For real estate developers and investors, a time of transition and evolution within the retail world presents abundant opportunities to capitalize by acquiring and investing in underperforming spaces.
With an infusion of capital, some strategic restructuring and re-tenanting with regional and national brands, a moribund center or underwhelming site can be transformed.
Understanding the strategies deployed to effectively identify, acquire, reposition and re-tenant retail is an essential prerequisite for any commercial real estate professional looking to get involved in the process.
The big picture
The most critical step in the process is selecting the right opportunities to pursue in the first place. Identifying existing retail assets that are underperforming is one thing. Finding those that can be successfully reinvigorated and repositioned through an infusion of capital and the application of some expertise is a little trickier.
It is a best practice to confine your search to well-established trade areas because you generally do not want a project on the fringe. The overall goal is to identify markets and trade areas where there is more demand than quality supply, and then work to find a creative and cost-effective way to deliver that supply.
Once you identify those areas, familiarize yourself with the contours of the market and look at sites and projects that may be good candidates for a reboot. Evaluate potential sites through the prism of retail real estate fundamentals: access, visibility, etc. Promising locations should subsequently receive more detailed scrutiny, drilling down to determine if the numbers make
Depending on the issue that may be holding a site or center back from reaching its potential, it may be necessary to move forward with either a complete scrape or a major repurposing. Oftentimes that involves a significant capital outlay and redevelopment plan. The problems are usually more than skin deep, and an aesthetic refresh, while helpful, is unlikely to make a transformative impact on its own.
Be aware that you may need to tear a building down to increase visibility, increase the number of entrance/egress points, or engage in some other significant reconfiguring. Be creative. Breaking one large building into two structures, for example, adds two additional end caps, and potentially provides outdoor/patio space that may add to the pedestrian flow and contribute to an activated street front. A fresh set of objective eyes is often all it takes.
One example from our own recent experience is the Tomball Four Corners Shopping Center retail center in Tomball, Texas, a suburb of Houston. When we acquired the project it was only 30 percent occupied and was owned by a special servicer that had foreclosed and was unwilling to put any capital into it.
Adding a median break, additional curb cuts and tearing down a portion of the center to improve access and promote traffic circulation through the site has worked wonders. Those improvements, along with a refresh of the buildings and a disciplined approach to selecting the right tenants, have pushed the property to 95 percent occupancy.
Another recent Texas project was the 100,000-square-foot Federal East Plaza in Houston. The Class B property was located in a high-traffic area but struggled with an antiquated site plan. It was revitalized through a redevelopment plan that included renovating the façade, demolishing a portion of a building in front to enhance visibility to the back of the site and adding parking. This led to landing a national retailer, which increased occupancy and will increase foot traffic in the center.
While aesthetics and architectural updates are secondary to re-tenanting and reconfiguring, visual appeal is an important piece of the overall revitalization puzzle. It is worth taking the time to ensure architectural integrity and avoid shortcuts. Don’t skimp on funding because it literally pays to do it right the first time. Short-term cost concerns are far less important than long-term appeal. Be prepared to pore over renderings and take as long as necessary to get it right. The right combination of an appealing tenant mix can have a transformative impact not just on the project, but also on the surrounding community.
Getting the tenant mix right is arguably the single most important step in a successful retail turnaround. One of the challenges is accommodating and working around owners who may be more concerned about their prospects for short-term cash flow. This stance can prompt owners to sign less-than-optimal tenants who are not nearly as appealing to consumers or national/regional brands considering the space.
Be strategic and analytical in such circumstances. If an undesirable tenant is on a month-to-month lease, it is obviously easier to resolve the issue, but a long-term lease can be a potential problem. A lot also depends on visibility and where tenants are located in the center. If those questionable tenants are positioned toward the back of the site or center, it is much less of a concern than if they are taking up a prominent, high-visibility site in the front of the project.
So how do you make that tenant mix happen? When a large part of a successful turnaround depends on curating the right tenant mix for the project and for the market — including a successful appeal to national and regional tenants that might not have previously considered the property¬ — knowing what/who you need and how to appeal to them is critical.
It begins with having a sophisticated understanding of what uses are and are not currently well represented in your trade area. Consider if, where and how your site out-positions other retail options and leverage those advantages. This overall approach is designed to appeal to retailers that focus more on location quality and are less rent sensitive. If you have a brokerage resource in-house, or a trusted broker partner, that is a great way to get a detailed tenant-driven perspective about priorities, preferences and sensitivities.
Finally, consider sacrificing somewhat on the financials to get that first big name in there. A national brand can not only help attract other big names, but makes local and less credit-worthy tenants more willing to fill out trickier and less desirable spaces.
— By Neal Wade, development partner, and Lunden McGill, broker, with Baker Katz.