HQ Strategy

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Last month Snapchat’s parent Snap, Inc. issued perhaps the largest and most significant initial public offering of 2017. One of the interesting aspects of this IPO was that Snapchat identified its lack of a corporate headquarters as a risk that could potentially undermine its growth and future revenue. Snapchat’s founders started the company in a Venice beach bungalow and have grown the business in scattered Venice and Marina del Ray locations. These are communities with a very constrained supply of available office space. Management has not articulated any plans to bring Snapchat’s staff together in a headquarters or even consolidate into fewer locations. A diffused workforce presents a challenge to collaboration, creating a consistency of culture and overall productivity, particularly in the innovation-based environments of TAMI (technology, advertising, media and information) companies. I previously wrote about how many TAMI companies like Google and Apple developed comprehensive and expansive workplaces filled with amenities that are intended to engage as well as attract and retain employees and embody the firms’ cultures (see: Time Space Workplace)

In New York City, Snapchat’s one principal office location is sited in the former The New York Times building west of Times Square. Here its growth has been haphazard as well, with new staff filling in virtually every available square foot leaving meeting and collaboration space virtually non-existent. One could argue that Snapchat’s apparent lack of a real estate strategy reflects the exclusion of real estate from overall business strategy. And this is not a common problem endemic only to new or fast growing firms.

Traditionally, the corporate real estate function has not occupied a position of prominence within most companies. As office space is typically the second largest corporate expense after payroll, most firms characterize real estate not as a platform critical to revenue and productivity, but as a cost to be managed and economized (even in growing firms) through measures like consolidation and densification (reducing square footage occupied per employee). The individuals who implement corporate real estate within a company are frequently perceived to be “order takers” and are often isolated from the actual C-Suite-based decision making process.

Truly progressive firms are starting to incorporate real estate within the C Suite, creating Chief Solutions or Chief Innovations Officer positions with principal responsibilities to rationalize a company’s real estate portfolio and integrate work place planning with the company’s overall business strategy.

Retail Reality Check

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I was honored to be a panelist at Columbia Business School’s annual Retail & Luxury Conference on February 17th.  Alongside chef and restaurateur Daniel Boulud and other inspiring entrepreneurs, I debated creativity in retail amidst an environment of disruption.  The conference’s keynote speaker, Geatano Sciuto, President of Fendi Americas, presented Fendi’s successful rebranding (and doubling of business) by blending a change in the “content,” new focus on fashion accessories and uber-luxury and change in the “container” (the store). Sciuto highlighted the development of the Palazzo Fendi Rome flagship into a hub of experiences, combining a ready-to wear store, private shopping suite, boutique hotel and Zuma restaurant as well as the dramatic renovation of the Fendi 57th Street New York flagship (See: Commercial Basis: Shopper as Flaneur) to captivate Fendi’s customers with “surprise and delight.”

I discussed how the new retail reality of ultra-pricey high-street store rents often requires brands to test new retail concepts and new markets with a pop-up to permanent strategy and explained why engaging uni-brand and multi-brand concept stores are the new department stores as formulaic shopping experiences continue to decline in popularity.  Finally, I detailed how brands like Adidas and Uniqlo are thinking about entire building occupancy that can convey their identity and values not only to consumers, but also attract and retain the critical creative class of workers they need to thrive.

Photo credit: Columbia Business School Retail & Luxury Goods Club

What Was Once Old is Now New Again

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Dating back to the 19th century, the famous department stores of New York (Bergdorf Goodman, Bloomingdale’s, Macy’s etc.) were developed and continue to be owned by the retailers themselves. In some cases, as the fortunes and appeal of certain department store brands waned, it was their real estate that actually retained value because of its locational strength.

For example, Vornado’s Steve Roth purchased the depleted Alexander’s retail chain precisely because of the value of its Manhattan location across from Bloomingdale’s and developed it into Bloomberg’s 731 Lexington Avenue mixed-use skyscraper.

After World War II, most new stores were not typically owned by the retailers, but were in space developed and owned by shopping center developers (later reconstituted into mall REITS) and leased to department stores and specialty retailers. For over 50 years most retail development was channeled into suburban shopping centers.

With the resurgence of urban downtowns over the past 20 years, the focus has returned to “main street” retail and particularly to mixed use developments and nonhomogeneous shopping centers, that often combine shopping, dining, office space and apartments. Interestingly, during the 2010-2020 period, New York City is seeing the largest investment in new and redeveloped retail projects in its history. With the exception of the Nordstrom’s tower, these projects are largely outside the upscale tourist-oriented retail/hospitality core (Fifth Avenue, Madison Avene, 57th Street), that with New York’s tourist boom, has recently seen the largest increases in store rents in history. They follow the post-World War II model of shopping space developed for and leased to retail brands. These range from the redevelopment of South Street Seaport and Brookfield Place to the Shops at Hudson Yards and the Westfield World Trade Center. Each of these shopping centers is geographically proximate, but not necessarily spatially integrated into a much larger mixed-used development. However, with the exception of restaurant and entertainment offerings, these shopping centers are not generally attuned to the consumption habits of those who will live and work in the balance of these developments.

