Entertainment Users in Texas Embrace Flexibility

Retail landlords want to fill space, especially given that large gluts of it have been returned to market as store closures have accelerated, a move that has coincided with entertainment users that want to expand their footprints.

But the logistics of bringing entertainment concepts into retail spaces — particularly vacated junior or big box spaces — are very complicated. This holds particularly true for entertainment concepts that involve movies and bowling. Ceiling heights and column spacing, for example, prevent many spaces from being repurposed cost-effectively for entertainment uses like bowling alleys and theaters.

In addition, lease terms for these deals are often based on traditional retail metrics like sales per square foot. According to Howard Samuels, president of California-based advisory and brokerage firm Samuels & Co., there is a strong disconnect between entertainment uses and conventional retail real estate that has yet to fully integrate experiential uses or “location-based entertainment (LBE).”

“Entertainment retail as a backfiller of boxes is a misnomer,” says Samuels, whose firm specializes in entertainment transactions. “Those users typically don’t want fixed walls and need higher ceiling heights. Most location-based entertainment concepts are very challenging to design, develop, open and operate. These concepts have very specific criteria for their physical spaces.  So if you have a concept that demands 35,000 square feet and a landlord that has a 30,000-square-foot space there’s a tendency to think, ‘well, that’s close enough.’ But it’s really not.”

This disconnect holds particularly true for some specific location-based entertainment concepts like Andretti Indoor Karting & Games, which is opening in Houston and Dallas in February and March, respectively. These concepts have very specific requirements, including column spacing and ceiling heights, and repurposing existing spaces to support these uses can quickly lead to heavy construction costs that won’t be paid by users.

Although entertainment isn’t always suited for vacated junior or big box spaces, it can often work in smaller, inline or freestanding locations. But there is a pressing need in brick-and-mortar retail to fill or repurpose all types of vacated space — more than 9,000 store closures happened or were announced in 2019 — and to develop synergies between tenants and elevate the consumer experience at malls and shopping centers. Adding entertainment uses can theoretically kill all those birds with a single stone, but the process requires both sides to be flexible with their demands.

“Clearly, we have more retail space in the United States than landlords can populate in a meaningful way,” says Joyce Storm, president of New York-based Storm Partners.  “Challenges to traditional retail have created a vacancy quagmire. Calls to action require new uses that redefine what ‘entertainment’ can be: a combination of movies, food and beverage, wellness activities — all brought together to make new destinations — or new event placemaking to drive consumer traffic.”

Storm, who has several decades of experience in retail leasing, development and investment sales, adds that the profound changes that have beset brick-and-mortar retail in recent years have been the catalyst for more flexibility for users and landlords alike. Both sides have to be willing to pivot on configuration, design, tenant allowances, rent and term.

“Retail real estate isn’t formulaic to begin with, and landlords aren’t in the habit of putting fresh capital into their spaces every year to keep entertainment experiences fresh,” she says. “But with all the factors working on the market today that make it important to fill space, you have to have optionality built-in. Because what’s popular right now in entertainment will definitely change and those concepts will eventually need to be updated.”

“As entertainment has emerged as one of the most in-demand categories of brick-and-mortar retail in the e-commerce era, these operators are regularly tweaking their concepts to maintain growth by experimenting with new attractions and therefore reconfiguring designs,” concludes Storm.

A Different Model

Samuels notes that LBEs, which are typically divided into pay-to-play (family entertainment centers like Andretti) or gated entry concepts (fitness clubs or theaters), typically rely on different metrics to evaluate financial performance.

These concepts’ business models are driven by attendance; price per head or revenue per capita (which provides that total gross revenues minus operating expenses equals earnings before interest, taxes, debt and amortization (EBITDA)). Most good entertainment uses need 18-20 percent EBITDA in order to stay in business. In addition, he says, these tenants typically need their rents to be close to or less than 10 percent of their total occupancy costs, depending on how labor-intensive the
concept is.

“There’s no relevance of sales per square foot in these transactions for these concepts, which usually have to inject more capital than traditional retailers, especially in year four or five, to keep them feeling fresh,” says Samuels. “So the industry needs to look at more unconventional metrics, and landlords have to be willing to take the time to really understand the concept beyond whether or not the tenant can pay a certain rent.”

Lastly, the industry needs to recognize that spending time at an attraction or entertainment user, means customers will be spending more time at their property, says Samuels. The industry must embrace the future of entertainment concepts in terms of the ideal tenant mix and how and why certain concepts will enhance their properties.

