Downtown nurtures new opportunities as stores struggle, vacancies persist

TRAVERSE CITY – Downtown Traverse City has always worn the trappings of success as comfortably as a fashion maven might wear a hot new dress.

But now, for the first time in memory, something has happened to disturb its signature look. Empty retail space is lingering on the market, and fewer retail tenants are fighting for space.

"We used to see space vacant for a couple days before it was snapped up," said Kerry Glaesmer, owner of 130-year-old Votruba Leather. "Now it might be empty for a couple months."

In other circumstances, it could be a humbling experience. The vacancies are an indisputable sign that the recession has been tough on retailers downtown, even if the city's core district still enjoys occupancy rates that are the envy of other communities.

Yet there is a change in the retail environment. Longtime downtown tenant Martinek's Jewelers has retreated to the Preferred Outlets mall in Garfield Township. Stores like the fabric and design specialist Stewart-Zacks have scaled back. Home Essentials, an interior design store, Items, a women's boutique, and Watermelon Sugar Gallery & Gifts are gone from the scene. National chains, pulling back everywhere, have stopped shopping for locations downtown.

In the trenches on Front Street, retail veterans have long battled tough winters. This year, the season had a special chill, contributing to turnover and a higher vacancy rate. Difficult times may not be over yet. Tourism will be down about four percent this year across the state, according to a Michigan State University study, weakening a crucial source of support.

"The national economy has caught up with us – no question about it," said Bryan Crough, executive director of the Downtown Development Authority. "The ones that are still here are taking a hit, but they are here for the long haul."

Mike Orden, a broker with Real Estate One, puts retail vacancies at no more than five percent, though that is significantly more than the historical rate of about two percent. Crough isn't worried about the space hanging on forever, either. "We expect most of those spaces to be occupied by summer."

Silver lining in softer market

There is a silver lining in the contraction, Crough said, though it might be hard to see amid the disappointment over business closings. For years, a lack of space kept experienced retailers from coming or expanding downtown.

Landlords now have more options for new tenants and have an easier time offering them larger spaces. Moreover, retailing experts say the business district's overly high occupancy masked the weaknesses of the environment. The study by Chicago-based Economics Research Associates (ERA) concluded that downtown has, to some extent, been "a victim of its own success," with overheated lease rates and an excessively tight market for space.

In both good and bad times, downtown has been a remarkable phenomenon. "Downtown Traverse City has more than withstood the test of time and all the challenges that have come into the marketplace," said Jay Wedeven, a partner at Southfield-based Strategic Edge, a consultant to national retail chains, and a Traverse City resident.

Downtown has also seemed the living embodiment of urban theorist Richard Florida's idea of a cool city serving as a magnet for talent – with filmmaker Michael Moore being only the most notable example. A steady flow of new entrepreneurs arrive each year, ready to take a shot at the American dream, and they give the downtown a flavor impossible to find in malls.

The results are unusual stores like one new arrival, Fustini's Oils and Vinegars. "That's a great example of the kind of thing that works really well downtown," said Dan Stiebel, commercial broker for Coldwell Banker Schmidt.

Talbots, an international retailer of apparel, shoes and accessories, and ice cream store Cold Stone Creamery have presences downtown, yet big-name retailers remain the exception.

Wedeven's partner at The Strategic Edge, Joan Primo, credits the merchants' entrepreneurial spirit for the diversity downtown. "Independents are always very helpful because they help to distinguish a downtown from a mall."

Wedeven adds: "Downtown has an incredible variety of restaurants that are continually being refreshed, and there are new concepts coming in all the time. And the State Theatre has brought excitement to the area."

Monuments to positive thinking

The current economic climate hasn't discouraged more monuments to positive thinking. Developer Gerald Snowden is moving ahead with his 140,000 square-foot RiverWest project at Pine and West Front streets. So is Thom Darga with his 70,000 square-foot 101 North Park at Park and East Front streets.

The new projects will help with a problem that ERA identified two years ago. According to the 2007 ERA study, retail space has grown extremely slowly – with an annualized growth rate of just 0.2 percent between 1996 and 2006. Even with half a million square feet of retail space, people still clamored for more.

The flip side of the entrepreneurial approach may be higher-than-average turnover, according to ERA. Its 2007 study for the Downtown Development Authority suggested retailing at the city's epicenter can be tough going for independents.

With demand for space high, lease rates have trended somewhat higher than rates nationally, and overly-eager entrepreneurs did not always appreciate their full impact on their bottom line. Crough says he would like to see more new retailers work with SCORE, a mentoring organization, and the Northwest Michigan Council of Governments to improve their odds of success.

"I would rather see less turnover and less stress," he said.

Retailers came under considerable stress after leasing their space in a surge of optimism. "But the expected high rate of success proved not to be true," he said.

But despite the disappointments, spaces didn't stay empty for long. According to the ERA report, stores disappearing from the scene between September and January were quickly replaced by new ones. The turnover reflected "about 15,000 to 20,000 square feet or 10 businesses a year," the report said.

In the past, agrees Stiebel, the supply and demand equation was out of balance. "Historically, there was so much demand for space that you had to be on a waiting list and ready to pounce if someone looked like they might be going out of business, if you wanted to get their space."

