Finding the Reuse Potential
When John G. Hoagland, CCIM, told his staff to keep an eye out for properties that needed "some help" in their Louisville, Ky., market, he probably didn’t envision what he now is marketing — close to 400,000 sf of a worn-out shopping center. During his 20 years in real estate, he has invested in several turnaround office properties — but of modest proportions compared to this.
The property, the Algonquin Manor Shopping Center, is a faded tribute to the retail enthusiasm of the early ’60s. Of the two buildings in an L-shaped arrangement, one once held a 72-lane bowling alley and a department store and the other a grocery store and a Walgreens among its 50 tenants.
Long past its glory, the center had only one tenant when Hoagland purchased it in July 1998. On the market for more than a year, its potential was not evident to many. Yet Hoagland looked at things differently. "Most people could only see it as an old shopping center," he says. "In fact, it was one of the largest remaining tracts of commercial/manufacturing-zoned ground in close proximity to the airport."
To his credit, Hoagland could look at the center and see the right property for a 1999 market. But opportunity, like beauty, is in the eye of the beholder. "After we did our site analysis, we were convinced that once we removed the nasty wet ceiling tiles, asbestos floor tiles, and other interior finishes, we would have a very nice shell to work with," he says.
But a shell for what? "After taking the time to get above the ceiling, we found 18-foot clear ceiling height with bay depths up to 180 feet. The property included approximately 30 acres of paved area with an additional 15 acres of expansion area. The exterior had a dated look and the image of the center needed some definite enhancing. After addressing both of those challenges, I felt the property could be reintroduced as an office/warehousing and distribution center."
Beyond the site analysis, Hoagland’s decision to buy and reposition the property rested on three factors: location, zoning, and the market for industrial space.
The area is predominantly industrial, he says. "Our closest neighbor is Phillip Morris with about 300,000 sf of tobacco warehousing. It also doesn’t hurt that the [Louisville] International Airport is within eight miles, and Louisville’s new Riverport Distribution Center is within four miles. Our proximity to major expressways is a mere four-tenths of a mile."
While the immediate area is a mix of residential, industrial, and commercial, the property’s commercial/manufacturing zoning, is "the best of all zonings," Hoagland says, "allowing for retail with a low level manufacturing zoning. The property was originally the highest industrial/manufacturing zoning, similar to our neighbors, but was down-zoned to allow for the shopping center."
Timing probably couldn’t be better given the tight market for industrial space in Louisville, which is attractive to businesses because of its central location in the country. UPS has an air cargo hub there and it is home to manufacturing companies such as Ford Motor Co.
A Calculated Risk
Even with all the positive factors, purchasing 400,000 sf of anything is a risk, especially in a modest-sized market. But Hoagland has been preparing for this for most of his career. "My partner, Breck Jones, and I set a goal 20 years ago to pay off all debt on properties as soon as we could. Consequently, this philosophy enabled us to borrow against our assets in order to purchase this speculative property."
Given the amount of redevelopment needed, Hoagland knew they would have to "be prepared financially to carry the project for at least a year. We also purchased the property at a price that enabled us to spend the T[enant] I [mprovement] dollars that were necessary. It was, however, very important for us to utilize the existing shell space."
After assessing the project as a "tremendous but calculated and manageable risk," Hoagland had no time to waste before starting the renovation. "We had no signed leases and a $1,000-per-day, seven-days-a-week interest expense, so we started construction the day we closed the transaction."
The Dirty Work
So far Hoagland has kept the project on schedule, beginning by redeveloping the phase one building that at one time contained a grocery store.
But he acknowledges that "redevelopment is often a moving target. You can plan on paper all you want but when you get into structural components of older buildings, sometimes you never know what you will find." Other unknowns include unbudgeted tenant improvements and just the challenge of scheduling. "Even though we have a construction coordinator on site, I have to spend a substantial amount of time making sure the little things are getting addressed," he says.
Inside the first building, his crews removed asbestos flooring, ceiling tiles and grid, heating and air conditioning, ductwork, and restroom fixtures. They added sprinklers, painted the ceiling, and repaired flooring. "We built out several suites of different configurations in an effort to identify a niche," he says.
To revamp the exterior, crews removed all retail signage on the building, the covered sidewalks from the mall area, and the perimeter sidewalks. They added berms and bushes, drive-in and dock-high access doors, a new roof, and new glass; painted the brick an off-white; and added a distinctive blue horizontal stripe around the building.
Going against the advice of others, Hoagland elected to keep a sign in the shape of a giant A that stood on the property’s edge. "We chose to build a block pedestal, paint it, and light it at night." The sign is now part of the marketing logo for A Commerce Center. This clever move merges the past with the present, taking advantage of the well-known local landmark and using it to announce the property’s new purpose.
Leasing the Property
Hoagland has leased about 70,000 sf to a variety of small tenants. He is working with a local company that would take about 225,000 sf and 15 additional acres and has proposals out on an additional 20,000 sf.
"Our target is to have the center substantially committed by fall 1999, and leasing is ahead of schedule. But it is just as important to get the right mix of tenant base in the project," he says. "I’ve had numerous calls from people who still would like to put retail businesses back in the development. But we feel it’s important to stick with our goal of the business park setting."
He says he hopes to have the project in the black soon by leasing existing space by year-end. However, the longer-term strategy involves developing an additional 10 acres in the front "that would make good outlots for fast food or retail. However, we have been so busy with phase one that we have not pursued the outlots as yet."
While his work on the site is not finished, Hoagland is convinced it eventually will pay off. "We are offering the same or better quality of space than is in the so-called more marketable areas. We sincerely feel our concept is needed and will fill a void."
But the basis of his success remains the fact that he chose the property not for what he saw but for its potential. "We would much rather purchase a property in this type of shape because, honestly, anything you do to it will make a tremendous difference."