Alec Pacella, NAI Daus
The Cleveland retail market has shown a dramatic recovery over the last five years. The overall vacancy rate has fallen from just over 14 percent in 2011 to slightly under 9 percent at the beginning of 2015, and rental rates have noticeably increased.
As a result, there have been some landmark sales as part of a brisk investment market and new retail development has started in earnest. However, there are also some high-profile retail centers that continue to be plagued by a variety of issues, in spite of the market’s turnaround.
Nearly $400 million of retail properties have changed hands over the last 12 months and this sector is the most active of all the property types. While local investors have certainly played a part, the majority of the buyers have been from outside the region.
Among the most active non-local purchasers has been a pair of REITs — Inland Real Estate Corp. (NYSE: IRC) and Devonshire REIT.
Recent purchases by Inland include Creekside Commons, a 200,000-square-foot center that sold for $28.3 million and Cedar Center North, a 60,000-square-foot center that sold for $15.4 million.
Meanwhile, Devonshire REIT has acquired The Plaza at Chapel Hills, a 450,000-square-foot center that sold for $57 million; Pavilion Shopping Center, a 250,000-square-foot center that sold for $35 million; and Erie Commons, a 235,000-square-foot center that sold for $18 million.
Lessons Learned
The region has also seen some large-scale retail developments fall on hard times. At the top of this list is University Square shopping center, which was redeveloped in 2003 using a unique, if not risky, design for this region.
At its core was a five-level parking deck with the retail shops surrounding the deck. As a result, the storefronts face inward, oriented toward the parking, versus outward, toward the streetfront. Two of the anchors, Target and Macy’s, are multi-level and both own their own stores. The center was sold in 2005 for $55 million.
Shortly thereafter, the property lost its grocery store anchor, which started a continual decline in occupancy, ultimately resulting in the center falling into default. Last fall, this 287,000-square-foot center was sold at auction for an astounding $175,000.
Equally astounding is the fact that, less than six months later, the property has fallen into default again.
Walmart’s Absence Stings
A few former Walmart-anchored centers have also not fared well after the retail giant vacated anchor positions to build larger-format stores nearby.
River Street Square and Streetsboro Market Square —both of which date back to the early 1990s — included two of the region’s first Walmart stores. But both have been crippled by the loss of Walmart.
A special servicer sold River Street Square, a 266,000-square-foot center, for $1.6 million in March after completing the distressed sale process. The property is less than 30 percent occupied.
Streetsboro Market Square, a 125,000-square-foot regional retail center that lost a large grocery store several years ago, is at the beginning of the distressed sale process, falling into receivership last December. It is less than 20 percent occupied.
Meanwhile, a third shopping center, Severance Town Center, dates back to 1963 and held the distinction as being the first enclosed regional mall in Ohio.
The mall was converted to an open-air center in the late 1990s, introducing anchor tenants such as Home Depot, Tops supermarket, Marshalls and Regal Cinema, in addition to a Walmart.
However, Walmart relocated to a larger store in nearby South Euclid in late 2013, and with the Tops and Regal Cinema also shuttered, the center slipped into receivership in early 2015.
High-Profile Projects
The development side of the retail market offers a similar paradox. On one hand, several new projects have begun. On the region’s southeast side, Bass Pro Shops and Costco will be anchoring a mixed-use development in Boston Heights.
Encompassing a total of 1 million square feet, this development will include a new headquarters and distribution center for Arhaus Furniture.
On the east side, construction is expected to begin on a project known as Pinecrest. Located in the community of Orange, this mixed-use development will include 350,000 square feet of retail along with 70 apartments, an office building and a 120-room hotel.
Meanwhile, on the west side, several big-box retailers have announced their intent to build in Avon. The stores include a 172,000-square-foot Menards, a 194,000-square-foot Meijer superstore and an 81,000-square-foot Cabela’s. The stores represent the first Cleveland-area locations for all three of these chains.
Drastic Measures Taken
But on the other hand, several projects have been stagnant for many years, with some even being de-constructed and redeveloped into alternative uses.
The Bridgeview Crossing project in Garfield Heights is an example of a project that was a victim of bad timing. The planned 800,000-square-foot project was expected to include Target, Lowe’s and JC Penney, among others. Work began in 2008, but was halted less than a year later as the faltering economy caused most of the major retail anchors to pull out.
A myriad of lawsuits and foreclosure actions have since ensued. A California-based developer now controls the 90-acre site, but its plans to restart the development have been stymied by the legal morass.
A great example of a retail project that ultimately turned out not to be the highest and best use for the site is the former Randall Park Mall. Billed as the world’s largest mall when it opened in the mid-1970s, the super-regional retail center encompassed 1.2 million square feet.
However, changing consumer spending patterns coupled with the general decline of the enclosed mall genre proved fatal for Randall Park. A slow but steady deterioration ensued, and the mall has been largely vacant for over a decade. Several failed redevelopment efforts followed and the center was acquired in late 2014 via foreclosure.
The plan is to redevelop the 100-acre site into an industrial park that will eventually encompass between 750,000 and 1.2 million square feet of new construction. In addition, some of the existing former department store structures will be selectively converted into industrial buildings.
Most of the mall area has already been demolished, and infrastructure work as outlined in the new master plan has begun.
— By Alec Pacella, managing partner, senior vice president, NAI Daus. This article originally appeared in the July 2015 issue of Heartland Real Estate Business magazine.