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RETAIL’S OFFICE ROMANCE

Corporate landlords woo retailers to give their buildings panache

BY JESSICA ROE

Photo: Ian Ritter
Top: A Pink shirt retailer adds a touch of class to a Sixth Avenue, New York City, office building. Right: The industry holds up 900 North Michigan Avenue on Chicago’s Magnificent Mile as a prime example of the successful blending of retail with office space.

“Ground-level retail sets the stage as a signature piece,” said Ross Glickman, CEO of Urban Retail Properties. “You don’t look at a building and say, ‘There are 20 law firms there.’ You say, ‘That’s the building Talbots is in.’”

With office markets nationwide still experiencing double-digit direct vacancy rates, the value of image is increasingly important. “Landlords are much more conscious about putting the right retailer in their building,” says Jeffrey D. Roseman, executive vice president and principal of Newmark New Spectrum Retail, a New York City-based brokerage firm. “If they’re going to woo a prestigious law firm or accounting firm, they’re going to want to see somebody really pretty on the ground floor.”

But what qualifies as “really pretty”?

“A discounter may have negative connotations for potential office tenants, whereas a Sephora can be quite inviting,” said Robert K. Futterman, CEO of New York City-based Robert K. Futterman & Associates, a retail real estate brokerage. As a result, office building owners continue to make concessions, primarily in tenant improvement packages, to secure such retailers as Aveda, Pink and Starbucks, which project style, promote activity and symbolize prosperity.

Making such concessions isn’t such a big sacrifice for an office landlord. “After all, retail is a very small component compared to the overall square footage of the building,” said Seth D. Nodelman, senior director of retailer services at Cushman & Wakefield’s San Francisco office. “A retail lease may be 10,000 square feet, compared to 600,000 square feet for an office tenant.”

While image might be an issue for the owners of class-A office buildings, all landlords consider convenient on-site retail amenities to be an advantage when closing office leases. From New York’s Madison Avenue to Chicago’s Michigan Avenue, office space owners welcome a mix of banks, drug chains, Hallmark card stores and casual dining chains such as Au Bon Pain or Briazz Café. Ground-level retail, located just off the main streets, also offers your Office Depot and your Kinko’s, your local dry cleaner and deli.

So if retailers bring prestige and convenience to office landlords, what do such locations do for the retailer? One critical factor for retailers is the size of the direct office population that will serve as a regular customer base, notes Cubie Dawson, senior vice president of the project and development services group in Jones Lang LaSalle’s New York City office. That base can extend from the immediate address out to a five-block radius. “Tenants in office spaces are primarily stand-alone retailers,” Urban Retail’s Glickman said. “They don’t have the true massing of retailers in the sense that they can feed from other retailers; they’re relying on who walks by their location from the indigenous population from the office buildings.” And that’s another reason office landlords are eager to maintain an active retail component in their buildings: Street-level activity gives potential tenants the sense that the building is not isolated or underpopulated.

Besides having to draw customers from a confined geographic circle, retailers in most central business districts have quite limited trading hours compared to their mall or strip center counterparts. Typically, retailers based in office locations do the bulk of their business from 7 a.m. to 6 p.m., Monday through Friday.

Yet, neither restricted selling hours nor an extended office market slump has caused retailers to pull back from office locations. “We have been encouraged to see the typical suburban retailer going back to the CBDs and looking for all kinds of opportunities, not the least of which happen to be office lobbies,” Glickman said. Among the mall stores moving into office locations are Casual Corner and The Limited.

One advantage of renting in an urban office building is that overall occupancy costs are generally lower than comparable space in a mall or shopping center in the surrounding suburbs. Moreover, in such markets as New York or Chicago, where retail has long occupied office space, sales per square foot can equal or exceed the numbers generated in suburban locations. “Almost across the board, every national retailer says its highest-grossing store is in New York City — there are just people everywhere,” said Roseman of Newmark New Spectrum.

Even so, big-box retailers are less likely than mall stores to move into office markets. Kmart has two sites in Manhattan, one at Penn Station and the other at 770 Broadway, a Vornado-owned office building in the East Village. And Target has a small space at Rockefeller Center to showcase Isaac Mizrahi’s fashions, but the company is looking at uptown developments that would be located close to housing and other retail. But so far, a Home Depot or a Wal-Mart is more likely to enter a major urban market on the heels of new residential or mixed-use developments.

Still, some observers believe it’s only a matter of time before there is a proliferation of big-box retailers in CBDs. “More landlords are willing to accommodate larger retail tenants in unconventional ways,” said Dawson. From Ann Taylor to Virgin Megastores, retailers are already adapting to irregular spaces, whether L-shaped lobby configurations or multilevel stores that include space above or below the street grade.

One of the best examples of the expansion of retail beyond the ground floor is 900 North Michigan Shops, on Chicago’s Magnificent Mile. Managed by Urban Retail, this six-story, 448,000-square-foot retail center is attached to 549,000 square feet of office space and a Four Seasons hotel. Besides its prime location, the layout of 900 North Michigan gives retail tenants street exposure and dramatic window designs to attract shoppers. At the same time, the office lobby is located on Walton Street on the west side of the building, a block from the retail entrance, so workers don’t find themselves tripping over shoppers.

Given the current softness of the office market, Nodelman says many retailers are taking the opportunity to move into class-A space before rates begin to climb again.

Retail leases in office buildings are typically negotiated on either a gross or triple net basis, depending on the market. In San Francisco, for example, triple net leases are common, with retailers paying a pro rata share of insurance, property taxes and common area maintenance. Nodelman says a retailer’s charges may be as much as 50 to 75 percent less than those paid by an office tenant, because retailers don’t utilize janitorial and other services.

With deals like that, observers say, it is little wonder that more retailers are looking at office buildings as their next shopping centers.