Leap of faith

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— The tenants of two new retail centers under construction near Mount Werner Road will need to capture $35 million to $45 million in annual sales, a commercial appraiser told an audience at Colorado Mountain College in September. Those projected sales figures for Wildhorse Marketplace and Central Park South represent more than 10 percent of combined retail sales in Steamboat Springs and Routt County.

Kevin Chandler of Chandler Consulting in Steamboat Springs made his remarks to the Financial Restructuring Committee of Main Street Steamboat. His projections are based on the assumption that both new commercial centers will be full. Neither is full yet, but developers of the two centers are pursuing tenants while they are under construction.

Chandler's estimates are based on average rental costs and business models that guide retailers. The kinds of businesses likely to sign leases at the two commercial centers will need to generate enough revenue so that their occupancy costs fall in the range of 6 percent to 8 percent of their sales, he predicted.

Chandler thinks the stores that open in Wildhorse Marketplace and the expansion of Central Park Plaza on the opposite side of Mount Werner Road will have a significant effect on Lincoln Avenue retailers. But the biggest known tenant, Gart Sports/Sports Authority (at Wildhorse), may not have a huge effect on the city's downtown commercial district.

"There are going to be strains on downtown, for sure," Chandler said. "Downtown needs to differentiate itself. I don't know that Gart will hurt downtown. I think it will hurt Wal-Mart."

Chandler pointed out that it isn't necessarily the case that the new shops and restaurants will need to take all their business from existing businesses to achieve their goals. There is the possibility that they will generate an incremental level of new sales in the valley. Still, the case could be made that the local market would have to grow by close to 10 percent to support existing businesses at their present level along with the new centers.

A 2002 consumer preference study suggests that a large amount of spending money is "leaking" out of the valley because consumers choose to spend their dollars in certain categories of merchandise and services in places other than Routt County.

Plugging some of those leaks would help new retailers succeed, Scott Ford of the Small Business Development Center at Colorado Mountain College concluded. The survey showed that consumers in Routt County are spending half of their shopping dollars elsewhere. That 50 percent level applies to almost all categories of merchandise, although there are some notable exceptions.

Gart Sports/Sports Authority is the largest sporting goods chain in the country.

Using a consumer expenditure survey conducted by the U.S. Department of Commerce, and adjusting them upward for the Routt County lifestyle, Ford estimated that residents of Routt County spend $4.99 million annually on sporting equipment and active sports apparel. Of that, 42 percent is spent elsewhere. He estimates that Gart alone could plug a leak of $835,000 spent outside the Yampa Valley for sporting goods equipment and active sports apparel. That amount is about 2 percent of $35 million.

Chandler said the cost of land is driving retail lease rates just as it is driving housing costs in the valley. The sale this summer of the Boggs Building in downtown Steamboat at a price of about $300 per square foot established a new benchmark on Lincoln Avenue.

Downtown also is seeing properties, such as the Nite's Rest Motel, sell based on the value of the land and not the structure.

"Some buildings are not worth much more than the land they sit on," Chandler said.

The Nite's Rest already is slated for redevelopment (see story on page 1B).

Rental rates in Steamboat range in price from $15 a year per square foot for second-floor offices to $30 and $35 per year for the best storefronts, Chandler said. The formula that retailers have to consider is fairly straightforward.

If a tenant is considering a 2,000-square-foot space being offered for $25 a square foot, and the tenant knows that the model for the business strongly suggests the tenant shouldn't pay more than 6 percent to 8 percent of sales for occupancy costs, he or she will need annual sales of $600,000 to $800,000 or $300 to $400 per square foot.

That works for some businesses and not for others. The high cost of commercial space means that every square foot is precious, Chandler said.

"People have to ask, 'How do we afford to be in downtown and be profitable?'" Chandler said. If you're going to be in downtown and make a profit, you've really got to maximize your space. If you have a 5 percent profit margin, there's not much margin for error, he said.

Ford said the high costs of occupancy in downtown Steamboat mean retailers have to be very good at what they do. He thinks the typical 6 percent to 8 percent for occupancy costs may not apply to Steamboat. Instead, businesses may be paying 11 percent to 15 percent of their receipts.

As a result, he said, their profit margins are narrower. That would create a range of effects, including downward pressure on payrolls. It also means mistakes are more costly.

"When you goof, you get punished," Ford said.

"The cost of occupancy in Casper, Wyo., is probably lower," Ford said. "But your costs of goods remain the same. Retailers know their market will only bear so much. Consumers have an idea of how much they want to pay for something, and they keep retailers honest."

The trick for retailers working with high occupancy costs, Ford said is to find a mix of products that not only attracts shoppers, but offers the business owner strong profit margins while giving the consumer a sense of value. For this reason, Ford added, high occupancy costs drive the mix of merchandise available for sale in downtown Steamboat.

Chandler's calculations regarding the sales Wildhorse Marketplace and Central Park South will need to generate are based on their combined square footage of about 110,000 square feet. He expects rents will be higher at Wildhorse, but settled on an average of $25 per square foot per year for the two centers combined.

Assuming all of the space in the two centers is leased, that would work out to occupancy costs of $2.5 million to $3 million annually. Based on the rule of thumb that occupancy costs shouldn't exceed 6 percent to 8 percent of sales, Chandler arrived at the need for those businesses to generate a combined $35 million to $45 million. He also used annual sales tax receipts to conclude that those sales would represent roughly 11 percent of the total $350 million in sales in Steamboat Springs last year.

Jim Hansen of Old Town Realty, who serves as the leasing agent for Central Park South, confirmed Chandler's figures are on target. City Finance Director Don Taylor confirmed that $35 million represents 10 percent of annual retail sales in the city. However, he said, it's not likely that all 110,000 square feet contained within the two centers will generate retail sales. Wildhorse includes an office building that will be occupied by a real estate agency, for example.

In spite of the high commercial lease costs, Steamboat real estate overall is perceived as a bargain, and money will continue to flow into town, Chandler predicted.

"Steamboat's still a pretty well-kept secret. The prices paid in Steamboat are relative bargains, and in the last 12 to 18 months we see that this out-of-town money is coming."

Chandler pointed to the $500 per square foot being paid for ski-in, ski-out condominiums at the Elkhorn. Those prices pale in comparison to the $800 and $1,000 per square foot being paid for comparable real estate on the Interstate 70 corridor, he said.

Chandler said that as more commercial spaces become available in town, there may be some relief for tenants downtown as landlords work to keep their tenants. It's important to keep in mind that it costs a lot of money to reconfigure a building for a new tenant, Chandler said. Some landlords who acquired their buildings when space was much less expensive may conclude they don't have to increase rents, he said.

Ford said rents on Lincoln Avenue aren't likely to go down, but they may level off.

Though retailers are vital to the local economy, it's important to keep the role of retail in the local economy in perspective, Ford said. Although consumers focus on retail because it's most visible and has an obvious effect in their daily lives, retail typically contributes no more than about 11 percent of the total payroll in cities across the United States.

Since Main Street Steamboat started, Ford has noticed that downtown retailers are communicating on a higher level than before. He thinks that is an important change. Downtown retailers are stronger as a group, he said.

"They are stronger as a team than they are separately. Still, each individual player has to be as smart as they can be."

-- To reach Tom Ross call 871-4205

or e-mail tross@steamboatpilot.com

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