Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/566807
44 • September 2015 • Western Real Estate Business www.REBusinessOnline.com T he Millennial generation is re-shaping the way our country does business. Those born between 1980 and 2000 were raised in an era that included the Great Recession and 9/11, which helped create their own viewpoint of what has val- ue. As a generation, Millennials appreciate experi- ences rather than tangible items. They prefer to live in smaller environments that ofer more social op- portunities, and they crave authenticity. This demo- graphic prefers unique, one-of-a-kind venues and tends to shy away from those that are cookie cutter in nature. All of these factors translate into new, hip and exciting retail opportunities — particularly in urban areas. But what does this mean to landlords in these urban cores? For those who are developing ofce and multi- family projects for this generation, retail will be the special sauce in their recipe that creates buzz and ex- citement, oftentimes branding the project. Achiev- ing this may mean giving up the traditional national tenant and choosing instead to lease space to a one- of-a-kind retailer or bar/restaurant that will appeal to this generation. In fact, landlords may need to prepare to provide a graded rental structure, with the initial few years of the lease being discounted, to attract the right tenants. There are certain unique tenants out there that are pioneering urban environ- ments, but may not initially be in the black. They will, however, add panache to once-blighted streets. These tenants will hopefully grow and start to see a proft once the properties are leased upstairs and more retailers are drawn to a particular block, creat- ing a critical mass of Millennial customers. If done correctly, this type of draw for the Mil- lennial generation can actually revitalize neigh- borhoods, thereby producing a new neighborhood with a personality all its own. This was the case in the southern section of Broadway in Downtown Los Angeles. The renovation of an old space into the Ace Hotel transformed it into a hip and trendy destination that became the catalyst for the entire area's transformation. Just two years later, there are a number of authentic locales nearby. Notable re- tailers in this section of the city now include Acne Studios, a Swedish retailer that ofers a cofee shop; A.P.C., a French ready-to-wear brand founded in 1987 by the Tunisian-Jewish born designer, Jean Touitou; and AESOP, a Melbourne-based luxury brand of skin, hair and body care products. Property values have literally doubled — if not tripled — as a result of all this momentum. Retail rents have followed. Landlords in this section of the Broadway district who took risks on newer con- cepts were able to reap the rewards. Even some of the national chains like Chipotle and Starbucks have taken notice. Many of their new- er stores are being designed and shaped to mold into the neighbor- hood, taking on a local personal- ity without giving up the national brand. Now, locations no longer have to mirror a standard layout. While all this new activity can be exciting, it also presents a chal- lenge to the landlord who must avoid costly mis- takes. Part of this strategy will involve doing a deal that is outside the box. It may also include leasing space to foreign-based tenants or startups that don't yet have solid credit in the United States. Though this can sound scary, it can be done. These transactions may require you to: • Create spaces that have a mystery factor. Base- ments, once thought to be best utilized for storage are now becoming viable spaces for bars and restau- rants. • Pay attention to what may be considered the best, most advantageous tenant mix for the neigh- borhood, not just your property. While this may seem more altruistic, it's no longer just about the building itself. It's about building a neighborhood. Once you bring in the "desired hip factor," it will ultimately transform the entire neighborhood. • Keep the experience in mind. You must make sure spaces are designed to be visually unique when people walk by. This may include features like inset patios. Remember, the direct beneft isn't the actual purchase, it's the experience. There is no doubt the urban core is changing. For landlords who want to be a part of this, it may in- volve risking the unknown. If planned correctly, however, this transformation can be the driving force behind a truly unique live, work, play envi- ronment that will not only capture the Millennial generation, but will bring positive energy back into our urban environments. Justin Weiss, Senior Associate, Brokerage, Kennedy Wilson in Los Angeles URBAN RETAIL PREPARES TO CAPTURE MILLENNIAL DOLLARS Landlords who are trying to attract the Millennial generation should do their part to court retailers close to that generation's heart, which can often include a variety of unique, independent concepts. By Justin Weiss Weiss The renovation of an old space into the Ace Hotel transformed it into a hip and trendy destination that became the catalyst for the entire area's transformation. Just two years later, there are a number of authentic locales nearby. Photo credit Spencer Lowell should generally accommodate reasonable requests and proactively include protections for the commer- cial uses. A commercial unit may have little value if its use is overly restricted or its share of expenses too burdensome. Ensure These Critical Issues are Addressed Commercial landlords and tenants should ensure the following issues are adequately addressed (at a minimum) when reviewing the governing docu- ments: Protection of Minority Interest — Protections should be included to ensure the commercial own- er's interests are not easily overridden or interfered with by the residential majority. This can be done, for example, by requiring a commercial owner's ap- proval for matters material to the commercial unit, and by excluding the commercial unit from, or pro- viding alternative standards for, certain rules and regulations, such as architectural review require- ments. Restrictions on Use — Restrictions on use, whether blanket restrictions on nuisance activities or specifc restrictions on access, hours of operation, noise levels and the like, are commonly included in governing documents and should be reasonable. Ideally, they would include broad exceptions for contemplated commercial uses, particularly with respect to operating hours, outdoor music and noise and common odors. Operational Obligations — The governing docu- ments should clearly indicate the extent of the as- sociation's obligations to insure and maintain the project and comply with applicable laws, such as accessibility requirements, so the parties can clearly allocate any remaining obligations in the lease. Appurtenant Rights — In addition to clearly de- scribing the commercial unit, the governing docu- ments should grant the commercial owner and its tenant the right to use other areas necessary for the tenant's operation. This may include parking, out- door patios, trash enclosures, roof access and shared signage. Operating Expenses — The operating expenses landlords and tenants customarily negotiate in a lease will instead largely be incurred by the asso- ciation and passed through to unit owners in the form of assessments. These assessments should be reasonably allocated. Commercial owners should not be required to contribute to facilities used ex- clusively by residential owners, and vice versa. To the extent facilities are shared, the allocation of costs should generally be based on rates of consumption or use, rather than a unit's pro rata share of the overall project. Jonathon Giebeler, Partner, Hecht Solberg Robinson Goldberg & Bagley LLP law frm in San Diego continued from page 42