ShareDespite everything, there’s oomph in the economy. A recent report from the Congressional Budget Office said it expects the economic expansion that began last summer to continue throughout 2021. The CBO projected real inflation-adjusted) gross domestic product to return to its pre-pandemic level by midyear and the number of people employed to return to pre-pandemic levels in 2024. The National Retail Federation in late February said that, as Americans get their vaccinations and the economy reopens, retail sales are expected to grow by around 6%–8% to more than $4.33 trillion in 2021. Still, the pandemic’s effect remains worrisome. With many office workers now more than a year into work-from-home protocols and consumer shopping habits changing, what’s to become of downtowns? We asked commercial real estate specialist Bill Milliken of Ann Arbor, Mich., and New York–based retail real estate strategist Larisa Ortiz to tell us what they’re experiencing today and what advice they’re giving clients.
Show Local Businesses the Love
by Bill Milliken
I run a full-service commercial real estate company that provides leasing, sales, tenant representation, and real estate consulting services.
For building owners and businesses in our cities, this is a challenging time. Things are quiet. We all look back on 2008–2009, the height of the Great Recession, as a low point—but it wasn’t this low. I live downtown in Ann Arbor, and I’m very aware of the reduced pedestrian traffic and street traffic. The biggest reason is that the University of Michigan is operating at dramatically reduced levels.
The return of students to the classroom will make a difference. But I see long-term change in office space. The amount of vacant office that we have now is high, and, according to Bisnow’s commercial real estate newsletter, 59% of businesses in offices are contemplating a reduction of their square footage based on this “new” phenomenon of working from home. Several clients have come to me saying they’re simply not coming back to their offices. We’ve listed their space for sublet trying to find users.
It’s hard to know how this will play out. I’m part of the Real Estate Answer Forum, a group of brokers, attorneys, and commercial real estate portfolio managers in the Detroit metro area. On a recent Zoom call I learned that DTE, a big public utility here in Michigan, had a 60,000-square-foot office up for renewal, and they walked away. A year ago their intention would have been to renew. On the other hand, one Detroit broker shared a story of a Fortune 500 company that doubled its space. Being in the office is central to their culture, so they want to be able to conduct business in the office while maintaining social distance.
One way to retain tenants may be to offer reduced rent lease extensions. But the best tenant retention tool is simply to have provided the highest level of tenant service during the term of their lease. Send Easter lilies. Build tenant loyalty. To move vacant office space today, you may have to discount asking rents by 25%–30%, maybe even offer an attractive tenant improvement allowance for the right lease term. Then there are always trade outs: Provide rent breaks to tenants in exchange for goods or services.
The most important thing local governments can do is to avoid making things worse. Avoid regulatory hardship during these times. Seek ways to help small retailers and restaurants keep their doors open. Increased costs for our businesses and property owners at this time would be the epitome of bad timing. The biggest thing the federal government can do is promote vaccinations. Normalcy won’t be back until the pipeline is filled and people feel safe going back into shops and restaurants.
Until then, we all need to do what we can to support local businesses. Last week, I went out to dinner, on a winter’s night, for the first time in months. We were seated in a tent dressed in parkas and hats. It was fun but not something I could have imagined a year ago. This local restaurant is a third-generation family business. Everyone would grieve if they didn’t survive.
Bill Milliken, CCIM, CIPS, is broker-owner of Milliken Realty Corp. in Ann Arbor, Mich. (population 120,000), located 45 minutes outside of Detroit. He served as Michigan REALTORS® president in 2013 and National Association of REALTORS® regional vice president in 2017. He currently chairs the board of trustees for Washtenaw Community College and serves on the board of New Detroit, a racial justice organization.
New Reality Requires Fresh Approach
by Larisa Ortiz
We focus on the principles that make great retail environments—so we can help cities with the investments and the policies they need to set the stage for private-sector investment. That might be zoning, it might be regulatory, it might be forming a business improvement district, or it might be helping to create or market programs for pop-up stores. The bulk of our practice is advising public and nonprofit entities, such as business improvement districts, merchants’ associations, chambers of commerce—stewards of places driven by retail. Before joining Streetsense, I ran my own business, and I led large projects for the city of New York. One project included rezoning of 125th Street in Harlem, a retail-driven environment. More recently, I worked with the city of Cambridge, Mass., on a retail strategic plan that included a great food-truck program, technical assistance for small businesses, and vacant storefront activation best practices.
We will see more vacancies, and that’s not just because of COVID-19. We are overbuilt in this country. In the U.S, we have 23.5 square feet of retail space per capita. In European countries, it’s well under 10. We spend a lot, but we still can’t support that much retail.
It’s a conundrum because residential is what’s needed. But nearby residents will scream that they don’t want new residents and their kids going to local schools, and they don’t want the commercial tax base diminished. We need to educate public sector decision-makers and residents that we are facing a new reality. I’m doing work in Santa Monica, Calif., along Third Street Promenade, and I was looking at their zoning code. They restrict residential throughout almost all of downtown, and they restrict schools on the ground floor. They use zoning to curate what happens at the ground floor. Many cities do this, and it’s wishful thinking. By contrast, we recently worked in Midtown Atlanta. There’s a lot of new development there, and the rezoning preceded our work there. I was pleasantly surprised to see an acknowledgment that retail can’t be everywhere and that some streets are residential streets—and it’s OK.
We need to be very, very mindful of how long it’s going to take urban centers to recover, particularly where there are destination drivers—cultural institutions, museums, nonprofit arts organizations—that have been such critical components. For example, the Tenement Museum in Lower Manhattan closed its doors during the pandemic. Will we come together to save these destination drivers? I hope so. That museum attracts something like 200,000 people a year to that neighborhood. For now, those people are gone. What we don’t want is to enter into a downward spiral where one vacancy begets another begets another. We know the impact of blight.
The public sector needs to come in and think about creative ways to hide vacancies. Malls do this all the time. You probably don’t even notice when there’s a vacancy in a mall. They put a billboard on it. Or art. When Hudson Yards (in New York) opened, there were many, many vacant spaces. They created tactile art, so a vacancy became this opportunity to touch something, and it became a fun thing.
COVID-19 is having serious impacts, but it may actually help drive this move toward mixed-use development. In downtowns driven by office-worker demand, businesses are more affected by the pandemic than downtowns that serve residential communities. There was just a New York Times article (Why Some Suburban Businesses Are Thriving During the Pandemic, Feb. 1, 2021) that talked about what I’ve been saying for months—that residents are discovering their own communities in a way they hadn’t previously.
We need creativity, and we also need flexibility so that we can fill spaces with what’s needed. There are often very onerous use restrictions that prevent change of use. Right now, that’s not a barrier we should be putting in the way of building owners.
Larisa Ortiz is managing director of public and non-profit solutions at Streetsense, advising public, private, and non-profit sector clients on retail real estate strategy in urban environments. A resident of New York, she currently serves on the New York City Planning Commission. She’s the author of Improving Tenant Mix, published by the International Council of Shopping Centers.