Developers Scramble to Create the Right Retail Mix Downtown

June 26, 2015

Jeanne Lang Jones

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On a sunny weekday morning, Tom Douglas spacious Assembly Hall is buzzing with activity. Office workers gaze at their laptops and sip coffee. Others, still in gym clothes from their morning workouts, gulp fresh juice and chat. At a deli a few steps away, customers waiting to order sandwiches watch the kitchen staff at a nearby pop-up eatery prepare for lunch.

When Douglas opened Assembly Hall on the ground floor of the new 24-story Via6 apartment building two years ago, many found the open layout puzzling. Gone was the orderly line of shops facing the sidewalk. With no clear delineation among restaurant kitchens, florists counter and coffee shop, the space seemed to some a little too chaotic.

But that was the point. Douglas wanted to mimic the bustling, communal feel of the traditional marketplace. That vibe and the vertical neighborhood created by including such services as a barbershop, a bike store and a fitness club, are designed to attract the kind of young people who might also consider renting one of the 654 units upstairs.

Coming soon to Amazons new downtown campus across the street will be a carefully curated mix of sit-down restaurants, bars and quick-service dining spots. Also under consideration are a bowling alley and places to listen to live music. Longtime retail leasing broker Maria Royer, the principal at Real Retail in Seattle, is working with Amazon to develop a retail and entertainment district thats open nights and weekends to fit the varied schedules of Amazon employees.

Together, these efforts will begin the process of transforming a once-deserted section of town into a lively retail district that will bridge downtown and South Lake Union, becoming a destination for the thousands of young people moving into the city. It could also serve as a model of how landlords and community leaders can use creative new retail concepts to bring life to moribund city streets.

Seattle has long been a mixed bag when it comes to retail. While the Pike Place Market receives millions of visitors each year, high-end retailers such as Neiman Marcus have often chosen to locate in Bellevue with its wealthy suburban residents, its easy parking, and its relative absence of panhandlers and homeless people.

Now, however, the young people drawn to the Seattle area by the booming tech sector want to live and work downtown. They, and the construction boom that has followed them, are creating a rare opportunity to use retail strategically to transform city neighborhoods.

The sense of excitement over the potential for retail in the city is palpable. Seattle is in the top five cities where retailers want to expand because of its exponential job growth and the growth of the tech sector with its high disposable income, says Royer, one of Seattles top retail leasing agents.

The vacancy rate for retail space in the Puget Sound area dropped to 5.1 percent early in the first quarter of this year, down from a peak of 6.7 percent at the end of 2010, according to Kidder Mathews. Meanwhile, asking rents for retail space have gradually started to climb. With more people shopping and going out to eat, says Susan Zimmerman, senior vice president at Kidder Mathews, we will see rent rates continue to stabilize.

Thats a welcome change. For decades, the downtown retail sector remained in a fragile state. In the late 1980s, when Frederick & Nelson closed, the city was on a downward spiral with many shop windows boarded up. Downtown was deserted in the evening. Then Nordstrom agreed to move its headquarters into the Frederick & Nelson space in exchange for allowing motorized traffic in the block of Pine Street between Fourth and Fifth avenues a stretch that had been previously restricted to pedestrians.

In an effort to revive downtown areas, urban planners required new buildings to include retail space on the first floor. The idea was to create activity along the sidewalk that would contribute to a more vibrant downtown. That concept worked in some parts of the city, but retailers struggled in other areas, where dark, vacant storefronts had the opposite effect.

Today, one downtown Seattle neighborhood after another is undergoing transformation. South Lake Union and the bordering Denny Regrade, whose streets were once deserted most of the day, are on their way to becoming 18-hour residential neighborhoods.

The momentum in this area pales against any other upswing the Seattle community has ever had, notes Dick Outcalt, cofounder with Pat Johnson of Outcalt & Johnson Retail Strategists in Seattle. The city is trying to compete with Silicon Valley, Boston and Austin and almost every city in America to attract and keep people.

City leaders, hoping to learn from past mistakes, are making an effort to guide the growth in ways that will create healthy communities. For example, planners have tweaked zoning regulations so that street-level retail space is mandatory only along certain streets in South Lake Union that get a lot of foot traffic, such as Westlake Avenue.

Much of the drive to build more inviting retail spaces comes from building owners who understand that great office space will not, by itself, attract the best tenants. Businesses want to locate their operations in buildings with a lively environment of restaurants and varied services that draw the kind of young talent they need to attract. Toward that end, older office buildings in Seattles financial district, including Columbia Tower, have recruited new retailers and added workout facilities to compete better with newer buildings that are coming on the market with such services.

Its not just stick a bank and a coffee shop in the bottom of the building, says Royer. Theres a real strong push for best-in-class food and beverage.

And so the magazine stands and florist shops once common in office building lobbies are fading away, says Jeremy Moller, a real estate broker and investor at JSH Properties in Seattle. Within the retail sector, restaurants and bars are doing better than apparel stores, a lingering response to the recession. People are not shopping as much but they are still eating and drinking, says Anne Marie Koehler, a vice president in the Seattle office of the real estate services firm Jones Lang LaSalle.

