Retail

Fashioning a New Look

Shopping Center Makeovers Can Rejuvenate Tired Retail Properties.

More than 43,000 neighborhood and community shopping centers exist in U.S. urban and suburban areas where regional megamalls are not geographically or demographically feasible. Ranging between 100,000 square feet and 120,000 sf and often anchored by a grocery store, these centers provide convenient, everyday goods and services to local trade areas. In today’s healthy economy, neighborhood and community centers are flourishing, showing improved occupancy levels, increasing base rents, and above-average yields.

During the last 10 years, many neighborhood centers have gone upscale, moving toward high-quality design, multicolor brick veneers, and decorative touches such as columns and capitals. These high-end centers are bringing traditional mall-only tenants such as the Gap, The Limited, Victoria’s Secret, and the new generation of super bookstores such as Barnes & Noble into the heart of residential communities.

To compete, many owners and managers of existing centers are upgrading to maximize their properties’ appeal and profitability. As they seek to improve older stores, create new retail formats, and pursue expansion plans, center owners must meet the challenge of adapting to changing consumer and retailer demands.

Revitalizing a property either through gradual, consistent changes or significant physical or tenant-mix changes should be based on a well-devised strategic plan. The right plan can maximize revenues, reduce operating expenses, lessen tenant disruption, increase the value of the individual asset, and — most importantly — increase shareholder value.

Buying into Change
Three catalysts usually motivate owners to revitalize a center: a slowdown in sales activity, changes in retail patterns, or physical and functional obsolescence. Understanding the effect of these circumstances can lead to a review of a center’s location; neighborhood traffic patterns; competition; and population density, income levels, and ethnicity demographics as the first step in creating a strategic plan to revitalize a foundering center.

Decreasing Sales. Changes in a submarket’s demographic makeup, a slowdown in the local economy, or new competition down the block may reduce sales activity, depreciating a center’s value. However, physical renovation undertaken without consideration of the tenant mix may result in a beautiful building with the wrong retailers for the submarket. Prior to renovation, owners must decide whether they are going to manage for the short term or reposition the center to attract new retailers and shoppers.

Changes in Retail Patterns. New trends and styles feed the retailing fire, and centers continually must adapt to entice new retailers, new retail concepts, and ever-fickle shoppers. The evolution of the mall bookstore to the super bookstores located in suburban and urban areas demonstrates this dynamic.

In addition, technology such as the Internet offers new competition to shopping center tenants. Online sales of cameras, computers, books, and other nonapparel items will continue to grow significantly. In no small measure, the addition of entertainment value to live shopping experiences is an effort to counteract these growing electronic sales.

Physical and Functional Obsolesence. The designs and construction methods of yesterday’s centers do not necessarily meet the needs of tomorrow’s retailers. Some retailers in today’s centers require shallow-depth small spaces with minimum storage areas due to "just-in-time" inventory management in which much of the merchandise is received, unpacked, and placed directly on the sales floor. In contrast, space needs for retailers in the late 1980s often were based on having adequate storage for inventory and preparation, a need that has been reduced as the usage of shippers including United Parcel Service and Federal Express has made small shipments and quick turnaround possible.

In another example, moviegoers now expect stadium seating, high-tech sound, and multiscreen cinemas with collateral entertainment. As a result, older cinemas, historically hidden in out-of-the-way locations in older centers, now are some of the most challenging spaces to re-lease.

External and internal property factors independently or in concert can affect a center’s obsolescence. Small anchor stores or a low overall height of the center represent typical internal factors. New competition, street changes, and the closing of nearby offices, plants, or factories are external factors that can affect a center’s staying power.

Revitalization Strategies
The following revitalization suggestions apply to typical 100,000- to 120,000-sf, well-located, grocery-anchored centers that have adequate parking and meet municipal codes.

Retenant. When the quality of a center’s tenants begins to decline, the owner must decide how to protect the investment. Often, nothing revitalizes a small center like a new anchor tenant — it is the foundation for all other activity at the center. Identifying and developing relationships with a range of prospective anchor tenants is a major component of the redevelopment process. For example, replacing a low-sales-volume national grocery store with a high-sales-volume regional grocer that targets a specific submarket often will bring a tired center to life.

