The time for local businesses is now

In recent months, I've been in discussions with the local retail real estate community about how we can help small business owners find the resources they need to open up shop. For our community, it's not just my personal desire to promote local business, but it's also a way to limit the number and duration of vacancies in our shopping centers. And we know that this should limit some of the mindless opportunistic vandalism often targeting shopping centers.

So imagine my pleasure at the sight of Ian Ritter's latest blog entry, Is Now the Time for Independent Tenants?

The shopping center developer's goal, like any other businessperson, is to maximize return on investment. This means filling all vacancies at the highest possible rent, with the most credit-worthy tenants. More specifically, this means that most of those tiny infill strip centers that were so popular in recent years would love to have a Starbucks. Next up, a Walgreens or CVS. And then comes the grocery store or Target/Wal-Mart for larger shopping centers. The reason is fairly obvious -- the daily traffic generated by these familiar names will attract other tenants hoping to derive some of that benefit.

But these aces-in-the-hole are all scaling back on expansion plans, and right at the moment that those last few spec centers are being completed. So now developers must ask themselves how they can rebuild the inherent value that is no longer available from such reliably high rent paying tenants. Is it merely a waiting game, or must they find other solutions? Well, let's just say that suburban markets and other newly growing secondary markets will probably have quite a way to go before they see any salvation from this residential real estate mess, and commercial usually follows residential.

So, is it finally time to look for local business owners for the first time? Well, yes and no. The truth is that neighborhood shopping centers have always relied on local tenants -- in the form of nail salons, hair salons, dry cleaners, Subway franchisees, etc. And these businesses are in a sort of catch-22 in the current market: while they could perhaps capitalize on weaknesses in the commercial real estate market, they're as cash-starved as the rest of the world right now. Let's not forget that we live in a leveraged credit-hungry economy and most small business owners must borrow from their homes in order to finance their businesses. So now, with little remaining equity in most existing homes, the typical small business owner is facing a much tougher environment for expansion.

But there may be other types of small business owners still on the sidelines. To find them, I say, bring on more doom and gloom. As well-paid professionals keep losing jobs, major employers maintain their hiring freezes, and we keep believing that cash is king, I think that some of those displaced yet talented folks will recognize an opportunity in the world of entrepreneurship. They'll be holding onto wads of cash from severance packages as they look for the next step in a career ladder that won't allow any sort of regression within the corporate environment. At the same time that they burn out on the job search and consider the title of "consultant," they'll likely see that real estate is finally cheap/affordable again, and say, "Hey, I could always do that," (whatever that is).

This process will likely take just long enough to allow developers to write off 2008's unrealistic expectations as ancient history and recognize 2009/2010 as a time to play ball or quit the game. While national retailers stop returning phone calls and emails, and they too increase demands in the rare cases where they consider new locations, developers need to change their habits to acquire new tenants (or else die on the vine). Likewise, communities should embrace this as an opportunity to redefine their community culture and do what they can to assist developers/operators in promoting local business.

Just when this is starting to work, as the pro-local crowd is cheering its success, and business owners are finally in the black, we should then take a breath and appreciate the restored momentum toward an American ideal of entrepreneurship. That's because the business cycle will finally sway back in favor of the developer (or new shopping center owner), thus making it more difficult for newcomers. And the entrepreneurial pioneers will have made the consumer market safe for national tenants again, which will make the competitive environment as difficult as it ever was. But then, other businesses will be hiring again too, so why would someone want to go the tough entrepreneurial route at that point?

I never said that business is easy. But I will always believe that businesses should be as local as possible. For more on this, please also check out the following:

Local First Arizona
Article: "Preparing Corporate Professionals to Start Businesses" (from BusinessWeek)

Now tell me there's no silver lining. Cheers!