on types of retail, changes to other uses such as office, medical, residential are also restricted.

In San Francisco, a brand-new shopping center opened its doors recently, located on the 900 block of Market Street. It’s the biggest and most ambitious retail development in San Francisco since the Westfield shopping center and cost $150 million to build.
 
The center was built to compete with the Westfield shopping center, located down the street, but due to the changing retail market, the building has been unable to secure tenants who are willing to pay the necessary rent to make the costs of the project economically viable. 

Interestingly, this project was originally built as retail as the Kress department store. When the urban market retail began to lose favor over the new regional suburb of shopping centers, it closed for a number of years.  A developer in the early 1980’s eventually converted the building to ground floor retail and offices above successfully. But during the down turn of 2009, it fell on hard times until the current developer bought it and converted it to retail when market street booming again with customers.

The reality is that this building should once again become an office building. The floor plates lend itself well to support the types of office space that tech firms like Airbnb and Facebook are looking for in the city. Yet, to convert the building back to office space (if it would even get approved) would take at least two years through the planning department. This would mean two years of a vacant building in an area that has been posed to seen massive changes with the added residential development planned all around this building.

City officials and developers need to wake up fast to these rapid changes and begin determining what steps can be taken and what product type should be supported in these ever-changing times. The good news is that buildings are still needed and will always be needed. But the bad news is that government leaders lead from behind and not from the front. By doing so, this could lead to the next real great economic collapse.

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