A persistent need for a tenant mix that is resistant to e-commerce and which facilitates a unique, authentic experience is prompting owners of older retail centers and malls to assume high levels of risk and redevelop their properties.
While there can be a plethora of non-tenant-related factors that spur redevelopment projects — the basic need to charge higher rents, the structural and aesthetic deterioration over time, a desire to restore the public perception of vibrancy — the ultimate success of almost every retail redevelopment project hinges on the tenancy.
“Modern consumers are attracted to experiential concepts and properties that are destinations, meaning those with a roster of diverse and dynamic tenants,” says Joe Coradino, CEO of Philadelphia-based retail investment firm PREIT. “Diversifying our tenant mixes across all our properties and markets is key to differentiating them.”
PREIT has several redevelopment projects underway in Pennsylvania. The company is repositioning the anchor space at the Plymouth Meeting Mall, which was previously occupied by Macy’s, to house several new tenants, including Michael’s, Miller’s Ale House, Burlington, Edge Fitness and DICK’s Sporting Goods.
PREIT has also transformed the former Macy’s anchor space at the Moorestown Mall into four box spaces that will house tenants that are mostly new to market, including Michael’s, HomeSense, Sierra, and Five Below. New restaurants like Hash House a Go Go and Joe Italiano’s Maplewood have also been added to the tenant roster, as has a new Planet Fitness.
For shopping centers, this typically entails adding more restaurant users and other retail categories that offer a critical service or a unique shopping experience, as well as integrating open recreational spaces. For malls, adding entertainment uses is becoming increasingly common, particularly when an anchor space has been vacated or sold back to the owner.
In Boston, for example, most retail redevelopment projects within the urban core are focused on the anchor tenant, says Kenneth Fries, vice president of leasing and development at Needham, Mass.-based RK Centers.
“Any redevelopment in our area is anchor-driven, whether that involves attracting a new one or redeveloping the property to meet a requirement of the existing one,” says Fries. “Increasing density is the only other way to pay for a performing property in Boston’s urban core — you have to be able to fit more to justify the costs.”
When paired with a telltale sign like sluggish sales and/or negative rent growth, any of the aforementioned factors can be the catalyst for pulling the trigger on a redevelopment project. But whatever the impetus for the project, without marketing to and leasing tenants that can afford market-rate rents, align with the surrounding demographics and drive foot traffic throughout the property, it’s all for naught.
“Knowledge of sales volumes is essential either through reporting, observation or discussions with industry insiders,” says Fries. “Of course, margins are not apples to apples, and landlords have to be able to understand how sales relate to costs of occupancy. But knowledge of negative sales growth allows us to get out in front of a future relocation or closing by offering short-term concessions in return for longer-term commitments.”
Construction Hurdles
Rising costs of construction materials and labor still impact budgets for redevelopments, which are typically smaller in scope than ground-up projects. But when you tackle everything from parking to landscaping to signage, those costs can add up quickly.
More so today than ever before, tenants are very concerned with their settings in terms of how they build their brands, install their signage, facilitate access from major arteries and mesh with their co-tenants. So it’s critical to enhance the property from an aesthetic perspective to bring in the best-in-class tenants and be able to charge the maximum amount of rent.
“While it is difficult to quantify the value of upgrades to signage, parking and landscaping, these elements absolutely play a role in maximizing a shopping centers’ value and competitive advantage,” says Robert Carson, president of New Jersey-based Levin Management Corp, which specializes in retail leasing and management. “Curb appeal has a definite influence on securing — and retaining — tenants as well as in drawing consumer traffic.”
In redevelopment scenarios, the mall or center has typically been declining for many years. One of the biggest challenges is to change the public perception and convince prospective merchants that your vision for the redevelopment is real and attainable. In that sense, these features are critical aspects of any successful project.
But construction-based challenges exist beyond the parameters of rising labor and materials costs. In major markets like Boston and Philadelphia, which have added several million square feet of new retail space over the past several years, proven and experienced contractors are in both high demand and low supply.
