Thursday, April 26, 2007

Is the retail market of Lawrence overbuilt?

The retail market of Lawrence, Kansas is out of balance, with space growing much faster than demand for that space.

Growth in supply

· From 1995 into 2007, the stock of retail space grew by 3.0 percent per year.

Growth in demand

· The inflation adjusted pace of growth in demand for retail space is growing at a rate of little less than 1 percent per year.
· The number of retail firms has been effectively flat and retail employment has fallen from 2001 to 2007.


· The mismatch between the pace of growth in supply and the pace of growth in demand is large (supply is growing at a pace 3 times the pace of growth in demand), and it is long-term (lasting more than a decade).

Proposed developments

· Proposed developments will add over 800,000 square feet of retail space. This represents an increase in the already overbuilt stock of over 12 percent.

Consequences of the mismatch

· There is over 540,000 square feet of vacant retail space in Lawrence, 395,000 south of it river.
· About 364,000 square feet of this vacant space south of the river is in general merchandise, automotive, and food use, a category that developers are seeking to expand further.
· General merchandise space, which makes up about one-half of the total stock of space, has a very high vacancy rate of 13.5 percent. Even if North Lawrence is removed from the stock general merchandise space has a vacancy of 10.1 percent, which is twice the level of a healthy market.
· The surplus stock is creating blight that was contained in North Lawrence, but now it is spreading.
· The City cannot absorb more space; additional stock will only increase vacancies throughout the City.
· The City needs to protect itself from the harm of this overbuilding by slowing the pace of retail development.

Wednesday, April 11, 2007

Who should set the pace of development?

George Gurley (LJW April 8, 2008) is correct that “the champions of growth and the proponents of preservation could learn to negotiate with one another.” However, his view of the planning and development process in Lawrence is incorrect on many counts.

Horizon 2020 is the community’s expression of what it wants. At 6th and Wakarusa, the plan called for 200,000 square feet of space. The developers built that amount, but they want to build more. They are manipulating the planning process, seeking to build over 400,000 square feet, more than twice the planned amount. When blocked from overbuilding, developers criticize the planning process for its “lengthy delays” and “inconsistent interpretations.” What is really happening is that developers will not take “No” as an answer. If an intersection’s retail space is built to capacity, then no more retail space is needed. Proposals to build more should be met with a firm “No” and calling this response a “lengthy delay” or an “inconsistent interpretation” is incorrect and unfair to the community.

Gurley disparages efforts to control the growth of retail spaces saying that “overbuilding is usually self-correcting.” The facts show this to be untrue. If the process was self-correcting, there would be no long-terms trend of excessive development or high vacancies. Unfortunately, Lawrence has witnessed both. From 1995 through 2005, the retail space in Lawrence grew by 3.0 percent per year. During the same years, real growth in spending increased only 0.8 percent per year. Thus, retail space grew at a pace over three times greater (in fact almost four times greater) than the growth in demand for that space. The result is a high vacancy rate and conversion of retail space to other uses, spreading the harm of overbuilt markets beyond the retail sector.

The vacancy rate for general merchandise space in Lawrence is over 10 percent, double the normally accepted standard, and this figure excludes North Lawrence and space converted out of retail use, such as the Riverfront Mall. Some of the converted retail space is now in office use, making it hard if not impossible for the office market to succeed. Think of the empty office structure in the 1800 block of Wakarusa; it has stood empty for years. Some of the converted retail space is in hotel use, making it hard if not impossible for the lodging market to succeed. Converting the Riverfront Mall into a hotel has reduced the capacity of other downtown redevelopment plans to materialize including the plan for which the taxpayers built the $8 million parking garage in the 900 block of New Hampshire.

Developers build in saturated markets because they are willing to gamble that they can still make money. They believe that new, larger, better located space can capture tenants away from older space. They believe that their project will succeed and others will fail. They believe that they can make their money quickly and get out before suffering the long-term consequences of a glutted market. The evidence is mounting against this thinking. For all but North Lawrence, the vacancy rates show that newer space is no different than older space when it comes to maintaining occupancy. The vacancy rates show that larger space is no different than smaller space. Finally, the vacancy rates show that the far west side of town is no different than the east side.

The community is paying the price for this overbuilding. The taxpayers endorsed a redevelopment plan for downtown, contributing the parking garage, but that plan never materialized. It was delayed by the 2000-2001 recession, but now it is doubtful that it can ever succeed because the City has approved large amounts of retail space in west Lawrence at 6th and Wakarusa and at 6th and the SLT. The shopping centers and downtown are all competing for the same tenants. The retailers are aware of the slow pace of growth in retail spending in Lawrence and will enter into the market only to the extent that they will be supported by this sluggish growth or can capture spending away from existing stores. This means that only part, and definitely not all, of the development can succeed. The blight is spreading. It was confined to North Lawrence, but now “dead malls” and underperforming shopping centers can be found throughout the city. These poorly performing retail centers tend to receive little maintenance. They become liabilities rather than assets to their surrounding neighborhoods. We need only look at Topeka to see what happens if this overdevelopment process is allowed to continue for too long.

Planning for the growth of retail space is hardly “farfetched” as Gurley states. Rather, pacing the growth in supply is a good way for the citizens of Lawrence to protect themselves from the overbuilding and blight that has plagued so many other cities when the developers are left to their own devices. Only the City, not the developers or the builders or brokers, can bring discipline to the development process and ensure that the pace of growth of space does not exceed the pace of growth of demand for that space.