ON ARCHITECTURE- Ghost Mall? Will rents adjust as vacancies grow?

Lease me: Office and storefront vacancies downtown, like this one at 111 East Main Street, have doubled since since July, according to a recent City survey.

At City Council's Monday meeting on February 2, a PR campaign was unveiled by the Downtown Business Association (in a display behind the Councilors) that placed signs with affirmations about the $7.5 million Downtown Mall rebricking project, including an a large banner on Market Street, with such phrases as "We're hitting the bricks so you can too," "Walking is cool," "These bricks are made for walking" and "We'll have you back on the bricks in no time." 

The campaign is meant to encourage folks that the Mall is still open for business, despite the barricades and construction going on. But will such affirmations be enough?

"I'm concerned about the struggling merchants on the Mall in difficult economic times, and the ongoing construction," Cynthia Schroeder, owner of the downtown clothing store Spring Street, told Councilors. "The merchants are taking a terrible beating from the construction...the Mall is like a ghost town right now."

Schroeder said she was worried about the number of vacancies on the Mall and hoped that the City would spend more money to stimulate occupancy and help landlords better promote the Mall.

The City handed out $50,000 to a private group called the Downtown Business Association in November, and on Council's consent agenda February 2 was an additional $50,000 for continuing downtown marketing efforts.

Of that first payment, Association president Bob Stroh said that $13,000 had been spent over the holiday season, and that $37,000 would be spent in the coming months on seven "block parties" to "celebrate the new Mall." 

"Merchants are paying top rents when the Mall was at its prime," Schroeder continued," and some of the landlords, including mine, have agreed to possibly lower the rents." Schroeder added that downtown merchants didn't want corporations like Starbucks and McDonald's moving onto the Mall. "We like the small stores, and want to keep it that way." 

Council quickly approved the additional $50,000, but there was little discussion about the growing number of vacancies on the Mall. 

On a recent stroll down the Mall, an out-of-town visitor the Hook spoke to was moved to comment on all the empty storefronts. "I don't remember there being so many empty spaces the last time I was here," the visitor said.

Indeed, during our own stroll on the Mall, the Hook counted at least 12 vacant retail and office spaces.

In addition to familiar locations that have been vacant for a long time, such as the former A & N and Order From Horder locations on the east end, and three locations between First Street and the Wachovia building, the former C-Ville Weekly offices, Sage Moon Galley, the Ryan Homes office (particularly strange, as it appears that the large furnished office had been abandoned, with contact information taped to the front door), the second and third floor of 106 Fifth Street, Migration gallery, and a location beside Lee's Hallmark shop are just a few of the places for lease.

And that's not to mention the locations that are empty due to ongoing construction, such as the Jefferson Theater and the Hardware Store building. One bright note is that an Urban Outfitters clothing store is scheduled to open in the Hardware Store building in May.

According to Chris Engel, the City's assistant director of economic development, the numbers appear to confirm Schroeder's worries. Since July 2008, vacancy rates downtown have doubled, from three percent to six percent, according to the City survey, which was conducted last month.

However, Mayor Dave Norris bristles at the suggestion that the vacancies are being caused by the on-going construction, calling it "a stretch" to make such a claim. 

"Am I concerned about any storefront vacancies on the Mall? Absolutely," says Norris. "But my sense is that the economic downturn is primarily to fault."

Engel, too, attributes the vacancy rate to the downturn. "While the increase does concern us," he says, "we believe a six percent vacancy rate is reasonable given current economic conditions." 

As Norris points out, when the economy goes sour, some of the first things that consumers cut back on are non-essentials like entertainment, dining out, and luxury goods– precisely the types of business activities that predominate downtown. 

Furthermore, Norris would remind business owners that it was many of them who pushed hardest for the Mall renovation.

"They knew there would be some short-term pain over a few months, convinced as they were that the long-term gain of an improved Downtown would more than make up for it," he says.

Still, while merchants may have expected some short-term pain when the project was proposed, few may have expected the economy to get so bad so suddenly. But there were those sounding a warning, including downtown developer Oliver Kuttner and Quilts Unlimited owner Joan Fenton. 

"Merchants on the Mall are not getting rich," said Kuttner in January 2008, already aware of what the government wasn't saying yet. "You may not think there's a recession, but there is... businesses are suffering."

And while the construction may not directly be causing the vacancies, the timing couldn't be worse.

"These are small businesses downtown," advised Fenton in January 2008, "and they can be seriously hurt by these disruptions. If you kill a small business for a year, you kill the business."

While Norris and Engel say the City's Economic Development staff has been meeting regularly with downtown businesses to see what kind of assistance the city might be able to provide (through direct business assistance, workforce development, and marketing programs), they say it's up to the downtown landlords to reverse the vacancy trend, as rents are primarily a factor of marketplace supply and demand.

"If downtown landlords start to see that they cannot rent their properties for the same amount that they've been getting, rents will inevitably come down," says Norris. "We may well see some correction soon in that particular market."

Engel concurs. "My guess is there is some rent adjustment going on in the market place right now," he says.

"Three years ago, there wasn't a space to be had on the Mall," says Carolyn Shears, a commercial real estate broker with the local branch of CB Richard Ellis, who attributes the number of vacancies now to the "bottom end" of a natural market cycle. "I suspect within twelve months we will begin to see the signs of a rising market, spurred on by positive happenings such as the Urban Outfitters and the Jefferson Theatre renovation.  It has nothing to do with parking or Mall construction and it has everything to do with market cycles."   

But Norris says he has long contended that the Downtown economy is not diversified enough and needs to include more residential development and the "everyday commercial" activity that it would support, such as a downtown grocery store, he says.

"That's not to say that we need fewer restaurants, fewer boutiques, fewer arts venues," Norris continues, "rather that we need more residential and everyday commercial in order to sustain Downtown for the long haul." 

Long term, it appears that the experts at CB Richard Ellis agree. In a 2008 analysis, they reported that "close to 600 residential units that have been proposed for the the Downtown area, which should have a significant positive effect on retailers for years to come." 

Unfortunately, many of the planned residential projects for downtown, such as Waterhouse Village, First & Main, the Coal Tower, have either slowed, ground to a halt, or like the plans that were received as part of a $150,000 city-sponsored design contest for a potential residential development on the site of the Water Street parking lots, appear like pipe dreams in the shadow of the the real estate downturn, which has hit high-density condos projects particularly hard.

According to the CB Richard Ellis analysis, this could create an unfortunate Catch-22 for the future of downtown, as the "numerous obstacles such as space layouts, space size, politics, and parking restraints" will limit downtown to having only "trendy boutiques and chic restaurants." Furthermore, the report concludes that, as it stands now, "limited space and fragmented ownership" is preventing any large-scale retail development from taking place.

However, there is that Urban Outfitters arriving in May. And while downtown merchants like Schroeder may not want to see corporate stores taking over the Mall, it may be hard look a gift horse in the mouth.