The willingness of a landlord to think outside the box in terms of performance metrics — and not to simply “go with the gut feeling” — represents another form of flexibility that must be undertaken for the industry to continue to grow.

Entertainment users and traditional retailers also differ in the fact that success in the entertainment industry often follows something of an inverse pattern. Whereas most retailers wait for certain areas to achieve certain levels of population density and traffic counts before opening stores in those locations, entertainment users tend to create the traffic themselves and enable other uses to thrive off them.

Essence of Entertainment

Ultimately, entertainment is about providing consumers with experiences that they cannot get at home. It’s an industry that has become synonymous with rapid change and evolution.

“In the entertainment industry, flexibility of space is just as important as flexibility of mindset,” says Mitch Roberts, CEO of EVO Entertainment, which operates several family entertainment centers across Central Texas. “We have to be willing to adapt to new disruptive technologies and wants of our guests, and we have to be able to do so quickly and without hesitation.”

EVO Entertainment has built its centers in Central Texas on the dual pillars of bowling and movies, but is tinkering with different designs and layouts. This flexibility has helped the company gain a foothold in markets like San Marcos, which has a younger customer base.

EVO Entertainment centers feature some combination of movies, bowling and arcade games in addition to food and beverage components. But the company is embracing newer concepts like Virtual Reality (VR), which is often considered a substitute for laser tag, and also experimenting with different designs and prototypes to meet the various demands of different markets.

For example, EVO’s center in San Marcos, located in Central Texas between Austin and San Antonio, was designed to create a boutique ambiance that caters to the city’s substantial population of young adults and Texas State University students. That venue features smaller bowling lanes, more classic arcade games and a full bar to promote socialization.

“In this industry, something new pops up every day that can be very exciting,’” says Roberts. “The key to success is keeping your ear to the ground and being open-minded about these new concepts and ideas. You can fail, and that that’s part of the learning experience. But this industry has to be more aggressive about giving people a wider variety of experiences and a higher quality of content.”

In the case of backfilling vacated spaces, entertainment concepts often have the rooftops, employment clusters and infrastructure in place — they merely supply the product. But even so, operators must be willing to get creative.

Perhaps a certain market already has escape rooms or an axe-throwing arena? Or maybe there’s already a purpose-built theater within that trade area? Whatever the case, entertainment concepts can easily cannibalize one another if they aren’t careful about their geographic spacing and diversity of games and activities.

Jeff Benson, CEO of Cinergy Entertainment, which offers various combinations of movies, bowling, VR games, ropes courses and escape rooms, is dealing with this issue firsthand. The prototype for the Cinergy entertainment center is roughly 90,000 square feet, but to continue to expand in Texas and beyond, his firm has had to roll out smaller designs.

Family entertainment operator Cinergy is introducing axe-throwing at some of its centers in an effort to consistently offer the most in-demand activities.

“We’d love to be part of these redeveloped malls or mixed-use destinations, and that’s a big part of why we’re trying to be flexible on our floor plans and scale down our prototypes,” he says. “So we’re working on smaller models between 40,000 and 70,000 square feet by downsizing the number of movie screens or bowling lanes, or in some cases cutting laser tag or ropes courses if the site doesn’t have the ceiling heights to support it.”

Cinergy, which won the International Association of Amusement Parks and Attraction’s 2019 award for best family entertainment center in the world, operates a venue in Copperas Cove, located in Central Texas between Waco and Austin. This center exemplifies how entertainment operators are forced to adjust to keep up with the hottest trends.

The venue featured a laser tag arena when it opened several years ago; that space is being redesigned again to support axe-throwing, an attraction that will also be featured at Cinergy’s newest center that is under construction in Kansas City. Cinergy’s center in Midland has also experienced its share of reprogramming, with the laser tag arena being converted to arcade space and party rooms being converted to escape rooms. Benson also says it’s likely that the escape rooms at Cinergy’s Amarillo center will soon be repurposed to support axe-throwing.

“We understand the economics of installing axe-throwing, and if it fails in five years, the space is still cheap to reprogram,” says Benson. “The same goes with our Hologate [VR] attraction; if it wanes in popularity, it’s easy to move out and easily refill the space with arcade or whatever the hottest new thing is. Flexibility is key, because none of these attractions are going to last forever.”

By Taylor Williams. This article first appeared in the January 2020 issue of Texas Real Estate Business magazine. 

Content Partners
‣ Arbor Realty Trust
‣ Bohler
‣ Lee & Associates
‣ Lument
‣ NAI Global
‣ Northmarq
‣ Walker & Dunlop

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