Retail Chatr

Kevin Kleen has a good post up today about the market stability of college towns.  He references an article from The Creative Class which looks at unemployment rates in various cities.  I’m going to stop short of saying that the article concludes that college towns are definitively recession-proof but I do believe the data offers some degree of correlation.  I’m not going to post the graphs or reference any specific data points here (you can click on the links in this post if you want to se them).  I am just glad to see Kevin pointing out something that I have always felt myself.  Investing in towns centered around “high-demand” colleges and universities is a very sound strategy.  When I say “high-demand” I am referring to the bigger universities (Pac-10, Big 10, ACC, SEC, Big 12, Ivy League, etc.) and even more specifically the non-commuter universities located near or adjacent to large population centers (examples would include UC Berkeley, Stanford, UCLA, UT at Austin, Georgetown, etc. to name a few) or in clusters with other colleges or universities (Harvard, MIT, Tufts, Boston University, Boston College, etc. come to mind).  I attended UC Berkeley during the recession of the early 90’s and I really don’t remember any of the retail property on Telegraph, Bancroft, Durant or College ever being vacant.  Sure, a tenant would go out here and there, but they were always quickly replaced by another one.  I believe that the built-in consumer base provided by a college “anchor” does protect from economic downturns.  For the most part, students incomes come from one of two places: 1) mom & dad; or 2) financial aid.  Either way, those students are not working too hard for that money and are generally less spendthrift than their parents or other coeds who may be putting themselves through school by working (a rather small percentage of the whole).  Additionally, the generally younger population surrounding colleges is more optimistic and entrepreneurial.  I think this is why you see so many “mom & pop” business pop up and do well long-term in college towns.  Many are started by the students themselves because they have the best sense for the local market, trade area, customers and demand.

To illustrate my point, I look to drinking establishments.  As an owner of a commercial property leased to a bar in a college town I offer the following thoughts/pros/cons:

• Risks:
  • Injury or death of a patron of the bar.
    • Clearly this is bad and a big risk but that is what insurance and NNN leases are for.  Additionally, I really can’t get behind any legal ruling that would hold the owner of the real estate responsible for the actions related to the business of the tenant.  (I’m not sure what happened to the owner of the building that burned down in Rhode Island during the Great White concert.)
  • Tenant going out of business due to serving underage patrons (loss of liquor license).
    • Loss of income due to downtime from vacancy is clearly a risk but I’ve never seen a bar stay vacant long in the many colleges towns I am familiar with.  The demand is strong and constant.
    • If landlord loses the tenant, your TI and LC costs should be minimal, if not zero because you have a fully built out bar (college students do not care if the new operator refurbishes the space as long as they can still buy beer) and you most likely will not need the services of a real estate broker because advertising a business opportunity for a bar in a college town will happen virally (trust me on this one).
• Benefits:
  • Demand for tenant’s product/service is strong and unwavering (darn near to perfectly inelastic demand in college towns).
  • Don’t have to worry about converting the building for a different use upon rollover.
  • Liquor licenses are usually limited in number within a certain proximity to a college or university making them very valuable and in many cases “grandfathered in” for certain properties (see Larry Blake’s in Berkeley).
  • High barriers to entry for competing commercial development and almost complete barriers to entry for competing tenancy.
  • High residual value land.
  • etc., etc.

I realize that a bar is a simplistic (and somewhat unfair) example but I do believe this same application to investing works for multiple retail uses in college towns (albeit not with the same surety).  Quick serve restaurants, drive-through restaurants, banks and  convenience stores are a few other uses that I think are no brainers in college towns.  The 7-Eleven in Berkeley is basically a grocery store for the students.  I would not be surprised to learn that 7-Eleven does $3+ million there.

On a side note, I think that Fresh & Easy should be targeting college towns as well.  Their strategy clearly is not working.  Every one I have been to lately looks like it is sucking wind.  They need to take a page out of the Raising Cane’s play book.

From the Wikipedia entry for Raising Cane’s (emphasis mine):

Like Baton Rouge, many of Raising Cane’s locations in other states are in cities with major universities. Examples include Norman, Oklahoma (University of Oklahoma), Minneapolis, Minnesota (University of Minnesota), Fort Collins, Colorado (Colorado State University), Lexington, Kentucky (University of Kentucky), Hattiesburg, Mississippi (University of Southern Mississippi), Lincoln, Nebraska (University of Nebraska), Columbus, Ohio (Ohio State),Charlottesville, Virginia (University of Virginia), Las Vegas, Nevada (University of Nevada Las Vegas), Athens, Georgia (University of Georgia), and College Station, Texas (Texas A&M University) Lubbock, Texas (Texas Tech University) and Nacogdoches, Texas, Stephen F. Austin State University.

It seems every company out there covets the 18 – 34 year old demographic.  What better place to reach them than around colleges.

One more thing: It goes without saying that investing in multi-family properties in major college towns is a no-brainer.  Apartments hunting is full scale war in many college towns, even during the worst of times.  That is good for landlords.

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