Why So Much Vacant Retail Space Downtown?

Tuesday, August 1, 2017, 7:47 pm
By: 
Alice Dreger

Above: Retail space still unrented at 300 West Grand River Avenue, a building that opened about a year ago.

Why is there so much vacant retail space in downtown East Lansing? I asked Tim Dempsey, East Lansing’s Deputy City Manager and Director of Planning, Building, and Development, to speak with us about this issue. Before working in local government including in the areas of Planning and Economic Development for what has now been seventeen years, Dempsey started his career in retail site location.

First off, Tim noted, “This is one of those topics where I've been surprised at times by the lack of understanding in the general public—how retail leasing works downtown. I've talked with numerous people over the years that think the City specifically controls which businesses comes in or doesn’t. While zoning sets the broad uses, and restaurants with alcohol must get Special Use Permits from the City, the majority of tenancy is strictly a private transaction between tenants and landlords.” In other words, there’s just so much the City can and does control.

Question: A lot of planner-types tell me that a major challenge faced by East Lansing is that the main commercial strip on Grand River Avenue has only one commercial side to it, with MSU being on the other side. Do you agree? And this is why the City has been looking to add “depth” to that via Albert Avenue with projects like Center City District, yes?

Answer: Yes, the "one-sided" retail nature of Grand River Avenue makes our downtown quite different than many non-linear downtowns, but also different from a small town main street that has retail uses on both sides. In a more traditional downtown, shoppers may stroll up one side and walk back down the other, because both sides have shops and other eye-catching uses. There have definitely been efforts over the years to improve retail along Albert Avenue and the side streets to "deepen" downtown. The most notable efforts are the City Center District project and now the proposed retail with Center City—both trying to make Albert Avenue another part of the retail core.

Below: a rendering of planned new retail space on Albert Avenue as part of the Center City District redevelopment.

Question: Some retail space that people see as “vacant” downtown has actually been purposefully vacated to prepare for redevelopment. I’m thinking here of some of the properties in the buildings meant for the recently-approved Center City District project, or the blighted buildings of the Park District. I don’t really think of these as “vacancies” (which I would use as a term for a place looking for tenants) because they’re really planned for demolition and then new development. Fair?

Answer: Absolutely fair. Whenever I've been asked about those vacancies, I've communicated that you cannot classify them the same as an occupiable storefront actively being leased. You can't occupy space that's not leasable.

Above: 565 East Grand River (left), now being finished, with retail space on the ground floor and apartments above.

Question: Some retail space is relatively new, as with 300 Grand River Avenue and 565 East Grand River Avenue. The owners of these spaces seem to be seeking relatively high-rent tenants. Is the reason they’re willing to hold out for that (rather than taking a lower-rate tenant) because that pays off in the long run in terms of income and property value?

Answer: I think there are several factors at play with newly constructed space. Yes, newer space is likely to be more costly due to initial construction AND build-out costs, compared to an older building that has effectively absorbed at least the initial construction costs. Another factor is that national/regional tenants that can afford the higher rents tend to be better capitalized and thus have better ability to withstand seasonal fluctuations in our market, often more so than the local independents and start-ups. So, I think landlords look at that stability as a benefit to them as well, i.e., they are less likely to experience tenant failure. Unfortunately, I think some fail to see that there are many exceptions to this on both sides—national tenants failing and independents that do well.

Above: The former Cosi restaurant, now for rent. Cosi had nationwide economic problems that led to closures.

Question: You said at Council it’s possible that retailers/restaurants that might be interested in locating in EL are waiting to see what options they’re going to have. Can you say more about that?

Answer: It's been my experience that most national/regional retailers/restaurants place a premium on finding the best locations but are also wary of unknowns. With two large projects pending, I can easily see where a downtown retail or restaurant prospect may be waiting to see what space might be available and when the construction impact will be over.

Below: Rendering of a building planned for the Park District at the northwest corner of Abbot Road and Grand River Avenue, including retail space on the ground floor.

Question: One might expect, given economics, that landlords would be willing to drop rental prices for retail to get tenants. Yet it seems like that doesn’t happen. Is that because they feel it is worth it to wait for a higher-paying tenant because of property values?

Answer: I think ownership entities with larger real estate portfolios are willing and able financially to accept greater vacancies over time as they hold out for what they feel is the right tenant. That may not be as much of the case for owners with fewer resources. In the end, while every property owner has the objective of earning income, they can have very different approaches as to how best achieve that income.

Question: If a retail space were to rent for less than it had in the past, could a landlord get a discount on the property taxes by showing reduced income on a property?

Answer: They can potentially get their assessed value lowered if their income drops significantly as the City’s tax assessor does use the income approach to valuation, meaning that he looks at commercial income when determining the value of a property. We saw this in the past with the City Center project when Barnes and Noble left. However, there are other market factors that limit how low this can go, or in the case of increased income in the short term, how high it can go. This can get quite complicated and is more within the expertise of the Tax Assessor.

Question: Some say that brick-and-mortar stores are going to become less common as Amazon and other companies do ever more direct-delivery. Do you see this happening in East Lansing?

Answer: Given the high education attainment of our community, and thus high internet use, I assume a lot of our residents are regular online shoppers. To the extent that you can find goods online already sold downtown, yes, I think it has and will continue to impact. In the case of getting specialized services or experiential retail, not as much. Dining is a good example, you might be able to order Blue Apron but you're not getting the experience of having someone serve you or running into people you know. And Amazon isn't likely going to give someone the personalized service and hands on wealth of knowledge that Richard Liscombe (Footgear’s owner) can when sizing Birkenstocks.

Ironically enough, I think the decline in shopping centers in the U.S. may help to bolster downtowns. So many retailers are again looking at urban cores that would have never considered them in the past. (See this article.)

Below: Element 903, where Grand River Avenue meets Bogue Street. The retail space has never rented out here.

Question: Are urban planners starting to see that mixed-use might not be the way to go with the crash of retail marketing persisting?

Answer: I can't speak for other planners, but for me, this is definitely the case with at least requiring retail on the ground floor. We're oversaturated with retail space across the U.S. Just look at the retail corridors and malls in this area; no one is immune from vacant space. We need to look at mixed-use not just from an individual building standpoint, but from a neighborhood angle as well. A single-purpose residential building near retail can still achieve the mixed-use goals.

Question: This is kind of related. What do you think is going on with places like Element 903 (at 903 East Grand River Avenue, shown above) and the relatively new structures near Kinko’s along Michigan Avenue? Why are those retail spaces on the ground floor of those new residential buildings not rented out?

Answer: I think these spaces have the challenge of being maybe a little bit beyond the downtown and Brookfield retail nodes, so that prospects may be concerned about that. In addition, it seems that, except for downtown, having the parking behind a business is still a major psychological barrier for retailers to overcome when committing to a space. That being said, I also don't know how aggressively these spaces have been marketed.

Question: Finally, one thing I hear from businesses is that East Lansing is over-regulated which makes it hard on retail and restaurants. Any thoughts on that?

Answer: I've heard the same concern regarding the 50/50 requirements for restaurants serving alcohol. Certainly, we have a more restrictive climate than other communities typically do with that provision. However, Council has tasked staff with re-examining those requirements and we will be doing that this fall with the Planning Commission, DDA, et. al. If there are other concerns, I would need specifics to comment on.

 

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