Urban Retail Success: A Case for New Models and Tools

Alyssa Stewart Lee and
Alyssa Stewart Lee Assistant Director, Urban Markets Initiative, Metropolitan Policy Program, The Brookings Institution
Pari Sabety
Pari Sabety Director,<br>Urban Markets Initiave,<br>Metropolitan Policy Program,<br>The Brookings Institution

June 1, 2005

Over 3,000 mayors and government officials traveled to Las Vegas in May to sell their cities to retailers at the International Council of Shopping Centers Spring Convention. The regeneration of many urban areas, demonstrated by population gains and new development in the past ten years, are clear success stories of how well some cities are doing in marketing their communities. After focusing predominately on suburbs and exburbs, major retailers have “found” downtowns. However, for every urban area that is rebounding, there is another that is not.

The question is: do retailers and commercial developers have the information they need to grasp the nature of these urban opportunities? City officials and planners have assumed that if they provide the right data—demographics, buying power, business composition—the “real value” of urban neighborhoods will be understood. While there are clear urban information gaps, the reality is that filling those gaps does not create the answers to drive urban investment. For cities to effectively support urban economic development and revitalization, it is critical to understanding the conduits through which data is turned into “actionable knowledge” for decision making, retail and commercial site selection models.

Site selection models indicate expected revenues, profitability and return on investment for a particular type of business at a particular location, and can help businesses decide whether to expand a warehouse or open a new store. Most often, these models are tailored for suburban market development. These markets are more homogenous, enabling repeated use of models to identify successful investment opportunities across the country. The dynamics of commercial activity in urban areas are different from those in suburbia, and so require different measures. For example, “drive time” is a good indicator of the distance a consumer will travel in an auto-oriented suburban market, but it does not translate well in an urban environment where many people walk or ride public transit rather than drive. Moreover, urban markets themselves are quite heterogeneous and require customized site selection models to illustrate their nuances.

While site selection models have been adapted for urban markets on an ad-hoc basis, these efforts are not well documented. So, although many developers and investors intuitively believe in the potential for profitable returns in inner city America, they don’t have access to a track record of which modeling approaches work best. Consequently, there is a strong need to document and build on the urban development models used for successful urban retail development, and to communicate findings to the field.

Models are predictive of performance, but actual data needs to be aggregated to define the opportunity of urban markets. The presumption of many developers and lenders is that it is more expensive to do business in urban markets, with a lower resulting rate of return. There is no dataset that substantiates this claim. Retailers, developers, and investors must collaborate to become more competitive by contributing retail performance data. For these forward-thinking contributors, this data will enable benchmarking to reduce information asymmetry, increase decision-making effectiveness, and ultimately improve market liquidity.

After good data and better models, the third requirement for stimulating urban commercial development is supportive public policy. Investment in certain urban cores can involve higher relative risk, and cities need to buffer risk where necessary. For example, by analyzing models customized for its unique urban characteristics, the City of Fort Worth, Texas demonstrated the market demand to support a theatre in its downtown. On the basis of this information, AMC agreed to build a theatre as an anchor for development; at the same time, the City agreed to guarantee a certain revenue level per month. Good data and models can open the door to a development, but to close the deal, public and private leadership is often critical.

Urban markets will suffer if they are not positioned properly in today’s global economy with good data, better models and supportive public policy. The city officials who traveled to Las Vegas should be clear that in the absence of good data and supportive public policy, developers have multiple options to invest elsewhere. Suburban population growth will continue to create demand for retail. At the same time, there are entrepreneurs who are willing to diversify in riskier markets to capitalize on the opportunity. Many of these American developers and retailers are leapfrogging new market opportunities within urban areas in favor of high growth countries like China or India. To uncover hidden domestic opportunities, retailers and developers must also view urban markets through appropriate models.

The Brookings Institution’s Urban Markets Initiative, with key partners such as the Initiative for a Competitive Inner City, the Neighborhood Reinvestment Corporation, and the International Council of Shopping Centers, is going beyond the traditional approaches to facilitate the development of needed site selection tools and models. This process is “demand-driven,” built on industry involvement and reflecting how information is used in investment decisions. Local and state governments must also be a part of the conversation, to understand how they can work with these new modeling approaches to their advantage, both in marketing their cities and in enhancing the commercial development process. The combination of industry, government, and nonprofit researchers and advocates offers great possibility for closing the information gap regarding urban retail opportunities and unleashing the full market potential of America’s urban areas.