Retenanting also could mean moving current tenants around within a center to ensure proper placement. In one instance, a successful Houston-based restaurant could not accommodate its prospective diners because its area of the parking lot was full during peak mealtimes. The center owner relocated the adjacent and equally successful martial arts studio to another part of the center to relieve the congestion and give the studio larger facilities to accommodate its growth as well. The cost to make this change was more than made up by the increase in the restaurant’s percentage rent.

Another retenanting approach may be to focus on leasing in general. Create a clear strategy for existing vacancies and weak tenants; identify desirable tenants not in the center and aggressively go after them. Make sure each leasing team member knows the pro forma return for each space and encourage the development of creative methods to meet these goals.

Aesthetics. Color preferences change with the times. Clearly, the brighter and fresher a center appears and the easier it is to access, the stronger each tenant’s presence becomes. The more dramatic the look, the greater the chances for generating traffic and ultimately profits.

In a more complex treatment, a Houston shopping center with a rustic wood façade located in a master-planned community was updated using exterior insulating finish system materials. This architectural building system uses malleable foam components that are covered with colored plaster, giving buildings a modern, highly sculpted look without adding the weight concerns that other structural systems might create. The center now enjoys high occupancy in a very competitive market.

Lighting. Bright lighting helps a center appear open and alive in the evening. It increases customers’ sense of safety and is one of the most noticeable property upgrades. Recent studies have confirmed that raising light levels increases evening sales at centers. Many new super grocery stores including Kroger, Albertson’s and Randalls are demanding illumination in the 12 foot-candle to 15 foot-candle range, well above the standard six foot-candle to nine foot-candle range. High-pressure sodium light fixtures continue to be popular for retrofits because of their longer life and higher per-watt output over metal halide fixtures.

Security. Security concerns are a critical component of any neighborhood or community center revitalization. Shoppers will not patronize a center — regardless of its location or merchants — if they fear for their safety. The revitalization of any center should incorporate a complete safety and security review of the center and its security programs, including a review by the owner’s legal counsel.

Parking. When expanding a center with pad sites or additional in-line tenants, evaluate parking requirements for potential reconfiguration. Many older centers have oversized parking spaces. By restriping the lot with some compact spaces or resizing all spaces to meet current industry standards, additional spaces may be acquired from the existing space.

Along with increased parking, improved ingress/egress can help a center. A Walgreens center in Phoenix added a deacceleration and turn lane, and sales picked up as a direct result.

Signage. A renovated center without new tenant signs is a job half-done. Good signage creates sales, and the type, style, size, and layout will set the tone for the revitalized center. Stick with easy-to-read, simple, eye-catching graphics. Landlords should consider financing the cost of new signs for small tenants.

Be aware that master-planned communities often have specific requirements concerning signs. To dispel excessive negotiations with tenants over color, specific designs, and the use of corporate logos, sign criteria always should focus on the quality of the sign.

Operational Standards. Merchants appreciate being in a well-maintained shopping center with high curb appeal. This usually translates into higher traffic and sales. Improve maintenance procedures such as sweeping the center more often, keeping vacant spaces ready to show, cleaning sidewalks and windows, and reducing flier bins and vending machines, which create trash.

Managers also should implement hours of operation so customers can count on tenants being open at a certain time. Likewise, loiterers can create uneasiness for shoppers and should be discouraged.

Community Service. Good community relations indirectly serve tenants and landlords by improving a center’s community image. Centers can provide bus stops, offer bookmobile parking, and allow fund-raisers such as car washes or community service projects such as blood drives to be held on the property. Have a consistent community outreach plan in writing to avoid problem disputes, such as allowing one community group to use the space while declining another. Set clear objectives about when the center allows third-party access and have a standard third-party use agreement covering liability, health standards, and legal requirements.

Retail Relations
The retailer is in a shopping center to sell merchandise. The more that landlords understand about the needs of the retailers, the more competent they will be in managing their properties, projecting future needs and trends, and developing a cost-conscious and creative master revitalization plan. This greatly will enhance the center’s character, appeal, and long-term tenant satisfaction.

