With the aggregate purchasing power of urban residents climbing and many of their communities still underserved, some developers are concluding that their next frontier is the inner city. But convincing retailers to see past inner-city stereotypes can sometimes be a difficult task, and the area comes with its own set of political and environmental problems.
The Business Journal recently conducted a roundtable discussion with commercial and residential real estate experts about this new frontier. Panelists were Don Spivack, deputy administrator of the L.A. Community Redevelopment Agency; Curtis Fralin, first vice president for CB Richard Ellis Inc.; Marva Battle-Bey, president and CEO of Vermont Slauson Economic Development Corp., a nonprofit community development organization; Luis Valenzuela, executive vice president of Capital Commercial, a real estate brokerage; and Christopher Hammond, CEO of Capital Vision Equities, a housing developer.
Question: What is it about the inner city that’s finally attracting interest from developers?
Hammond
: I think what’s happened is that the urban sprawl has sprawled just about as far as it can go. So as a result, retailers are looking to the last frontiers, which are turning out to be the inner city. So there’s a good opportunity for nontraditional players, who I think are pleasantly surprised at the opportunities that are available there.
Spivack: Maybe I can start with a little bit of background, because these have been areas investors have traditionally shunned. Shortly after the civil disturbances in the early ’90s, there were a number of studies done to try to put some numbers into what the inner city represents. There were some interesting findings.
Roughly 24 percent of the city qualifies for being in the inner city areas that are densest, oldest and have the lowest income. That area is also substantially denser than other parts of the city. The population density in the inner city is about 16,000 people per square mile, which is about twice what the city as a whole is. The population is primarily minority, both Hispanic and African American. In comparison to the rest of the city, they have low educational attainment. The unemployment rate is substantially higher than in the rest of the city. At the same time, because of the concentration of population, there’s tremendous buying power, and for many years this was simply ignored.
Since the disturbances, there has been a recognition that you do have a large consumer base there and there has been a movement of supermarkets, and to a lesser degree big-box development, to tap into the commercial buying power that exists in these areas.
Q: So, while the average inner-city household income may be relatively low, the sheer number of households is attracting retailers’ attention?
Valenzuela
: Yes. Being a broker, you think of things on a one-mile radius. A good one-mile radius count is 40,000 people. A great count is 60,000 people. The Pico-Union area has well over 100,000 people in a one-mile range. If you start to look at it from that perspective and you’re a retailer, you really do have a market here that you can cater to.
Battle-Bey: Vons supermarket had a commitment to a store in the middle of South Central that never got built, and we bought that land from them. We were very disappointed they didn’t build that store. But we’re going to open a commercial center there. The whole reason we’re doing that location is because the community wants a sit-down restaurant. You might think, “Why buy a piece of land for $2.5 million to build a sit-down restaurant?” That’s what we need in our community. We will put a Denny’s there, owned by an African-American franchisee. And we’re going to put in a grocery store a new independent entering the L.A. market.
Q: So big chains like Vons still haven’t woken up to the fact that, as independent grocers have proved, there’s good money to be made in the inner city?
Battle-Bey
: Not all chains. Nothing against Ralphs and Food4Less they’re everywhere in minority neighborhoods because they know they can do well there. What they do per square foot there rivals anywhere else in the region.
Valenzuela: At least within the Latino market, buying power is increasing by $1 billion every two weeks, just in L.A. County. The independent supermarkets have done extremely well in these areas and it’s more difficult for the major retailers to come in. These independent markets cater to their customer, they understand that if you don’t have a car, they’ll give you a ride home if you buy more than $30 worth of groceries. They understand the types of food we want. What’s happening is that big chains don’t know how to market to Latinos.
Fralin: It’s the independents’ sales volume that has incited some of the larger chains to even look at the area. We can talk statistics, but I really believe it’s a matter of changing perceptions of ethnic areas. Educational attainment is quite high and median income is $50,000-$60,000 in some urban pockets, but we tend to group that whole area into the inner city, and it isn’t. There are pockets of well-off communities, and that’s what I tell retailers. This whole area is not just one core area; you have Baldwin Hills and Ladera Heights, where incomes are very high. We’re able to accent specific areas, four square blocks, and show the difference. For example, Manchester and Vermont avenues. In one corner, the median income is $18,000. In the northwest quadrant, the median income is $32,000.
Q: Are chain retailers receptive to your pitch about pockets of wealth?
Fralin
: They’re receptive, but I’ve been doing this for 12 years and I can count on two hands the number of new retailers that have entered our areas. It’s always a challenge getting the major players to come into the market, but I don’t think you can (overstate the importance of) the chain tenant. Those mom-and-pop stores, just by virtue of being in the same shopping center with a major chain store, can do quite well.
Battle-Bey: But it’s going to be very difficult for a lot of mom and pops to compete directly with major chains because of pricing. They’re competing on price point and they can’t. A lot of people want the big boxes because of the pricing. They know they can go in there and spend little money and get a lot of the goods they need. And the independent stores can’t continue to compete.
Q: What about the product mix issue? Are major retailers better off carrying their mainstream products in inner-city stores, or should they carry more ethnic offerings?
Fralin
: The perception by retailers is that they have to modify their products for a certain community. But you go into some of these successful Hispanic independents, they’re selling American merchandise, they just have a Hispanic name. We in the community really want the same services the other communities have, so you don’t have to change your inventory to please us.
Valenzuela: Well, that’s not always the case. One of the tenants we’re working with is Maya Cinemas, that’s going to compete against the other big theater chains. What (the owner of Maya) is doing is looking at under-served areas, which could be African-American, Latino or Asian communities. It will be a state-of-the-art theater. He understands that in these communities you have more children, so he’s going to have cry rooms (soundproof-glass booths) within the theaters. They’re doing things that literally cater to the community. They’ll play Spanish-language or ethnic or foreign movies. Right now, we’re working on (developing a theater on) an industrial site on San Fernando Road, because that’s what’s available.
