How can State Street be revived? In my last article on State Street’s retail glut, I pointed out that there are 30+ retail vacancies in the downtown State Street corridor and that Santa Barbara is following a national trend in retailing. That is, there is too much retail space, online sales are challenging retail stores, and generational spending and shopping habits have changed.

The revival of State Street lies with the City, property owners, and retailers. They have to adjust to a changed environment. This is not a transitory phenomenon; we are witnessing one of the rare times in history when there are major shifts in human economic behavior. Shopping and life-style patterns have changed and to ignore them is to see the permanent decline of State Street.

Some readers commented that I neglected to mention the impact of the homeless on shoppers. Actually, I did consider the homeless and there is no doubt that they haven’t enhanced the State Street experience. It would be nice to solve the homeless problem, and perhaps there is more the City and the police can do, but, as Chief Lori Luhnow says, these folks have Constitutional protections from arrest for legal, but obnoxious, behavior. If there is a solution, they won’t disappear overnight.

However, the homeless have been with us for a long time and that can’t explain the sudden appearance of 30+ vacancies; it is more complicated than blaming it on the homeless.

Here are some of the new ground rules of the retail world:

1. Online shopping will continue to grow faster than shopping at brick-and-mortar stores. E-commerce now represents 22% of of retail sales. The younger the generation, the more they shop online. Smart brick-and-mortar retailers are moving online. For example, Nordstrom now does 23% of their business online.
2. Department stores are a declining business. Big is a liability in a fast-changing retail world. The trend in chain store closings will continue. Big stores are passé.
3. Retailers can’t compete on price against online competitors. Understand the phenomenon of “showrooming” where shoppers photograph your product’s SKU and then search for it online. Nothing sells for “retail” any more.
4. Younger generations see social media as a more fun way to interact with their friends than hanging out at the mall. Malls will continue to struggle.
5. Gen Xers (1965 to 1980), Millennials, aka, Gen Y (1981 to 1995), Gen Z (1996 to present) are all more conservative financially, and are spending less and spending smarter (thanks to the Internet).
6. These generations also have more debt and are less wealthy than their Baby Boomer predecessors.
7. Brand identity is becoming less important to younger generations. Witness the fall of Abercrombie & Fitch.
8. They are looking for “authentic” products. Thus, the trend for organic products, less packaged foods, “craft” goods, “artisanal” concepts.
9. “Stuff” is less important than “experience.” Dining out with friends, $5 lattes, travel, and exercise and health are growth sectors.

To Retailers:

I confess my guilt for being an online shopper. It’s fast, convenient, and I save money. It takes a lot to get me down to State Street. You retailers are painfully aware of this. The new ground rules say you need to connect with us shoppers in a meaningful way; i.e., create a shopping “experience”.

A lot has been written about this “experience” but no one really seems to know what it means. There is a lot of experimentation going on to find out. If I or the zillions of consultants knew how to do that it would be easy, but it isn’t. But this is why you became an entrepreneur because you’re creative and you have an idea that you love. You have to figure it out. But it’s being done.

Sell products that you can’t easily get online. Figure out how to communicate that concept. Pay careful attention to store design. Make me go “wow” when I walk in. What’s wrong with a coffee bar and clothing (Whistle Pig, Breakfast) or beer and art (Lama Dog)? Hook up with other local entrepreneurs. There are young fashion designers here on their way up (Joah Brown, Carbon2Cobalt, Purnell).

You need to spend money on social media. It’s not all Facebook and Twitter; it’s a science and your competitors are spending big bucks to grab your customers.

I have faith in entrepreneurs.

To Property Owners:

Do I have to spell it out? Things have changed. The reason your stores are empty is because retailers can’t afford the high rent. If you are waiting for an economic recovery, you’re too late: it already happened and your stores are still vacant.

You need to adapt. Smaller spaces are now more desirable to retailers. You need to be flexible with potential tenants and your tenant improvement costs are going to rise. Average asking rents on State are about $3.86 NNN, excluding the $7 p/sf that the Hotel Californian project are asking. Of course, an “average” may not reflect the reality of your property, but this gives you an idea of what is going on. Do you think rents are going up from here on out?

If rents are not going up, and with many vacancies, if the laws of supply and demand are still valid, it means that rents and property values are going down. As you know, real estate values run in cycles. We are now near the top of the boom phase of this cycle. Commercial real estate values are flattening. Face reality.

To The City:

The consistent refrain I hear about the City from property owners, retailers, contractors, and developers is that the City’s planning process is broken. If the City government wants to help property owners and save State Street, they must fix the problem. The planning department must be streamlined so that different departments are not giving contradicting opinions on the same item. The whole process must be speeded up which means that the byzantine permitting process must change to reflect contemporary realities.

The City has always been behind the curve. I remember years ago when Barry Berkus, an innovative, iconoclastic architect proposed a commercial project downtown with retail on the bottom and condos on top. Barry told the planners how Italian cities thrived for millennia on that design concept. He was shot down and he famously said he would never do another project in town. Well, he did, and that concept some years later was a condo on top of retail which was fabulously successful.

If the City really wishes to support its downtown, then it needs to be as flexible as the entrepreneurs and visionaries who wish to change it and make it survive. It needs to catch up with the times.