Repositioning of Retail Center

13 Replies

Dear BP Community,

What are possible uses/concepts for the repositioning of a large retail center? A center whose complex is continuous/interconnected and is located in a suburban area. 

I'm curious to hear because, without any supporting facts or figures, I believe that the popularity of the traditional retail experience is fading and over the next decade online retailing will take an overwhelming majority of total sale percentage.  This new wave will force anchor tenants to shy away from renewing leases in these retail centers and leaving owners to reposition their asset (provided retailers are unable to successfully modify the functionality of their space).

I just came back today from the ICSC conference in Atlanta,GA

We were in some classes taught by developers in the business for 20,30,40 years. These developers had 5 to 10 large projects and millions of sq ft in the development pipelines,

They said New York is overpriced on retail rents right now and it is a losing game for the landlords there. A game of chicken is being played right now with landlord and tenants there.

Retail is not going away. It is becoming more of a user experience to go out and visit destination type tenants. Large big box is reducing it's footprint and putting some warehouses closer by for faster shipping to houses and stores.   

@Matt Roth As far as I am concerned, in the past malls were mainly measured by the amount of so-called 'anchor-stores' (such as Macy's, Bloomingdales, Northstrom etc.) that (I guess) would lead to the assumption that it attracts more customers to the mall... Going forward, you will see more malls with experience. Best example for that is the American Dream Meadowlands, there will be an indoor ski-slope, iceskating etc.... (think of malls like in Dubai and other countries)... 

Personally, I am on the fence whether that will work out. I could imagine that in the example above it will perfectly work out when they advertise it enough to the millions of tourists who visit NYC and offer direct shuttles there from convenient locations... Otherwise, I am not sure whether that concept works in the long-term...

Only my 2 cents.. Curious in which directions this thread goes! Thanks for opening

@Matt Roth

There is a lot of uncertainty in retail that it seems you're already well aware of.  Here are a few recommendations:

  • As much as possible, if you acquire a retail property make sure that it's located in a great location inside a city.  If retail demand drops 20-30% or more (which is likely), you don't want to be the property owner who owns the oldest, worst-located retail center in town.
  • If you have a choice between tenants, choose tenants that are service oriented.  Such tenants include hair salons, nail salons, restaurants, check cashing, etc.  These tenants have the highest likelihood of being viable businesses over the next 10 years and into the long-term and won't have the ability to take their businesses online
  • Keep in mind that there is much larger risk for larger retail spaces which are over 10,000 SF because of the difficulty of replacing existing tenants if they vacate.  Spaces that are under 10,000 SF can easily adapt of office space, medical space, and can work for hundreds of types of businesses.  But when spaces are over 10,000 SF, the demand from tenants is extremely limited and there is a big risk of not being able to re tenant vacancies   
  • Lastly, it's probably not a good idea to acquire a center that's operating anywhere near it's full potential.  If a center is 100% occupied with tenants paying market rents and it is being sold at a market cap rate, then there is no cushion in case the worst case scenario ends up happening to suburban retail.  If, on the other hand, you acquire a retail center that is 60% occupied, or with rents that have plenty of room to be increased, and the owner is pricing in the property in a way that would allow the investor to make a profit through leasing and raising rents, then you're in a much safer position.  Worst case scenario, if the value of the property drops by 20-30% because of the challenges facing the suburban retail market, at least the profit through your hard work will cover all of the downside

Thank you to everyone that replied (@Joel Owens, @Sandro Hagenbuch , @Josh Beroukhim ) -- very good insight. 

Though my intention for this thread wasn't to assess the future outlook of the retail market; instead I was hoping to gain functional ideas for the repositioning of large retail centers, i.e. convert a large mall into a hospital/senior-center or a food hall/market. 

This popped into my head after a retail center, in an area where I grew up but no longer live, had difficulty in attracting new retailers after the anchor (and junior) tenant jumped-ship.  These owners were then stuck with a traditional retail asset whose spaces sit vacant.  The owners tried providing a better user experience by converting a portion of the space into a aquarium.  But, in agreeing with Sandro, this repositioning play isn't a long-term viable solution.  Ultimately these owners will be left with the decision to sell or fully alter the property's use.

So my main question; if you were the owners in the scenario above, what are viable options for new uses?