Q: Is that wise?
Hammond
: There are a lot of inner-city industrial sites where the planning is inconsistent. You have single-family homes that are right across the street from manufacturing. If we have any hope of trying to recreate our communities, we have to think through where people are going to live and where they’re going to work.
Q: Can’t the city undertake rezoning to make the land uses more consistent?
Spivack
: The city does establish the zoning, but it’s a very lengthy process. When the zoning is too wide open, you don’t get anything to happen, so you need to establish some clear direction in certain areas. There are industrial sites scattered all over the region because they are sites where railroad tracks crossed major roads. So they became industrial and a lot of those don’t make sense to remain industrial.
Hammond: Some of the largest assemblages of land are the industrial sites. In the case of (the retail center) Chesterfield Square, that was an old industrial site that had been sitting for some time. There have been arguments for the past few years that you need to keep industrial sites industrial. But you have land needs when you’re talking about big-box development. The opportunities for assemblage have to be in primarily industrial areas.
Q: But wouldn’t industrial jobs pay better and do more for the community than retail jobs?
Battle-Bey
: One of the problems is that you’ve got a lot of underutilized industrial land, so the jobs per square acre are small in comparison to when you have big-box retail, which provides low-paying jobs but lots of them. If you could convert that land to high-use industrial, you could get more well-paying jobs out of that. Twenty years ago, you couldn’t get anyone interested in converting that industrial land to commercial. But now we’re out of space, so people are looking for ways to convert it to the highest and best use.
Hammond: Plus, some of the more traditional sector developers have been (pleasantly) shocked by the whole notion of subsidies and how that all works. Some of the people I’ve worked with have been shocked that this can be very good business, that people won’t beat you up when you go to a community meeting (and propose a commercial development) that people will celebrate you.
Battle-Bey: But urban communities don’t have the kind of coffers they used to have to give to developers. The programs that were around 20 years ago to give incentives to developers aren’t there today. There is a lot of capital in the marketplace, but not necessarily at the government level.
Q: One thing governments do have, however, is the power of eminent domain to require pre-existing property owners to sell so that large tracts can be assembled for redevelopment. Why isn’t that utilized more frequently?
Valenzuela
: You’ve hit on one of my pet peeves. One thing I always talk about with public officials is that you need the power of eminent domain. But it’s a political football, it’s a nightmare and it’s too difficult for politicians to (force homeowners to sell). You need to educate communities to understand what redevelopment is all about that redevelopment is not a bogeyman looming over a community that’s going to kick little old ladies and families out of their homes.
Spivack: That was exactly the response when we were putting together the redevelopment plan for the east side of Los Angeles. We spent about six years putting together that project. The first four years were spent going through the education process and going through the venting of all the people who had been displaced by previous (redevelopment) projects. They knew intimately some of the issues of eminent domain because they had been at the bottom end of it.
Q: Are there other factors that make the eminent domain process a sticky one?
Hammond
: You’ve got a lot of sub-issues. All communities want things both ways. They want development, at the same time they don’t want it in their backyards. The fact is that this is hard work, doing these urban developments. You have to work through the community process. You have to talk nicely to people to get them to sell you the property, and often that means overpaying for the property.
Valenzuela: You often have these switch programs, so that if someone has a single-family home that you have to take, you have to find them another home and you’ve got to find one that has more amenities and that is better equipped than the one they had. That takes more work, and it takes a political campaign.
Battle-Bey: And if you’re going to move homeowners around, you’ve got to find people an alternative home they can afford. And that’s difficult to find in our community, because we don’t have a lot of new housing being built. I’m concerned that location issues may take precedence over what we do in communities, in terms of taking care of human capital.
Q: But even when homeowners are treated fairly, there’s still often resistance, right?
Spivack
: The people who are being relocated generally find out pretty quickly that they’re getting into better places. They’re the easy ones. It’s the people on the outside, who see eminent domain as the big bogeyman, who are causing the problems.
Hammond: Then there’s the new charter reform, which has created neighborhood councils which, by their very nature, are going to make it more difficult to get projects assembled.
Q: Given these environmental and political problems, how is it economically feasible for a developer?
Fralin
: Our development issues are the same as in other communities. I think one of the things we’re trying to show the world is that there is a social-responsibility aspect to developing shopping centers in South Central, but you can also make money in these areas. I think that’s important because tenants won’t come if they don’t think they can make money, and developers won’t bring projects.
Q: But this was true 10 years ago. Now a few pioneers have gone in and they’re seeing phenomenal sales. So why do the perceptions persist?
Fralin
: One word: racism. It’s still there. You can’t ignore it. As early as nine years ago, we didn’t watch videos. There wasn’t one Blockbuster or Hollywood Video in our community. We’re only now beginning to drink coffee. Today we still don’t read books we don’t have a Borders in our community. And we definitely don’t buy electronics we have no Best Buys or Circuit City. So hopefully, there will be a time when tenants feel comfortable to bring us the services we already utilize.
Q: What about lenders? Are they opening their minds and pocketbooks?
Battle-Bey
: Tenants drive the financing. You’ve got to have the triple-A tenants to get the kind of financing you need. If you get the tenants, there’s money out there.
Q: What’s ahead for this new market in the inner city?
Valenzuela
: I think you are going to see more of a Polynesian population and retailers are going to need to understand that. I think the buying power in L.A., especially in under-served communities, is going to grow so rapidly that corporate America won’t be able to ignore it.
Hammond: I’m not quite as optimistic. I’m not so sure, with the economy going into the cycles it tends to go into, that these urban infill projects won’t be some of the first ones to get put back on the shelf.