Tough market for gift shops

In part, ERA attributed the turnover to "apparent imbalances between current rents and sales levels," especially in the miscellaneous/gift store category. Some businesses paid more rent than they could afford, based on their annual sales. So it came as no surprise that stores like Lutfy's Hallmark would close or migrate from downtown.

The ERA report recommended closer coordination between landlords and development agencies like the DDA to assure that more high-quality retailers become downtown fixtures. That could mean mostly selecting tenants based on their long-term viability, rather than their willingness to pay a higher rent.

"Percentagewise, the vacancy rate is still very low, and it's nice to see a little vacant space so people can move around if they want," Stiebel said. "But I don't think rents have come down at all. They might have to come down a little bit if landlords want to fill the space."

Brokers generally estimate that rates average $15 to $20 per square foot, and the ERA study published in 2007 put the average at $17.

Downtown has seen office space rise 20 percent to about 750,000 square feet since 1997, with the four-story, 40,000 square-foot, mixed-use, Radio Centre, one of the latest additions.

The office market has softened more than retail has, Stiebel said. Many tenants are downsizing their space, and moving out of new buildings with the city's trademark view of the bay. "That's just the opposite of a couple years ago when everyone wanted something new," he said.

Orden of Real Estate One, isn't worried about the retail market being too soft. "We are well above 95 percent occupancy, which is really strong, relatively speaking, for a weak market," he said.

While some retailers take advantage of the new flexibility to right-size their operations downtown, others may end up outside the city limits. Martinek's Jewelers, for example, was reincarnated in the Preferred Outlets mall in Garfield Township as a jewelry repair shop and a consignment sales store.

"Downtown will never dry up," owner Paul Everts said. "But the problem is, can you make it through the winter season and make it toward summer?"

With more space, a golden


In any case, Crough doesn't see just a silver lining in recent changes, but a positively golden one. Downtown can now execute a time-honored strategy for developing retail with staying power: Get veteran, successful independents to set up shop downtown or expand there.

With more battle-tested merchants, downtown can expand its tourism market share. More people will travel longer distances to come to Traverse City, or so the thinking runs.

The recent moves by a number of retailers – notably Cherry Republic, Robert Frost Shoes and Jacques Torres Chocolates – seem to bear Crough out.

Kris Kruid seems to fit the mold, if there indeed is a mold for an independent-minded Traverse City retailer. She is owner of the new Jacques Torres Chocolates on Front Street. After starting and running her small chain of chocolate stores in New York, she came home to Michigan to scale back her involvement in the business. But she soon fell prey to the temptation of the perfect vacant retail space on Front Street.

"I was not shopping for space," said Kruid. "My decision was really triggered by seeing the space available. I was coming to downtown for lunch and I looked across the street and saw the 'for lease' sign."

Smitten with the "beautiful space," she quickly worked out a deal with landlord W. Bruce Rogers.

Bob Sutherland, owner of Cherry Republic, was recently able to expand his two storefronts into a single, larger, operation in the Whiting Hotel building at Cass and Front when What to Wear, a women's clothing store, moved down the street. Eventually, he plans to take up as much as 9,000 square feet in the building.

But Sutherland found it tough to carve out the space he wanted. He began looking at options three years ago, and spent a year keeping an eye out for the right space. Eventually, due in part to the staggered lease expirations, he was forced to take two spaces that weren't contiguous and then wait for the storefront in the middle space to open up.

"Now that What to Wear is gone, we can link them all together," he said. "We really wanted to do more than the storefront. We want to offer a full experience like we do out in Glen Arbor." Cherry Republic has three buildings and 7,000 square feet, complete with a store, winery, café, garden, and other features.

His aspirations extend beyond the Cherry Republic's indoor space. While he has handed a recent project -rehabilitating the Whiting Hotel – to developer Gene LaFave, he still would like to see more attractions downtown and better connections between its various parts. That would make it an even better travel destination, he said.

That meshes well with the ERA's recommendations in 2007. With the abundance of surface parking, vacant development sites and one-story buildings, "there are clear opportunities for infill real estate development," ERA said in its report.

Right now, Darga, the developer of 101 North Park, and Snowden of RiverWest, are doing the heavy lifting of mixed-use development: attracting the tenants that are so important to the banks that put up financing.

"I have a tenant to take a major portion of the first phase of RiverWest," Snowden reports. He hopes to begin construction in the spring of 2010 and complete phase one in 2011. He is now in talks with Traverse City officials on a public and private parking component of the project. He regards parking as a crucial component for the west area of downtown.

101 North Park has commitments for several penthouse condos. While construction halted at the site recently, the DDA remains optimistic about the project. "This is a prime location, and hopefully its location will help see it through to completion," said Rob Bacigalupi, the DDA's deputy director.

LaFave, now the developer for the Whiting, has been pursuing a mix of private and public financing for its rehab.

Retail consultant Wedeven thinks current merchants can fare well if and when the planned developments move ahead.

"But the developers have to make sure they have the right mix of retail, office and residential – or whatever," Wedeven said. Residential components of the new projects like 101 North Park will give retail a boost, he notes.

If downtown is overbuilt for a time, newer projects could be at greater risk than long-standing landlords and stores on Front Street, he said.

But if the past is any indication, the economy will support new developments like RiverWest and 101 North Park, Crough said. Snowden, who developed Radio Centre's two phases, agrees.

"Over the long term, Traverse City will continue to be an attractive space to live and work," he said. BN