Publications

Placing a Department Store In a Mixed-Use Development

Sheldon A. Halpern & Eli Taban
Shopping Center Business
November 1, 2006

As the trend towards mixed-use development continues to gain the favor of real estate developers driven by scarcity of land, environmental sensitivity of local authorities and community demands for live-work pedestrian lifestyles, department stores are entertaining the idea of leaving their traditional regional mall spaces in favor of mixed-use projects. In conjunction with this growing trend, department stores are facing new challenges as they strive to preserve their own interests while reconciling the inevitable tensions these interests have with those of their mixed-use neighbors.

Department stores have traditionally been in a position of great leverage as anchor tenants in the regional mall setting, but the requirements of residential and office neighbors can impact at least some of that leverage, and demand more creativity in mixed-use documentation. Typical challenges for department stores in mixed-use developments include maximizing store visibility, including retaining brand appearance; providing easy in and out access and accessible parking; and maintaining approval rights over project design, size and configuration. This article will consider some of these challenges and attempt to shed some insight on which negotiating positions a department store may be willing to compromise in the context of a mixed-use project.

Maximizing Store Visibility

Department stores typically want the highest possible visibility to outside traffic so as to generate as many in-store visitors—and purchasers—as possible. In contrast, non-retail uses, particularly residential, are often highly sensitive to traffic, noise, light and hours of operation.

The extent to which department stores may be willing to compromise visibility may depend on the context for its customers in the market and in the trade area. If customers are used to finding retail in less-than-visible locations, retailers may be less insistent on visibility. For example, if a department store is a part of a destination project that fosters its own sizeable pedestrian traffic, roadside visibility is less important than it would be for a more remote development project where internal traffic largely comes from those driving by.

Customer context can also determine the appropriate level of negotiating flexibility that a department store has with building signage. Building visibility and identifiability can sometimes be a substitute for building signage, building signage can sometimes be a substitute for free-standing signage and free-standing signage can sometimes be a substitute for building visibility. Again, if drive-by traffic is not a primary source of business for the store, then both building and free-standing signage may be of less importance.

Brand appearance is often critical, especially when it is central to a department store’s customer draw. The significance of national department store branding is increasing as companies like Federated Department Stores, Inc. expand their reach and come to rely more on national brands than regional brands.

Mixed-use developers, however, need to be careful to maintain architectural harmony throughout their projects and should insist on controlling aesthetic presentation for their building façades. Usually the local governmental authority will also require coordinating exteriors. A simple compromise between department stores and mixed-use developers is to give each use in a project a different "face." This is to say that each product (e.g., office, retail and residential) may have a slightly modified façade design so as to improve product visibility while also preserving the project’s overall architectural harmony.

Easy Access and Accessible Parking

Most department stores have customers that demand easy “in and out” access to the stores. Meanwhile, most mixed-use designs encourage a stay at the project so that visitors can live, work, buy and play all at the same location. Accordingly, there is a fundamental tension between the developer's efforts to encourage pedestrian use of the project and the department stores' efforts to meet their customers’ demand for vehicle use.

In order to service their customers’ needs, department stores insist on parking lots that are close to, and connected with, the store’s exits. Department stores whose customers use carts may have even more stringent requirements, especially as to access to parking. Mixed-use designers are encouraged to produce “intuitive” design, creating the ability for customers to access all aspects of the project, whether in cars or on foot, without excessive thought or inquiry.

Department stores become particularly sensitive to parking when issues like “poaching” by office parkers, who are often subject to high daily parking charges, are considered. Department stores often want to control not only the location, size and design of parking lots, but also the operation and pricing of each, and the means by which “poaching” will be discouraged.

While strict parking regulations are often at the top of department stores' requirements, they may be flexible with parking ratios and other requirements in the event of shared parking by certain uses. For example, office peak hours are 9-to-5 on weekdays and theater peak hours are after 5 p.m. on Fridays and weekends. Similarly, department stores may be flexible if convenient public transportation is available, especially in urban developments whose high land costs make typical parking ratios less feasible.

Control/Approval Rights

Aside from common areas, retailers typically will not need to control non-retail uses. Still, department stores remain interested in how non-retail uses affect a project's retail use. For example, controlling the density of residential may be important for ensuring overall parking availability if parking is shared. The kind of office use (e.g. medical), number of theatre screens type and kind of restaurants can affect parking use, frequency of visits, brand appearance and parking requirements. While important to department stores, exterior design control may be less important with respect to non-retail uses, particularly those not directly adjacent to the department store.

In the end, department stores and mixed-use developers have a mutual interest in meeting each other’s requirements. Developers want to include department stores in their projects in order to draw more retail customers and attract residential and office tenants. Department stores would like to be in mixed-use projects because neighboring office and residential users provide an inherent customer base.

Developers and department stores alike would be well-advised to approach deal terms with reasonable requests and logical solutions. Although not every interest can be mutually met, there is undoubtedly enough middle ground to make these projects work for both sides.

This article is based in part on an outline entitled "Mixed-Use Developments: Document Structuring and Other Challenges" (c) ICSC 2005 presented by Sheldon Halpern and Bradley Syverson at the 2005 United States Shopping Center Law Conference.

About the Authors: Sheldon Halpern is a Partner and Eli Taban is an Associate at Pircher, Nichols & Meeks, a law firm that represents commercial real estate clients nationwide through its offices in Los Angeles and Chicago.

This article appeared in Shopping Center Business, November 2006. ©2006 France Publications, Inc., www.shoppingcenterbusiness.com