Another model of retail development being pursued by LVMH through its L Real Estate affiliate, which perhaps other global luxury conglomerates would be wise to consider, involves investing in and owning luxury retail-driven urban mixed-use developments in prime shopping/lifestyle neighborhoods where the prospective retail brands (owned by LVMH) generate not only value (and rent) for the investors but in essence become part of the branding of the entire project to attract the highest paying office and residential tenants. This is the basis for L Real estate’s investment in Miami’s Design District (Brand Meets Space) for L Real Estate mixed used retail-center projects in Shanghai, Ginza and Abu Dhabi.

Brand Meets Space

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Reports of the death of retail are premature and exaggerated. In fact, the challenge of e-commerce is a major driving factor for dramatic innovation in what a store represents, how space can be configured to suit a brand’s image and objectives and why branded buildings are best suited to engage consumers in a multi-channel sales environment. Below are three salient examples:

Metrograph, No. 7 Ludlow Street, New York

Millennials don’t just want to stay home, order in food and stream Hulu. The immediate popularity, particularly among millennials, of the Lower East Side’s Metrograph building demonstrates this. It features two theatres for independent films, but also much more. Metrograph includes a restaurant, curated candy shop, bar/lounge and a miniature bookstore. It’s a branded place in touch with New York’s repertory theatre tradition that rejects the prosaic multiplex aesthetic with elements like custom seats made from pine reclaimed from Brooklyn’s Domino sugar factory.

Domenico Vacca Club15 West 55th Street, New York

The Italian luxury label, Domenico Vacca, closed its three traditional Manhattan stores in favor of establishing a branded flagship presence off Fifth Avenue. What elevates the new Vacca Midtown presence beyond traditional bespoke retail is the incorporation of a private, member-only DV social club, a café, barbershop, salon, private event space and extended stay furnished apartments along with an 8,000 square foot boutique with a private V.I.P. atelier for special order collections. Particularly for the  international tourist/shopper, the Vacca building creates a power spatial context for elite luxury in New York.

Miami Design DistrictBuena Vista, Miami

In a little more than two years, the world’s leading luxury brands have nearly all made substantial retail investment in Miami’s Design District. More than a shopping center, the Design District allows brands like Dior, Tom Ford, Hermès and Bulgari to each establish a branded showcase building in a neighborhood known recently as a quiet outpost for high-design home furnishing. Many have questioned the audacity of such expenditures far from Miami’s principal tourist retail hub (Lincoln Road) and the super-high-end Bal Harbor Shopping center. But with the expansion of direct Asian flights to Miami, the importance of the city as a luxury travel outpost is clearly on the rise. Each of the major brand outposts of the Design District feature dramatic staircases and roof top lounges primed for events, photography and private shopping rooms. The performance of these stores is not measured by sales transacted on site, but by how these spectacular environments serve as settings for sales professionals to engage luxury consumers and establish ongoing relationships.

Photo Credit: Alessandra Chemollo

Should You Consider Owning Commercial Space and Leasing it to Your Business?

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Firms looking for office or retail space in New York find that the majority of opportunities are available onlyfor lease and not for purchase. But for entrepreneurs and other private business owners who have the ability to purchase (and finance) the acquisition of real estate to lease to the businesses they own, the hunt for relatively uncommon commercial purchase opportunities may be worth the extra effort and due diligence. The most important location criteria for selecting any office or store must be accessibility to talent and visibility to targeted customers. No matter how attractive a commercial purchase opportunity may appear, any location that potentially hinders a firm’s prospects should generally countermand the benefits and opportunities presented by property ownership. Leasing space also typically provides much more flexibility (and liquidity) if a company is growing, unless a purchased building or condominium provides surplus space into which the business may grow.

 

There are very clear potential investment, tax and business expense advantages for a company’s principals by owning the real estate that can be leased to the firm owned by these same principals.

  • If the supply of the type of real estate acquired is constrained, there is strong likelihood its value will increases over time. For example, commercially zoned townhouses in New York are not common but desirable and generally no new inventory of this product type is added to the market. If the property does increase in value and is eventually sold as a part of a 1031 tax deferred exchange, the equity can be moved to another property by the seller with no immediate tax liability on the capital gain.

