Strategic Site Selection and Management

The Main & Wall session dedicated to real estate decisions was all about strategy—strategic site selection, strategic portfolio management and strategic financing.

“You don’t pick a good location, you pick a good strategy,” declared Mark Zygmontowicz, managing director, MapInfo Corp., Ann Arbor, Mich.

When competing for real estate, a retailer’s biggest adversary is not the store selling the same merchandise—it’s anyone looking for the same footprint in the same market.

“In the race for space, it is imperative that retailers have a defensible growth strategy,” continued Zygmontowicz. “Site-selection technologies can model on a site-by-site basis the impacts of co-tenancies, adjacencies and parking—all the variables that enter into a real estate strategy.”

Consumer Control: Successful retailers give shoppers what they want

During a luncheon presentation at the Main & Wall Conference, David Hogrefe, managing director of Columbus, Ohio-based FITCH, reminded attendees of the importance of providing a satisfactory shopping experience, emphasizing: “Consumers drive the marketplace.” The shopping experiences that retailers provide, either in-store or online, determine a retailer’s success. According to Hogrefe, “Seventy-five percent of all purchase decisions are made in the store; the touch and feel of the [retail environment] makes the difference.” Hogrefe’s presentation summarized a special report published by FITCH and Chain Store Age that revealed consumers’ favorite retail experiences. The full report, “Give the People What They Want,” can be accessed at www.chainstoreage.com/specialreports.

Additionally, consumer demographics and competitive variables must be factored into the site-selection equation. Retailers need access to as much granular information as possible about the customers making purchases in their stores.

“You have to know the drawing power of your stores under different geographic circumstances,” said Zygmontowicz. “We create optimization models that look at the existing competitive environment as well as the potential impacts when new competitors are introduced into the market.”

One of the most common real estate mistakes made by retailers is attributing the success of their highest-performing stores to “false positives.” Zygmontowicz shared the example of an apparel retailer that was easily confused by the fact that its highest-performing stores in the New York market were in neighborhoods with significant Hispanic populations.

The retailer interpreted this to mean it should look for locations with substantial Hispanic populations, despite the fact that the retail brand had been shown to have a negative correlation to Hispanic customers. However, Zygmontowicz explained, “The success of these stores was not because of the Hispanic population; it was because the sheer magnitude of population density in that trade area made up for the lack of per capita contribution.”

Raising capital for expansion: How retailers finance their growth is another critical aspect of the real estate strategy. For many retailers, net-lease transactions, also known as saleleasebacks, provide the resources to fuel new-store openings.

“When we are considering deals, we look at a combination of the value of the real estate and the credit of the retail company,” said Gino Sabatini, director of New York City-based W.P. Carey & Co., which manages a $9 billon net-lease portfolio. His company is even more interested in net-lease transactions with portfolios that include a retailer’s distribution centers, and about 50% of the company’s retail business is actually build-to-suit.

When negotiating net-lease agreements, Sabatini advised, “Ask for substitution provisions that will allow you to replace an underperforming or dated store.”

Agreements should also include language for purchase options, which provide one or two points across the life of the lease when the retailer can buy back the lease.

Risk assessment: The session’s moderator, Andy Graiser, copresident of Melville, N.Y.-based DJM Realty, pointed out that retailers are beginning to consider potential risks associated with natural disasters and weather patterns when they make site-selection decisions.

Voicing agreement was Gary Bull, managing director, retail industry leader, of New York City-based Marsh, which helps retailers manage their total cost of risk. Bull noted that regions of greatest concern are the storm-prone coastal Southeastern United States and California’s earthquake zones. “These are some of the most populated areas of the country and retailers cannot avoid having stores there,” said Bull. “The real impact is the cost of insurance in these areas and, in some cases, the ability to obtain [adequate] coverage.”

As a general rule, retailers are risk-takers in Bull’s estimation, but even with insurance, retailers often retain 80% to 90% of the losses they experience.