Wednesday, January 18, 2006

Consumer Price Indices in Center City Communities

Superstores have only slowly entered major cities. A number of economists are now hard at work documenting the consumer surplus gains when Walmart enters a local market. There are interesting political economy questions of why major cities have been slow to rezone areas to allow superstores to enter. Clearly smaller incumbent firms will lose out if these lower cost firms enter. A classic Olson pressure group story would posit that consumers face high transaction costs to work together to lobby for law changes that would allow superstores to enter. There is also a free rider problem here. Incumbent firms recognize that they win from the status quo zoning and lobby to keep this barrier to entry in place.

For reasons not explained in this Times article below , HOme Depot has recently opened up in Brooklyn and demand for its products is quite high. This case study highlights that the center city poor who are unlikely to have cars (which would allow them to shop and search in the suburbs) face higher prices than everyone else. This lowers their real income.

An obvious point is that these superstores not only offer lower prices but also more variety. A serious analysis of how much the urban poor gain from the entry by stores such as Walmart or Home Depot would have to take into account both factors.

While many people bemoan the rise of superstores such as BArnes and Noble or Starbucks, Walmart, or Home Depot ---- it strikes me that these companies deliver a low risk, low price product. It is true that some funky, quirky businesses can't compete with these companies but is this really such a bad thing?

January 18, 2006
Square Feet
Bringing a Big-Box Store to a Tough Area of Brooklyn

Each week, about 25,000 customers find their way by car, foot or public transportation to a five-month-old Home Depot store at 585 DeKalb Avenue, which sits on a five-acre site next to Public School 54, in a residential section of Bedford-Stuyvesant, Brooklyn.

"It's excitement all day long," said Ricky Campbell, the manager of the store, which has a steady flow of contractors and residents from the neighborhood and from areas not far away, like Williamsburg, Flatbush and Prospect Heights.

It is the 1,940th store in the Home Depot chain, but the first big-box store in Bedford-Stuyvesant.

"It's a shot in the arm for local shoppers," said Kenneth Adams, president of the Brooklyn Chamber of Commerce. "The project helps satisfy pent-up consumer demand in Bed-Stuy and neighborhoods beyond it. Bed-Stuy has fantastic housing stock and lots of do-it-yourselfers. The store should be very successful."

The company also saw great potential. "Bedford-Stuyvesant was a void for us," said Mike LaFerle, vice president for real estate at the home improvement retailer, based in Atlanta. The chain, begun in 1978, opens 5 to 10 stores a week around the country. The official opening of a new store in Charleston, Staten Island, tomorrow will increase the number of stores in New York City to 19.

"Bedford-Stuyvesant falls between our Hamilton Avenue, Long Island City and Woodhaven Boulevard stores," Mr. LaFerle said. "It's an underserved community with a lot of redevelopment and people investing in their homes. It's a very family-oriented neighborhood with a lot of brownstones and single-family homes. A lot of communities look to us for home improvement."

Mr. Campbell pointed beyond the store's 241-car parking lot. "If you look right out this door, you see buildings being renovated," he said.

The Home Depot is in a renovated industrial building that was built by I.B.M. in 1977. A 60,000-square-foot space on the second floor, with a separate entrance, has been occupied by the Brooklyn Job Corps Academy, a training program, since 2001.

As part of a full renovation costing more than $15 million, an 11,256-square-foot mezzanine was created, where customers designing high-end kitchens and picking out appliances could escape the hustle and bustle of those shopping for lumber on the main floor. Home Depot paid for the renovation of the interior, and the building's owner paid for upgrading the infrastructure and the Job Corps center renovation.

The store has roughly the same area, at 111,974 square feet, as a Home Depot built from the ground up.

"Retrofitting a building is always interesting," said Alex Arancio, real estate manager of the chain's New York metro region. "It had contiguous space, 30-foot-high ceilings, and floorloads and basic infrastructure suited to our needs."

Mr. Arancio negotiated a 20-year renewable lease in the spring of 2004 with Octagon Properties, the building's owner. The company would not disclose the terms.

Frank Zuckerbrot, a partner at Octagon Properties, whose construction arm, Cook & Krupa, did the renovation work, said: "We had a vision for redeveloping the existing industrial building into a retail center from the first moment we looked at the property. We were a little ahead of the market. It took some time to attract the appropriate types of tenants."

Octagon entered into a joint venture to redevelop the property in 1998 with American Technological Solutions, a computer repair company, which had succeeded I.B.M. as a tenant. In 2000, the company moved to Texas and sold its share in the venture to Octagon.

Octagon had a deal with a supermarket to become a tenant, but that fell through. A hospital and pharmaceutical company also considered the site.

"It didn't make sense keeping the property industrial," Larry Smith, an Octagon partner, said. "It would have been underutilized that way."

Because a residential renewal had been going on for some time in the neighborhood, the timing seemed right for a home improvement store in Bedford-Stuyvesant. Indeed, Mr. Zuckerbrot asserted, "Home Depot was an out-of-the-ballpark home run for the tenant, broker and community."

Clara McDonald, a customer who owns a brownstone nearby on Hancock Street, said she "couldn't be happier." She had driven to the store with her friend Betty Jones from Crown Heights, who was searching for a part for an old thermostat.

Another customer, Vurnell Martin, said he had spent about $20,000 at the store on numerous items including cement, jigsaws, beams and handsaws, for the renovation of his brownstone in Prospect Heights. "We don't have to travel too far," he said. Nearby, his contractor, Trent Slade, counted out 20 two-by-fours needed to frame the bedroom walls of the house.

Some local leaders are restrained, though, in their assessment of the store's benefits for Bedford-Stuyvesant.

"On the positive side," said City Councilman Albert Vann, who represents the area, "a big-box store like Home Depot in Bed-Stuy provides sizable employment of local residents and discount prices for supplies and materials used by homeowners and contractors. When you go for the big box, there's also some negative impact. I've been told that there's a local paint store and some hardware stores whose sales are down."