Improved Growing Conditions
Urban sites, friendlier locals make now the time to develop.
RRetailers have been hearing this message repeatedly in recent years: It’s a great time to build. Lending rates remain at historic lows and building costs remain incredibly competitive.
And now, one of those perennial stumbling blocks of site development—local approvals—is also easing.
“At least at the local level, where they had relied on building and permit fees to drive a lot of their local economies, they’re hurting from the economic slowdowns much as anybody,” says Joseph Viscuso, vice president and commercial sector lead for Stantec, West Chester, Pa., a firm that provides “soup to nuts” commercial development, including 7-Eleven’s recent tackling of 630 new U.S. and Canada sites in 2012. “I do think there’s a general easing or desire to see more people get through the process.”
Viscuso acknowledges that this easing isn’t true of every municipality, pointing to instances of higher permitting fees and increased scrutiny of best land-use considerations. Nevertheless, he says, “when the project budget is in the millions and they raise the fee a couple of hundred dollars, there are not really many complaints as long as they see the approval path made a little clearer.”
He points to some local municipalities forming economic development groups to attract business as a change of practice from just a few years ago.
Jim Fisher, CEO of Houston-based IMST Corp., a site-development research firm, also has observed a general easing of local approvals and resistance to c-store developments.
“What were rather business-stifling governments have realized they need revenue and tax base. ‘As much as we hate oil, we will talk to oil,’ ” he says. “So a lot of potential sites that were out there but couldn’t pass muster because of the insane type of restrictions put on by local governing agencies have been lifted. They have become more open to ideas.”
Fisher says that while California, western Washington, Oregon, some areas of Ohio and the Northeast remain difficult from a development standpoint, overall, “Aggressive retailer marketers know this is an excellent time [to develop]. And there are a lot of great opportunities out there.”
Consider: While IMST did most of its business in Texas, Louisiana, Oklahoma, the Gulf Coast and Carolinas during the recession’s depths, now it is seeing more projects in the Midwest, Pennsylvania, Ohio, the Mid-Atlantic and Rockies. Fisher also sees big development opportunities in areas where natural-gas drilling is ramping up, including northern Pennsylvania, southern New York, North and South Dakota, West Texas, New Mexico and Wyoming. “That has really spurred a huge amount of activity for development,” he says. “These areas where some finds are located are so remote that there are literally no products or services there.”
Further spurring opportunity, many states have passed permit-extension acts, which suspend the expiration of some local, county and state permits and approvals to continue the momentum of development during periods of slow economic growth.
That does not mean that all of state government is waving development through. Expect business as usual with the departments of transportation and environmental protection, Viscuso says. “Even while the recession has occurred, at the state and county level, they’ve continued to pass tougher environmental regulations,” he says. “Developers are still having a hard time dealing with those types of issues; it doesn’t matter whether you’re a Walmart, retail store or new housing.”
Heading to the City
There is a longer-term opportunity driven by the trend toward urban densification during the next 15 to 20 years, in which a large portion of the population—downsizing baby boomers, young adults—will migrate from rural and outlying suburban areas toward urban centers.
“What drove my generation to single family housing was appreciation—you can move up,” says Viscuso. “On the flip side today, why would you buy a single-family house? You see your parents’ mortgages under water. Given those conditions, you are going to see more multifamily [units],which will occur more toward the inner-city, so we will see regentrification toward inner cores. Retailers would be wise to follow that pattern.
“This will force retailers to downsize,” he continues, pointing out that big-box retailers such as Walmart have already begun to shift to smaller formats to fit urban communities. For c-stores, it may mean more inline sites, some without gas.
“Green-field development will be more difficult from a regulatory standpoint,” Viscuso says. “I’m just not sure you want to be in those outlying areas over the next 20 years anyway.”
Fisher says urban markets such as Chicago St. Louis, Boston and metro New York, which in the past one to two decades have been very restrictive about the type of development they will allow, are today presenting the greatest opportunity. One example of this is infilling, in which abandoned or empty parcels of land in core urban areas are available for the taking.
“Retailers are coming back into those core urban or suburban areas and building new-generation facilities that have tremendous density around them with a lesser amount of competition because you couldn’t build [in the past],” says Fisher.“There’s been a desert for fuel and services because of a lack of ability to develop, because of restrictions put on by the local government. There is zero land in an area like that, so you have to come back into the area and find something that you can recycle into next-generation use.”
IMST has been conducting reuse studies of old car dealerships that closed during the auto industry’s reorganization, as well as abandoned restaurant sites, both of which offer “unbelievable density, in an unbelievably ill-served market.”
Still, many municipalities prefer to work with local retailers, says Fisher. “So it’s more of an opportunity for local-area retailers to excel,” he says. “In that case, we’ve worked with companies where the local government has come to them. This site needs to be reclaimed—it is abandoned, hasn’t been purchased, and they’re willing to do special zoning variations, but we want it to be you.”
