The building at the southeast corner of Fairview Avenue and Five Mile Road in Boise used to be a Kmart. Since closing in March, it has sat empty, an 84,000-square-foot, two-acre linoleum desert.
The building is the largest of 29 retail vacancies in the Treasure Valley with at least 15,000 square feet, according to Boise commercial real estate agency Thornton Oliver Keller. A bigger one is coming: Macy’s will close its 8-year-old, 104,000-square-foot-store in Nampa’s Gateway Center within the next few months.
Five Hastings stores in the Valley closed when the media-and-gifts chain folded late in 2016. Sports Authority vacated 45,600 square feet in Boise and 35,000 in Nampa. Paul’s Market closed 35,000-square-foot stores in Nampa and Caldwell after being purchased by Albertsons.
With big-box and mid-box (15,000- to 50,000-square-feet) stores closing, Bob Mitchell, partner and retail specialist at Thornton Oliver Keller, says it is hard to find a tenant who can fill a Kmart-sized expanse. So he is trying a different approach: He is negotiating with four smaller retailers interested into parceling the space into chunks.
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“We still have good retailers,” Mitchell says. “They are just not taking quite as many square feet as in previous years.”
Natalie Lemas Hernandez, chief operations officer at Nancy Lemas Team, a Boise commercial real estate agency, paints a darker picture for big-box retail.
Stores are losing sales to “showrooming,” when customers come to the store to research or try on goods before ordering them online for less, Lemas Hernandez says.
Five large department-store chains — Macy’s, JC Penney, Kohl’s, Dillard’s and Sears — have closed about 750 stores since 2013, about 20 percent of their combined total, as retail sales by Amazon.com and others have grown, she says. Online retailers have lower operational costs than brick-and-mortar stores, and online sales rose 29 percent to nearly $342 billion from 2013 to 2015, according to Internet Retailer, an industry research website.
“A lot of the big anchor stores have been closing left and right,” Lemas Hernandez says.
‘THE AMAZON EFFECT’
Michael Ballantyne, managing partner at Thornton Oliver Keller, says the Valley’s 8 percent retail vacancy rate remains two points below the area’s 10-year average. The good news for commercial real estate agents is that transactions for Valley retail spaces have increased 17 percent from 2015.
But absorption of available retail space in the Valley was down last year for the first time since 2009, according to TOK’s database, which Ballantyne says is evidence of “the Amazon effect.”
Ballantyne finds more evidence in his own changing consumerism. He recently ordered a memory-foam mattress from Tuft & Needle that was delivered to his door. The ease of the transaction highlights why companies such as Mattress Firm — which has four stores and faces three competitors’ stores within minutes of Boise Towne Square mall — might not survive, he says.
“It’s the best mattress I’ve ever had,” he says. “Why would somebody tie a mattress to the roof of their Honda Civic when they can order it online and have it delivered to their eighth-story apartment?”
Mattress Firm did not return a call requesting comment.
Landlords still have to lease stores. We'll still be busy. I just think in the long run mix will be different.
Michael Ballantyne, Thornton Oliver Keller managing partner
The shift to online sales is changing what commercial developers build, says Jason White, vice president of marketing for Boise-based White-Leasure Development Co. The company, which develops retail properties throughout the West, is looking for a new tenant for a 22,000-square-foot Hastings space in Nampa and is building fewer big-box and multitenant projects.
“The internet is definitely leaving its mark on brick and mortar,” White says. “The retailers who are successful will be the ones who do both.”
CATCH THE WAVE
To be sure, major retailers are already doing both as they invest in their own web operations. Wal-Mart paid $3 billion for online distributor Jet.com in August to bolster its web presence. Wal-Mart, Fred Meyer and Albertsons recently joined a growing number of stores by offering online ordering for curbside pickup or home delivery.
Meanwhile, Amazon plans a turnabout move into brick and mortar with a grocery store called Amazon Go. The retailer will test the concept with a store in Seattle this year. Amazon Go shoppers will scan their own items using a smartphone app, without a line or checker.
Mall operators have been developing or planning their own apps to make shopping easier and more appealing, Lemas Hernandez says. For example, an app could direct shoppers to open parking spaces and deliver coupons to arriving customers, using their previous shopping histories to deliver deals most likely to intrigue them.
Ballantyne says big-box retailers may find success by downsizing and converting stores “from destination retail into depots.”
“Retail will see significant change over the next decade,” he says. “[Locations] will be where you can pick up an order at a store, or the space will be used as a distribution hub, more like a warehouse than a store.”
The growth of online sales has changed the way retail developers and property owners think about large anchor tenants as draws for smaller surrounding businesses, says Mitchell, the Thornton Oliver Keller partner.
Grocery stores have been the gold standard for strip-mall anchor tenants, because they bring weekly visits from many shoppers, he says. Big-box retailers are also traditional anchors.
Health clubs, such as Axiom Fitness at The Village at Meridian and elsewhere, are coming into vogue as anchors, Mitchell says. He is working to get a fitness center into one of the Valley’s vacant Hastings stores.
“Dry cleaners like that people drop off clothes before their morning workout,” Mitchell says. “Take-out pizza places like that people pick up pizza on the way home from work. Different kinds of businesses can be viewed as anchors that people didn’t look at before.”
Lemas Hernandez contends shopping malls in Mexico do better than American stores at offering customers experiences they cannot get online, including fashion shows, choir performances and play activities for children.
On a recent visit to a mall in Guadalajara, Lemas Hernandez watched shoppers play bumper boats and children take a half-hour long train ride. Adopting such attractions could help U.S. malls compete with online retailers, Lemas Hernandez says.
“It’s way ahead of what our shopping experience looks like,” she says. “I couldn’t believe it. I wanted to stay. It was fun.”
Those lessons also apply to small retailers: “If mom-and-pop shops aren’t able to adapt, I don’t see much of a future for them,” she says.
Boise retailer Mixed Greens isn’t offering bumper boats, but the mom-and-pop art-and-gift store at 237 N. 9th. St. is taking other steps to make itself a shopping destination. It plans to expand soon.
Owner Chris Gray says the shop’s first line of defense against online retail is offering mostly jewelry, beauty products and gifts items made by his wife, co-owner Molly Gray, and other local artists.
The second is packing in customers during events such as First Thursday and Small Business Saturday. On those days, the store has local artists, food vendors and samples from breweries and wineries to give shoppers extra reason to stick around.
The store temporarily moved from its 1,100-square-foot shop down the block to a space with nearly 5,000 square feet, where the Grays hosted different pop-up shops each day during the holiday shopping season.
More than 100 shoppers filled the space during December’s First Thursday and Small Business Saturday, Gray says. He says the couple will move into the larger space in March after completing renovations.
“It was insane,” Gray says. “There was no way we could have fit that many into our other space.”
Zach Kyle: 208-377-6464, @ZachKyleNews. This story appears in the January 18-February 14, 2017, edition of the Idaho Statesman’s Business Insider magazine as part of a special section on commercial real estate. Click here for the Statesman’s e-edition, which includes Business Insider (subscription required).