 

  • If a business owner acquires real estate through a Limited Liability Corporation (LLC) structure and the company (also typically structured as an LLC ) pays rent to the LLC to occupy the space (a lease backarrangement), the company can deduct the rent as a normal business expense and the property owner can offset the rental income with interest payments, operational expenses and depreciation.

 

  • Since the company owner is also the building landlord, the lease rent can be stabilized. In contrast, if a business rents from a third party landlord, it will likely face base rent increases and tax and operating expense escalations over the course of the lease term. This can be very critical in a tight real estate market prone to rent spikes. This explains why a bar such as The Brass Monkey  has been able to maintain its unpretentious but successful niche as rents in its Meatpacking surroundings have spiked – the bar’s principals also own their building!

Time. Space. Workplace.

There is no single prototype for the workplace of the future. With that said, below are two unmistakable and disparate trends that are currently driving the planning and design of office space:

  1. Technology, advertising, media and information (TAMI) firms are creating all-encompassing work facilities with an array of amenities intended to not only engage their employees but also encourage them to work on-site and collaborate with each other to develop the branded products, designs and content that generate revenue. For example, Facebook’s Silicon Valley headquarters includes not only the largest open plan work space in the world but also an array of employee perks including bike repair, a barber shop and multiple dining choices. These perks are designed to increase productivity and ensure the staff doesn’t clock out at 5 PM. When a smaller TAMI company is looking to lease office space in a multi-tenant office building, the available services and facilities, including dining, recreation and shopping within the building and immediate neighborhood, are critical to selecting the most dynamic and creative functional environment.
  2. Professional service companies (consulting, accounting, insurance, finance, real estate) are employing technology to cultivate a mobile and flexible workforce and de-emphasizing fixed and dedicated personal work spaces in favor of work settings for team and client engagement. At the management level, firms like the accounting and consulting giant PWC have eliminated the concentrated “headquarters executive office floor” in favor of a decentralized management team, spread amongst geographies and connected by technology like Google Hangouts and face-to-face interaction as permitted by travel schedules. Thanks to technology, independent contractors and small business owners can work almost anywhere. Co-working environments like WeWork and The Grind offer not only flexibly designed work spaces with the attractiveness of short-term occupancy commitment but also the opportunity to benefit from interaction with similar firms and professionals.

At Working Mothers Media’s 2016 Work Life Congress: Time. Space. Workplace. (http://www.workingmother.com/work-life-congress-2016), I will be speaking and conducting a seminar for corporate leaders to assess the impact of these key workplace trends on company culture, talent acquisition and employee engagement. Stay tuned.

The Future of Soho Retail

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In a recent interview with me on the floor of the NYSE, Cheddar TV founder and host of the network’s daily business news broadcast, Jon Steinberg insisted that SoHo’s current high store vacancy rate indicated the neighborhood was a “nightmare” because it had become inundated with shoppers from New Jersey.

In fact, SoHo’s retail vacancy, which doubled in the last 18 months to 20%, is a result of rising real estate values and skyrocketing rents driven by the neighborhood’s desirability as a shopping destination for brands like Moncler, Louis Vuitton, Dior and Chanel, appealing to the higher-income global tourist drawn to New York in record numbers since 2008.  For many other retailers, however, looking chiefly to drive on-site store sales, the rents are too high to sustain profitability.

While the stretch of Broadway between Houston and Grand Streets may have some similarity to a mid-level New Jersey shopping center in terms of the range of brands featured (from Uniglo to Zara to American Eagle), the reality is that SoHo is perceived globally as one of the most desirable 7-day neighborhoods in the U.S. SoHo’s strength reflects a mix of fashion and tech firm offices and showrooms, luxury loft apartments as well as leading “high-street” brands on streets like Prince, Spring and Greene and trendy restaurants like Cipriani, Ladurée, and Felix.

More importantly, as e-commerce and particularly the technological obsessions of millennials (and centennials) transform shopping, leading global brands are looking to vital neighborhoods like SoHo as environments ideal for engaging consumers in new types of retail experiences. I’ve just represented Sennheiser, the leading German headphone and microphone manufacturer, in licensing a five month “pop-up” SoHo store to launch the brand’s U.S. retail presence. The primary intent of this store is to engage consumers with exciting displays, events, and concerts to generate brand awareness and stimulate multi-channel sales. The future Sennheiser space is now occupied by the premium Belgian ice cream brand Magnum (now owned by Unilever) which has been phenomenally successful in launching in the U.S. in SoHo — typically with customers lining up around the block — curated by a strong social media presence.

The willingness of landlords in SoHo to entertain “pop-up” leases reflects recognition that today’s higher vacancy requires greater flexibility in rents as well as retail concept.