High Land Values Drive Urban Retail Innovation

As published in the Florida real Estate Journal Aug. 16-31, 1999

Boca Raton – Florida’s downtowns are changing rapidly and as metropolitan centers mature many urban retail facilities are evolving into their “second generation.” Besides the inevitable passage of time, what other market factors are driving changes in downtown retail locations? More important, how are developers and property owners responding? There’s no simple answer to those questions, of course, but we can recognize some fundamental factors that are causing change in Florida’s cities these days—the most obvious being the underlying value of the land itself. As land values escalate, the pressures increase on owners of properties that are not achieving the standard of “highest and best use.”
    So what are these escalating urban land values doing to the retail real estate industry as a whole? Their impact is especially clear in three general areas: new or reinvented product types, governmental policies and financing strategies.

New Products
    Today’s urban infill strategies are generating a variety of innovative real estate products, as the industry recognizes unmet needs in its urban markets. A few of the more popular examples include:
    *Redefined retail concepts—“urban pioneers” in many of Florida’s new downtown residential settings quickly learn that they can no longer rely on many of the conveniences they took for granted in the suburban neighborhoods they left. Basic purchases are not as easy to find as they were in the suburbs.
    In response, we are seeing a variety of innovative retail product types—many of them redefined versions of traditional retail settings—designed to bring familiar suburban conveniences to core urban areas. Examples include new, smaller supermarkets, such as the new configurations introduced by Publix in the Miami Beach and Orlando areas, and Miami’s Dadeland Station, a vertical “bog box” center. There are also discussions of other vertical, multi-floor “big box” retail centers in the Miami area to address the unmet needs of new households moving into the Brickell Avenue area, as well as north of downtown Miami along Biscayne Boulevard.
    *Entertainment/retail centers—The most visible urban retail trend in the past decade, entertainment/retail activity centers have accelerated noticeably within the past three years or so. Typically built around a combination of movie multiplexes, game rooms and upscale restaurants, these destinations include such centers as Disney’s Pleasure Island, Cocowalk and Mayfair in the Miami market and new developments in Ybor City in Tampa.
    *New residential/office/retail mixed-use—Although the mixed-use concept has been around for decades, it is continuously being redefined. Some of the newer iterations include Boca Raton’s Mizner Park, Tampa’s Hyde Park Village and the Shops at Sunset Place in Miami, all of which have incorporated certain amounts of residential product into their overall mix.
    *Co-branding—Whether it’s a sub shop inside a gas station or a bank branch inside a supermarket, location sharing is an idea whose time has come. In addition to offering unrelated services in a single location, co-branding ventures now include multiple competing outlets—such as separate bagel and coffee retailers or doughnut and sub shops in the convenience store component of new gas stations, or the logical combination of Tri-con Global Restaurants (a spin-off of PepsiCo) Taco Bell, Pizza Hut and KFC outlets.

Governmental policies
    Urban development trends have not gone unnoticed by governments, of course. While local governments have played a high-profile role through urban redevelopment programs that encourage the “gentrification” of urban neighborhoods, other levels of government have also impacted these patterns.
    At the federal level, for example, the “1031 tax-free exchange” regulation is generating significant activity. The demand for free-standing drug stores, supermarkets, etc., has increased as sellers of properties seek to defer taxes. Another factor is the passage of so-called “brown fields” legislation, written to encourage the development of environmentally contaminated sites, many of which are located in urban areas.

Financing strategies
    Although life insurers have largely withdrawn from directly joint venturing the development of urban projects, due to capital requirements that limit their ability to participate as owners, a variety of funding sources have taken their place. Among them are the so-called” opportunity funds” developed by a number of Wall Street firms, along with pension fund advisors and, increasingly, high-net worth individuals who seek to joint venture projects with experienced developers. The increasing value of the underlying land is also leading many property owners to consider joint ventures with developers involving their properties.
    These financing sources and transaction structures are increasingly attractive to urban development projects. Developers and investors are recognizing that the days of simply buying an empty building and filling it up are, for the most part, history. The highest yields in today’s real estate economy are from development—a condition we can expect to remain true for many years to come.