Kimco is redeveloping Hylan Plaza in Staten Island into The Boulevard. Valued at $180 million, the project will feature 400,000 square feet of retail and restaurant space.
Coordinating schedules with the best project partners can be tricky and can easily lengthen construction timelines, leading to higher labor costs and in some cases, extended time frames for stores to be closed and sales to be lower. Other variables, such as weather to community support for the project, can also adversely factor into the equation.
Virtually every retail redevelopment project carries these types of risks, perhaps even more so in the age of e-commerce. In financing these deals, lenders look closely at a firm’s track record of executing similar projects, as well as how underwritten rents compare to market rates.
But in addition to these commonly scrutinized variables, proof of positive leasing activity can also go a long way in securing favorable loan terms. Visual aids, such as renderings, 3-D models and detailed site plans, also help lenders understand the nuts and bolts of the project, as well as the aesthetic and social appeals it can provide to shoppers.
Lender Perspective
In addition, lenders in the retail space are looking more closely at tenant profiles, from credit to concept, more closely in today’s market. Providing evidence of in-place cash flows once the project is completed can also help mitigate some of the hurdles with regard to both leasing and financing.
“Anchor tenant quality and financial stability continue to be among the most important elements for a prospective financing situation,” says Carson. “Brand strength, along with earnings history and projections are important to convey. Many institutions will shy away from projects anchored by tenants who send up red flags based on reported and rumored problems.”
Carson adds that strategic analysis of competitive centers in the trade area is equally critical in determining whether or not to moving forward on a redevelopment. Older centers that have not been renovated for some time or which have had turnover within their anchor spaces will struggle to retain the same quality of tenants as newer properties.
Seth Kessler, senior broker at the New York City office of The Shopping Center Group, concurs with the importance of analyzing comparable leases during the course of the underwriting stage.
“It is critical that the developer uses accurate and recent closed deal rents when determining the underwriting figures,” he says. “Real estate markets can change drastically during a development project’s life, and by the time a developer is ready to deliver, rents can be out of line from the initial underwriting.”
Leasing Challenges
To some degree, all facets of retail redevelopment projects are undertaken to attract and build the ideal mix of tenants for that neighborhood. Disrupting or modifying in-place leases adds another layer of complexity to redevelopment deals.
Landlords will sometimes abate or discount rents during construction to compensate for lower traffic and sales. But either way, it’s critical to keep tenants in the loop on timelines and objectives for the project. Landlords must manage these obstacles on the leasing front while also recruiting new tenants that can afford the higher rents that the center must inevitably command following the redevelopment.
While the actual execution of a project does not affect prospective tenants, current tenants that plan to remain at the center post-completion can certainly be impacted by construction. Working closely with these users to negotiate rent abatements before ground breaks can make for a much smoother transition, sources say.
Timing the marketing campaign of the new space is also important when leasing a retail redevelopment, says Ian Rice, a landlord and tenant rep specialist also based in The Shopping Center Group’s New York City office.
“One of the biggest challenges is aligning the initial go-to-market strategy with realistic delivery expectations,” says Rice. “If the brokers bring the space to market too soon, many construction and operational issues will arise, and the project can quickly lose credibility and interest with potential tenant brokers and retailers.”
Rice notes that developers that mistime the execution of their redevelopment projects are equally vulnerable. He points to the American Dream at The Meadowlands, a mall located in East Rutherford, New Jersey, as an epitomizing example of this hazard.
Mills Corp. broke ground on the project in the mid-2000s but quickly encountered obstacles when financial backer Lehman Brothers defaulted on construction loan payments. Redevelopment plans were then proposed in 2011, but ended up being delayed by weather, civil disputes and various lapses in construction financing from both public and private sources.
Canadian conglomerate Triple Five Group is now leading the project and has given an opening date of October 2019. Rice notes that there is tremendous excitement behind the opening due to its various setbacks over the year, many of which were exacerbated by bad timing.
— By Taylor Williams. This article first appeared in the August-September issue of Northeast Real Estate Business magazine.