Real Estate Site Selection 101: Finding the Perfect Location for Your Next Store
How to assess the Market, the Destination, and Location when pricing the Deal
The tl;dr
Real estate is all about location, location, location
But there’s more to site selection than its location alone
Opening in a great location within a low tier market is no better than a low tier location in a great market
Operators need to evaluate the Market, the Destination, AND the Location together to ensure their Deal is priced sensibly
One of the most difficult things about real estate is site selection
There are many qualitative and quantitative aspects of a site, it can be tough to weigh them against each other. And if you’re new to it, it’s tough enough to even know what to look for. Identifying and internally aligning on your criteria is paramount to a successful offline program for two reasons:
Speed: if you don’t know what you want ahead of time, then it’s like shopping on Amazon without any of the filters: there’s a lot of crap to sort through, which will slow you down. Aligning ahead of time on, for example, the target size of the spaces will enable you to eliminate anything that doesn’t fit.
Results: if you can identify the most highly correlated variables that are associated with your store performance (eg population), then adding minimum quantitative thresholds will achieve both speed AND increase the odds that you’ll have a successful store opening.
All of that said, there are so many possible attributes of a store that you should look at, and it’s up to you to determine which ones are the most closely correlated to your definition of “success”.
When you examine a site, you’d be remiss to only evaluate that single layer of a new store opportunity
Every site has four layers of depth that should be evaluated as a whole:
Every Market is different
When evaluating a site, it’s important to understand it in the context of its respective market.
Store format preferences
I and many other brand operators dislike malls. They’re not cool and tend to have more expensive rents than their street equivalents. I’ve presented numerous malls to Real Estate Committees where initial reactions were “Aren’t malls dead?” But for certain markets, malls are still very much the dominant, and accepted, store format.
A former colleague of mine would categorize destinations as “commerce vs cool” — the former typically described the typical boring mall where all of our desired co-tenants were, where the latter would describe the hip street that people walk but don’t really shop. A great example in my mind is Santa Monica Place (“commerce”) vs Abbot Kinney (“cool”). The latter was once branded the coolest street in America, but non-F&B retailers don’t do well there.
Transportation
Regardless of what kind of product or service you’re selling, how people move about the market is critical in defining your trade area and overall store potential. For example, Manhattan is a market where most people use the public subways, regardless of demographic or income. This is a critical market attribute to understand because it heavily influences two things in particular:
Trade Areas: trade areas are commonly defined as X-minute drive times, but in markets like Manhattan that have more public transit, you may find that drive times are not applicable. This is important because any potential site you consider should have an in-depth trade area analysis behind it. You can’t analyze a store without understanding its reach (ie its trade area).
Cannibalization: Building off the above point on trade areas, how people move around the market will also help you understand the potential for cannibalization. Using Manhattan as an example again, if you open a store on the UES, you could actually cannibalize every other store in Manhattan because it’s relatively easy to get from SoHo to UES in a short amount of time — this always happens, and always surprises operators. (But note that not all cannibalization is bad — a topic for another time).
Market potential will dictate how many stores you should even consider having
For example, Richmond is a relatively small market where most specialty retailers only have 1 location; adding a second one can be (expensive) overkill. There’s no point in considering a second location if you’ve already planted a flag and can’t consider exiting or relocating.
Defining market potential is a large exercise in and of itself, and requires you to do some research into who your customer is, and where the lookalike populations are. It also requires you to avoid falling to the Fallacy of the Average, a topic I bring up a lot. Your average customer in the US might be different from the average customer in Chicago. I worked with a brand whose national customer base was one demographic, but their San Francisco customer is predominantly another demographic. Markets differ, and understanding those nuances is important as you think about market potential.
In the same way you might consider co-tenancy (ie your neighbors) when evaluating an opportunity, you should also do the same at the market (MSA) level. If you’re a wedding dress brand with 3 stores in Atlanta and you’re evaluating a 4th — but your three most relevant peers/competitors only have two stores in the market — you might want to reconsider. I like to benchmark my store counts in a market to those of peers/competitors as one of many indications of market potential or saturation.
Speed of business can influence how valuable a market could be in the short term
When you’re building brick and mortar locations, you’ll inevitably deal with the local building department. They effectively dictate how construction happens, and most notably are responsible for issuing the permits and inspection requirements. Some localities are easier to build in than others, with permit timelines ranging from a few weeks to more than a few months. While the timelines themselves may not dictate whether you enter a market, they’ll dictate when you will.
Once you’ve aligned on market potential, you need to build your short list of Destinations
Most of the top markets in the country have numerous viable options. Some attributes I like to weigh in order to help me prioritize my options are:
Format: Street vs lifestyle center vs mall. If you’re a high end restaurant, for example, you may be less interested in an indoor mall vs a street location.
Traffic: as one of the most heavily weighted metrics for site selection, it’s important to understand how many visitors the destination gets. However, just because the center is lower foot traffic than another doesn’t mean it won’t be successful. Tyson’s Galleria vs Tyson’s Corner is a common debate for retailers breaking into the DC MSA (Northern VA sub-market), and while Tyson’s Corner is undoubtedly higher trafficked, Tyson’s Galleria is notably better for higher end brands. One of the reasons different locations charge lower/higher rents is because you’re paying for access to the foot traffic. A metric I like to compare the “cost” of the foot traffic across destinations is Annual Rent / Foot Traffic to get a metric similar to CPM (Cost Per Mille).