Being known in the retail community as a responsive, honest, efficient, and capable landlord maximizes the ability to become the landlord of choice when retailers’ expansion needs arise.

Joseph W. Karp, CPM

Joseph W. Karp, CPM, is vice president and director of asset management and leasing for Houston-based United Investors Realty Trust, a publicly held real estate investment trust that owns and manages 26 neighborhood and community shopping centers throughout the Southwest. Contact him at (713) 260-1444 or [email protected] Value to PropertiesFrom an investment standpoint, the main reason to undertake a property revitalization is to increase its value for potential sale. In most cases, that means increasing a property’s net income, which improves a building’s revenue stream for resale. While each property type requires a different strategy, here are a few suggestions for increasing the net income of properties overall. Increase Curb Appeal. This probably is the most common way to make a property more attractive to prospective higher-income tenants and potential buyers. Refurbishment can be as simple as an updated color scheme on the building’s exterior, new landscaping, or a refurbished lobby. More complex changes involve replacing ceilings, lighting, and restroom fixtures; and modifying or adding signage.Provide Additional Services. Adding value can be achieved through new services offered at the property. For instance, add an office facility to an apartment complex, making fax machines, computers, printers, and even small conference rooms available to tenants at a nominal but profitable cost. This also could work in incubator office buildings that rent space to one- and two-person companies.Concierges are becoming a popular service in office buildings as well as in upscale multifamily properties in large cities. Owner/managers provide nonrentable space free to the concierge, who earns a commission from referral sources such as ticketing agencies, cleaners, and restaurants. While increasing tenant retention, a concierge also may attract tenants interested in a higher level of service.Another tactic, which requires more analysis, is to reconfigure lobby space to accommodate service tenants such as newsstands, take-out food shops, flower stalls, or coffee bars. Such a strategy not only increases tenant services but also provides another source of rental income.Redirect a Property’s Use. This generally starts out as an in-depth study of the property’s highest and best use to determine the highest net present value for the property. However, if the best use of the property is thought to be retail but the cost of conversion is so high that it results in a negative net value, the highest and best use is something else.The simplest redirection tactic is buying a vacant, functionally obsolete, or deteriorated building, bulldozing it, and building another structure. Costs generally are easier to project, with the land basis being equal to the acquisition and demolition cost and the building costs known upfront. Conversions that reuse the existing facility where the costs and the assessment of market demand for the new product are harder to project are more difficult, requiring more thorough studies and contingency funds. Nevertheless, conversion examples abound: urban B and C office buildings come back as boutique hotels and upscale condominiums; outdated retail centers are reborn as office/distribution centers; and unused industrial sites are transformed into self-storage facilities or call centers.Environmental Remediation. An old gas station with underground storage tanks is a high-risk property that most likely will not sell without quantifying the cost of remediation. Yet such properties often are located in retail strips along well-traveled highways leading in and out of towns and cities. Removing the tanks and giving the property a marketable bill of health recovers the true underlying value of the property. A phase one environmental report and an investigation of environmental insurance are necessary before proceeding with this strategy.Increase Energy Efficiency. Many utility companies provide services to suggest potential energy cost reductions. Energy-related modifications may include balancing heating, ventilation, and air conditioning systems, calibrating pneumatic controls, or installing computerized system controls.Before embarking on any plan to improve the property to increase income, consider the following questions:How long will it take to re-lease, modify, or sell the property? What is the downtime? How much income will be lost in rent? What is the net increase in income or utility, and consequently, value? What is the cost of the funds to be used and what alternative investments are available that could produce a higher return? After answering these questions, perform a discounted cash flow analysis to determine if there is indeed going to be an increase in the current net present value of the property. Then compare the DCF to alternative property uses or other potential investments. If the net present value is negative, alter the proposed plans or consider a new concept.— by Ernest L. Brown, IV, CCIM, vice president of the investment services group for Grubb & Ellis in San Antonio. Contact him at (210) 828-5050 or [email protected]

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