As a side note, Joel suggested the new trend for retail concept: smaller retail footprint with nearby warehouses... Is there a name for this trend/concept -- perhaps the "Bonobos model"?

Thank you in advance for your responses.

@Matt Roth I would love to hear what ideas you have yourself.

We have had success over the years back filling Big Box spaces with smaller retail tenants. However, we are finding it more difficult over time. We have back filled one space by converting it in to self storage about 2 year ago, but so far it has not shown any profit.

I second what everyone said.  The retail environment is definitely more "service oriented" at least if you want to attract non-box/corporate tenants.  However, many upscale cities are also pushing back against massage parlors and nails salons.  I've seen success in kids indoor playgrounds in my area.  

Where I am in Southern California, warehouse and office space is in high demand.  Lots of logistics and shipping companies looking for space.  

Though I would do the due diligence to see if the space you are looking to buy can be adapted.  Many retail spaces are in specifically zoned areas that wouldn't welcome industrial or office uses

@Matt Roth I have some value-add retail investors that have been and continue to be very successful in turning around poorly managed retail centers and anchors which have gone dark. The location and demographics will be critically important, but in their successes it seems like a repositioned center will have as an anchor one of the following: major gym, movie theater, discount apparel store (TJ Maxx, Ross, DD's Discount), hobby store, general discount store (99c Store, Dollar General). There should also be a good mix of fast casual restaurants which we see many new concepts being successful over the traditional burger / fast food chains such as personal pizza and poke bowls. A mix of the above and local businesses should be a strong value to a suburban neighborhood. 

Our Company has successfully converted 8 vacant big box/grocery stores into Self Storage Facilities. This business model allows us to purchase below replacement cost, reduce construction costs by up to 30% and acquire existing structures that are conveniently located in underserved ( self-storage SF per capita of 3 or less) MSA’s. In addition, most of our acquisitions include large parking lots that are not needed for self-storage, so we have the ability to sell off outpads (sections of parking lot) to developers resulting in a boost to our IRR.

Self-storage is quick, low cost and easy to manage. However, finding underserved markets is difficult and cities are hesitant to approve rezoning for self-storage due to the lack of sales tax revenue. They want to replace their lost revenue and in a few cases have required us to include small retail stores in our development.

In addition, we are exploring the redevelopment of vacant/partially leased anchored shopping centers into mixed use developments with a mix of apartments, office, retail and restaurant. Our goal is to create a place for people to live, work, play and shop and for the apartments to help support the surrounding retail.

@ Kevin Wong - What markets are your clients focused on? Have they had success?

Tim Wilson

Converting box stores to self-storage.  that is genius!

Are you finding (I assume you are) high demand for self storage?  I'm not familiar with self-storage so trying to understand the supply and demand for these types of a business in a typical Southern California suburban area such as Thousand Oaks and Pasadena.  

We have and are successfully converting retail, industrial, and other asset classes into Self-Storage.  You can do a basic Supply Index study to determine if the location has sufficient demand, and whether it is undersupplied. 

From that point, you can also hire a Feasibility study consultant to give you further assurance before moving forward. 

Look at all my blogs/posts, as I have answered this question many times as to the thumbnail sketch of the process, and a quick & Dirty market study and proforma. 

Cheers, 

@Jason Mak We only have one ground-up self-storage development in Southern CA. All of our conversions are outside CA at this point.

As @Scott Meyers mentioned, we also do a Supply analysis. The initial analysis can be as simple as identifying the existing self-storage facilities in a 3 and 5 mile radius from your proposed location using google earth pro. Then you measure and add up the total square footage of each competitor and divide it by the population in the 3 and 5 mile radius. This calculates the total self-storage SF per capita (or person). Typically, 7 SF per capita is a well served market, so we focus on locations under 5. 

After this step, we want to make sure our property has a better location (i.e. first property potential renters see leaving home) than other Class A climate controlled properties, our competitors have high occupancy rates, the local economy has above average job growth and a high ratio of renters.

Thanks!

http://www.businessinsider.com/what-will-happen-to-closed-malls-2017-6/#before-the-atrium-5

Some mentioned smaller retail spaces.  How many square feet do you consider "small"

Is there a sweetspot SF for retail spaces to attract service oriented tenants.

I'm guessing 800-1200 SF?

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