Vacancy rate: This tends to be correlated with foot traffic, and is a good indicator of how strong the overall sales are and how popular a destination is. Malls will even commit to maintaining an occupancy rate (the inverse of vacancy rate).
Co-tenancy: especially if you’re still in the early days of building your brand, it’s always best to “fish where the fish are” and ride the coattails of complementary peers and/or competitors. For example, a bakery will likely do better in a location where its neighbors are also F&B or grocery, and a new menswear brand will likely do better in a destination with established menswear brands that are already drawing qualified traffic. I’ve historically identified the co-tenants that are most cross-shopped with my brand and then scored a destination based on how many of those desired peers are there: destinations with 3 of my 10 desired co-tenants is scored lower than a destination with 7 of 10.
Benchmark / competitor sales: while many operators view traffic as the most critical variable of a destination, I typically focus on relevant benchmark sales. If I’m a women’s apparel company whose customer base cross shops Madewell, I’ll put a lot of weight on how Madewell is doing. While this is technically confidential information, every broker and landlord is willing to give you those numbers if they want you there.
Trade area: this is arguably the most important aspect of a destination, depending on what kind of retailer you are. The trade area defines the reach, which can be quantified in a few different ways:
Population: a trade area with a higher population will more likely do better than a trade area with a lower population. While it’s not 1:1 (2x population does NOT mean 2x the sales), it’s always better to see than not.
Relevant population: trade area population is more meaningful if you can filter out just the “relevant” population. For example, if you’re using Tapestry Segmentation tools (see below), you’ll be able to zero in on just the relevant groups that matter to your brand.
Existing customers: if you’re a small brand with limited brand awareness, then perhaps most important in the trade area is to prioritize trade areas with the most existing customers. If you’re an omnichannel brand, that means web customers. If you’re an F&B concept, that might mean your Uber Eats customers. Generally speaking, where you have the most existing customers is where you will have the most potential customers. Be careful with this though, as it can lead to over penetration. Timing is key, and differentiating which destinations will be incremental vs duplicative isn’t always easy.
Proximity to existing locations: To build off the prior point on trade areas, measuring proximity to existing locations is critical to ensuring you’re not adding a redundant/overlapping trade area. I like to map 30min drive time trade areas as a general starting point, and if it significantly overlaps with an existing store then I’ll get a little nervous.
Landlord: Every destination has a landlord, and every landlord has their own way of doing things. Whether that manifests itself in deal structure, response times, or trust in their tenant merchandising strategy, the ownership/management can influence my selection. For example, WS Development and Jamestown are two of my favorites. Their people are great to work with on the deal-making side, they’re not bogged down by internal red tape, and they build great shopping destinations. I even recently recommended a brand stay in a mediocre destination because it was acquired by Jamestown and I’m confident they’ll make it great. On another note, you may want to avoid a location because of the landlord, whether that’s because their deal team is notoriously difficult, or because it might offend the competing landlord who also has a center in the same trade area. While I’d never pick a location because of the landlord alone, it has to be a consideration every time.
Cleanliness & security: Whether you like it or not, the safety and cleanliness of a destination reflects on your brand. I previously opened a store at a mall where two weeks later (and for weeks after that) we’d been hearing of shootings and robberies in broad daylight in the parking lots. Needless to say, we tried to exit as soon as possible.
Internet provider: This sounds silly but had been a HUGE problem recently. Many malls have (what seems to be) exclusive contracts with select providers. Unfortunately, that typically means that you have to use the provider as dictated by the mall, which in many cases was unreliable, extremely expensive, and without alternatives. I’ll just leave this here. Bigger brands can likely negotiate alternatives, or if you have a pre-negotiated exclusivity contract with your own provider then you can navigate around it, but many malls are reluctant to let you choose your own provider. As more tech-enabled brands open stores, I see this being a bigger pain point and hopefully addressed soon.
Parking: one of the most commonly underrated aspects of a destination’s viability is the parking, both for customers AND employees. While I believe that customers will ultimately “deal with” shitty parking if they like your brand/store enough, it’s always better to have more available (and ideally free) parking. And for prospective employees, it can be a deal breaker if parking is paid only AND the employer doesn’t reimburse them for it.
Union labor: Some destinations (and even, more broadly, cities) require or strongly encourage Union Labor. This by itself isn’t a bad thing, but it inevitably means you’ll need to significantly increase your construction budget, or risk the notorious inflatable rat drawing negative attention to your space and brand.
Customer preference: this is a sort of “hack” that landlords and brokers are offended by, but I think is an awesome tactic: just ask your existing customers. If you’re an omnichannel brand, you likely have e-com customers in the MSA that you’re examining. In a past life, I would always send that customer base a list of options that I’m considering, and ask them to vote and tell me why they selected that one. A landlord received the survey once and thought we were idiots, but we were listening to our customers — I think he was just insecure about his mall.
Location, Location, Location
Even if you’re in the right destination in the right market, you still need the right location. Here are some location-specific things to look out for:
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