Urban Markets Provide Opportunities For Retailers And Investors
America’s changing demographics are creating new urban neighborhoods.
William Lindsay

America’s demographics are changing. In 1970, just one out of eight Americans was non-white. In 2000, that figure rose to one out of four, and by 2010, Hispanics, African Americans and Asians will account for nearly 80 percent of the country’s projected population growth, according to the U.S. Census Bureau. So how does this demographic shift affect retail real estate investment?

Urban, ethnic markets have been underserved for years. The demographic shift is becoming more critical, and it is creating new opportunities for investors and retailers. In order to serve these communities, retailers are opening stores in non-traditional formats in urban, dense, ethnically diverse communities. Investors are also broadening their investment criteria, to capture these opportunities.

The underlying fundamentals for targeted urban retail remain very strong:

1.) Retailers are targeting distinct demographic groups because the growth in buying power is expected to outpace non-targeted suburban retail. By 2008, the combined buying power of African Americans, Asians and Native Americans will be more than triple its 1990 level of $456 billion, and will exceed $1.5 trillion, a gain of $1.1 trillion or 231 percent, according to the Selig Center for Economic Growth. The Selig Center also reports that the combined buying power of these three groups will account for 14.3 percent of the nation’s total buying power in 2008, up from 10.7 percent in 1990. Moreover, the total household income in these demographic segments more than doubled between 1989 and 1999 from $550 billion to $1.2 trillion, and is projected to surge to $2.27 trillion by 2009. By then, these markets will control about one-quarter of the nation’s income and spending power — about $225 billion in income and $120 billion in total retail sales, according to a study conducted by ICSC/Clarion Partners.

2.) In their search for customers, retailers have realized that they must go to the neighborhoods in which the buying power resides. By opening urban stores, and showing flexibility on their traditional formats, retailers can better address the needs of their customers and capture the buyer and build brand loyalty earlier. The suburban locations favored for many years are, in many cases, over-retailed. With the growing population and shift in demographics today, retailers must explore all potential profitable market opportunities.

3.) Savvy investors focus on markets where there is limited competition. Although urban investing has had growing cache over the past few years, a small number of institutional investors are focused on dense, low and moderate-income neighborhoods, where there is real buying power and an underserved customer base.

Repositioning Retail To Serve An Urban Community

The recent market repositioning of Vallejo Plaza in Northern California is an example of the non-traditional opportunities available for retailers and investors in a changing population base.

Vallejo Plaza is a 330,000-square-foot community shopping center located in Vallejo, California. In February 2003, through the Bay Area Smart Growth Fund, Pacific Coast Capital Partners joined with La Caze Development Company to acquire the center from an institutional investor. At the time, it was only 62 percent occupied with 100,000 square feet of unoccupied space. Both partners believed that the center’s poor performance and low occupancy rate was based on the previous owner’s traditional thought process and not on positioning the center with tenants that could successfully serve the changing demographics of the local community.

The trade area for Vallejo Plaza is strongly Asian/Pacific Islander. When we acquired the center, we focused on the makeup of the community, and after evaluating the market we noticed there wasn’t a full-service grocery store in the immediate area. Residents had to travel a great distance in order to buy basic grocery items.

The property underwent a major market repositioning which included the re-tenanting of all of the vacant space to local merchants. The re-tenanting included 53,143 square feet leased to Seafood City, a full-service supermarket chain that would tailor its products to service the local community as well as provide basic grocery items. In addition, we provided a long-term lease at below market rents to the Vallejo Community Arts Foundation, the umbrella organization for City of Vallejo’s art programs.

As a result of the repositioning, Vallejo Plaza is currently 100 percent leased with the right mix of tenants that provide much needed retail services to the surrounding community.

National Retailers See Opportunity In San Jose

The Story and King redevelopment project in San Jose, California, is another example of retailers looking to capitalize on profit opportunities in dense, urban locations. 

Through our Bay Area Smart Growth Fund, Pacific Coast Capital Partners is currently working with Blake Hunt Ventures and the San Jose Redevelopment Agency to redevelop a project site at the southeast corner of Story and King roads. The project is located in a dense, urban neighborhood of San Jose that has a trade area of almost 300,000 people within a 3-mile radius. Once again, the project site was developed with a retail, big box home improvement use, but the retailer had left the location and most of the center was dark.  The community expressed a strong desire for retailers selling basic items. Currently, residents have to travel to a traditional suburban retail center more than 3 miles from the site to find these types of retailers. Thus, as part of our efforts, we targeted large national retailers that could provide basic necessities to the community.

As a result of our efforts, we have signed a purchase and sale agreement with Target for the sale of an 11-acre parcel, which will anchor the development. Target immediately recognized the potential success of opening a store in the community after reviewing the demographics and the lack of retail in the surrounding area. Target has two existing stores within a 3- to 5-mile radius, but felt the population density and ethnic makeup of the trade area population provided a significant opportunity to capture additional market share. We have also secured letters of intent with Walgreen’s and Famsa, a furniture and electronics retailer based in Monterrey, Mexico. The remaining 27,000 square feet of space is currently in lease up to a mix of national, regional and local retailers and restaurants, some of which are Hispanic-oriented and some of which are traditional retailers that see an untapped market opportunity.

Vallejo Plaza and Story and King are both examples of retailers identifying opportunities in dense communities with focused demographics. Vallejo Plaza services a community with retail that targets the distinct demographics. Story and King is an example of large national retailers seeing the opportunity to expand their customer base in an urban neighborhood.

These two examples demonstrate the immense opportunities for investors and retailers when looking for opportunity outside traditional suburban locations. The profound shift in America’s ethnic and demographic makeup coupled with the immense buying power of these markets can’t be ignored. These untapped markets provide investors and retailers with an opportunity to make a profit while serving communities that have not attracted capital for some time.

William Lindsay is one of the founding partners of Pacific Coast Capital Partners LLC, a full-service real estate investment firm and lender with offices in Los Angeles, San Francisco and Sacramento, California.