This shift toward food and drink represents the preferences of a dominant new species in the downtown ecosystem: millennials. These young people between the ages of 18 and 35, prefer downtown living to the suburbs, renting to owning, and experiences over possessions.

This generation would rather have a smartphone and a plane ticket than a nice jacket, says Moller.

Millennials are eco-conscious and they value crafted goods, from small-batch beers to artisanal chocolates. Because they arent forming households as early as previous generations, they have higher disposable incomes. And when it comes to spending money on an experience, the primary destination downtown is the restaurant.

To attract the desirable restaurants that will draw millennials, building owners are offering tenant improvement allowances that are four to five times what they were four to five years ago, notes Moller. Payback terms on loans to tenants are also looser. Landlords charge substantially less interest on tenant loans. Where they might have made money previously by charging tenants a higher interest rate say, 8 to 10 percent than they themselves had to pay to obtain the funds, landlords now either make a negligible amount or break even, charging only 4 to 6 percent, Moller says.

If the operator is a name celebrity chef such as Tom Douglas or Ethan Stowell someone who can draw people to a building landlords may be willing to offer a low base rent versus a percentage of sales, Moller adds.

Every retailer needs to maintain a healthy ratio of rent to sales to maintain profitability. Landlords are becoming more sophisticated about what that formula looks like and how to underwrite their deals, says Royer.

At Via6, Douglas says he pays a flat rent to landlords Bentall Kennedy and Pine Street Group, adding, They have been very helpful working with us to make sure we stay viable. They want to make sure we make it through to when the huge Amazon project is done.

Even the best restaurants can get stale, so some restaurateurs are experimenting with ways to keep the experience fresh. Thats the thinking behind the pop-up restaurant Douglas operates in Via6, which he said was his landlords idea. The restaurant changes its menu every few months from chicken to sushi to burgers. Douglas says he might do curries or prime rib sandwiches next.

Its like a little tester, Douglas explains. If it really takes off, we can figure out how to incorporate it into what we do.

Just as restaurants need variety, so do restaurant districts. This is something Royer is working on in her effort to develop a restaurant scene at Amazons new campus that will serve the neighborhood seven days a week. Were choosing operations that will enhance the hours of the district by being open on the weekend, she notes. Additionally, she is recruiting really strong quick-service operators to handle the significant number of employees who will come in at lunchtime, as well as bars and lounges that will be open late at night.

The Downtown Seattle Association (DSA) has recognized that its retail district skews too heavily toward shops selling clothing, so it has begun offering a free matchmaking service to help restaurateurs find the most suitable locations downtown.

We consider downtown the hole in the doughnut as far as restaurant activity is concerned, says Andi Pratt, retail program manager for the DSA. Wed like to see a larger presence of independent chefs open in downtown Seattle.

Restaurants have already driven the revitalization of neighborhood retail districts across the city. Thats what happened on Capitol Hill and the Pike/Pine corridor, says Koehler. You get a really great restaurant that anchors a neighborhood, then the retail follows.

Its also happening in Pioneer Square. Within the past two years, 50 new retailers have opened there. Thirty of these businesses are restaurants, says Karen True, director of business development for the Alliance for Pioneer Square. Its kind of a Wow! she adds.

With the closure of neighborhood art galleries and furniture stores during the recession, the alliance and community stakeholders got together in 2011 to create a strategy for the area. Restaurants were a key component because people will go anywhere for fabulous food, True says.

Now, with the development of hundreds of new apartments in Stadium Place, the alliance would like to recruit more services, such as a dry cleaner, True says. The right retail amenities can help make residential projects like Stadium Place and Via6 more successful in attracting tenants.

Rather than build a restaurant and hope the other retail services follow, developers increasingly work on solutions that include all those services right from the start. Millennials seem to live, shop and eat pretty close by, says Susie Detmer, a senior vice president in the Seattle office of the real estate services firm CBRE. Theres a lot of exploration now with more unique kinds of retail where one space combines a lot of different uses.

At Stadium Place, shoppers can stroll from the Cone & Steiner General market through a housewares section right into Velouria, a boutique that moved to Pioneer Square from Ballard. Nearby, chef Matt Dillons The London Plane and The Little London Plane restaurants have retail items for sale. The London Plane offers groceries, housewares, baked goods and flowers. A few blocks away, retailer E. Smith Mercantile serves craft cocktails in a bar at the back of the store. Over in the Pike/Pine corridor, neighborhood residents can pick up fresh cheese at the Melrose Market, which is anchored by Dillons Sitka & Spruce restaurant and Bar Ferdnand. Many shops there reach out to millennials by offering unusual, small-batch or locally made items that cant be found easily online.

As more people live downtown, Koehler expects the citys retail sector to evolve and prosper. The neighborhoods will mature, more restaurants will be open in the evening and more services such as dry cleaners and dog daycare will be available. If Seattle gets it right, the city will be dotted with attractive, vibrant retail districts that improve the quality of life, attract talented workers and, ultimately, help the city to nurture stronger, more competitive companies.