Viscous says resistance against c-stores depends greatly on the brand and local dynamics. “As I like to say, credibility is at the local level,” he says. “If it’s a chain recognized to be a top-of-the-line c-store, then you get less resistance.”
In rural areas, national chains may hold greater sway, says Fisher. When in doubt, visit the local chamber of commerce. In most cases, the pulse of the chamber reflects how aggressive the community is in attracting new businesses, he says.
Granted, the effort will involve dealing with local governments for approvals and permitting, so any interested retailer will need to have its real estate, legal and financial advisers in place. But the door is no longer closed to new c-store development, Fisher says: “As long as you can play the game, have the time and the financial wherewithal to invest in it, then the door is cracked.”
Sites that are abandoned are even easier to develop than new builds, because not only are they eyesores that the local government is anxious to improve, but the regulatory approval process also will likely be less difficult.
“A retailer comes in, says, ‘I want to refurbish space.’ I will roll out the red carpet for them, and they don’t have to poke a hornet’s nest to work with the DOTs and DEPs of the world,” says Viscuso.
One area that remains relatively unchanged is the availability of financing—especially for developers.
“There’s a tremendous amount of capital purportedly on the sidelines right now, and banks have money to lend,” says Michael Phelps, senior vice president of retail petroleum lending for RBS CitizensBank, Providence, R.I. “But commercial real estate is still the third rail because there’s a perception that there’s a lot of overcapacity.” This perception has trickledown to retail developers.
Because of this, more retailers have shifted from buying or renting developed sites to self-development. Financing can still be a challenge for large projects, says Fisher. “On smaller projects, where you’re dealing with community banks and smaller outstate markets, then financing is staying relatively fluid,” he says. “A lot of companies are self-financing from cash flow.”
While the weak economic recovery has encouraged many local municipalities to grease the wheels on new development, it still pays to approach the process thoughtfully. Joe Viscuso of Stantec offers the following tips to ensure smoother approvals:
- Identify the project stakeholders. What local groups and agencies will have an interest in the approval process?
- Clearly identify all necessary permits, timelines, contacts, meeting dates, etc\Understand the timeline for the approval process. Which step comes first, and which steps are necessary before you can proceed to the second?
- Arrange meetings with the agencies and stakeholders before the plan submission meeting to find out what their hot buttons will be.
- Arrange meetings with local homeowners or special interests groups outside of the formal approval process to understand what they will be looking for as the process moves forward.
- Respond to questions honestly and timely so issues are not allowed to fester.
- If issues cannot be addressed within the project budget or schedule, offer possible alternatives.
Site Selection Pointers
Jim Fisher, CEO of site-election and development firm IMST Corp., offers the following tips when choosing the best site for a new c-store:
- Focus on established areas with population densities above 2,500.
- Search for special populations such as universities, military bases and resort areas.
- Identify areas experiencing new retail-chain development (e.g., restaurants, banks, hotels, drug stores or grocery stores).
- For projects that rely on complementary retail, commercial or residential development, be aware that these can experience long delays.
- Ensure that adequate land area exists to meet all development objectives while achieving distinct profit center integration.
- Identify and understand all planning and zoning issues that might affect the considered site.
- Establish drive cuts, turn lanes and median crossovers with the Department of Transportation early in the process, and stay in contact with the agency.
- Do not rely on government action to facilitate site development. Road improvements, completion and realignments are experiencing timeline extensions.
- If the facility will be a “neighborhood” facility, get buy-in from the neighbors (see “Building Local,” p. 96).
- Do not settle for an alternative, less promising site as a way to adjust development strategy.
Lending 1 -2 -3
For operators planning to grow in 2012, Michael Phelps of RBS Citizens Bank advises minding the following guidelines:
Identify your capital partner/lender now. The biggest mistake operators make is maxing out their lending at a local bank and then, when a growth opportunity appears, assuming they can get financing through a large bank. “That’s too many balls in the air. You’re trying to recapitalize the balance sheet at the same time you’re negotiating and executing on an acquisition.”
Consider the ROI. New sites must hit an ROI hurdle to make them attractive to a lender. “It’s an investment like anything else. You have to be confident that it will produce cash flow. You have to be confident that the ramp-up period will not be too long.” While RBS will extend the interest-only period of loans to the first six months of a store’s operation, “some banks are reluctant to see that uncertainty. You have a large principal balance out there and you’re just making interest on it. Is it going to start servicing the principal?”
Be transparent. The most solid lender-client relationship is built on trust—from both sides. “The worst thing that happens is a surprise at the wrong time. Don’t be forced into explaining something that your capital provider’s discovered. If there’s a wart on something, let us know. Given time, a financing source can get around it.”