ICSC Roundup: Developer Talks Construction Costs, Store Closures, Role of Mixed-Use
LAS VEGAS — Besides rampant store closures, one of the biggest challenges retail developers currently face is high construction costs. An ongoing labor shortage, higher prices on certain materials that have been tariffed, and the general impact of inflation have all driven costs of new development to historically high levels.
That said, developers that play the long game and have the vision and resources to execute multiple uses are up for the challenge. Structured Development, a Chicago-based real estate firm that builds a variety of project types, but tends to specialize in retail and mixed-use, is an example of such a company.
Jeff Berta, the company’s senior director of real estate, met with REBusinessOnline at this year’s ICSC RECon show in Las Vegas to discuss current trends within the retail sector and the challenges of executing mixed-use developments.
Berta has held a number of positions in the real estate development, construction management and architecture fields. What follows is an edited transcript of the conversation.
REBusinessOnline.com: Construction costs are very high right now and are making projects more difficult to pencil out. What’s the real story behind these rising costs as it pertains to developing a mixed-use project?
Jeff Berta: There are a couple different dynamics in the marketplace. For starters, there had been a long stretch of lower costs because of the way the market was in the immediate post-recession years. However, over the last three to five years, construction has been ramping up. At the same time, there’s a labor shortage within the industry.
When you have those two things happening, you have less competition and more specified subcontractors. Those subs are the better ones because they haven’t gone away, but there are fewer of them. Inevitably, you end up with higher construction costs and that’s what we’re seeing right now. You balance that against the return and the rent you’re charging. Lenders look at that what their risk tolerance is relative to the construction. But we believe it’s doable.
REBO: Mixed-use projects are growing in popularity in the development world because they often create vibrant, social destinations wherein the uses can support one another. What are some of the biggest challenges associated with developing mixed-use projects?
Berta: One challenge is dealing with the municipality itself, which is a governmental agency. You have to get its approval on your construction permit and approval on the project. You may need a planned development approval.
The other part of the political side is you have a community that lives around you. They may not always want development to happen even though it may already be approved. They may not be supportive. You may have to go to great lengths to ensure you are connecting with the community at the right time to understand what their needs are or to educate them on your vision for the development.
REBO: As a developer, is it part of your job to be able to look at a neighborhood and visualize what it will look like in five to 10 years?
Berta: Without question, part of being a developer is having vision. One of the things we say in the office is that if this job was easy, everybody would be doing it. It’s not easy. It’s referred to as an old man’s profession, and it takes a lot of time and patience. Vision comes with understanding the neighborhoods and knowing what needs and wants to be there.
REBO: You originally wanted to be an architect. What changed your mind?
Berta: As I got into the working world, I started to realize my interests went beyond just being the designer. I evolved my career path in corporate real estate and now into development. It’s largely because I have the experience in the construction and architectural world and now in the business and political side to bring all of this together, which is what developers need.
The vast majority of architects who stay in architecture do so because they love design. Our company hires architectural and construction services out because we’re a small outfit. What we’re able to do is go find the right architect or contractor for the project. We customize each team to fit the project. We’ll give them a program and vision and it’s their responsibility to bring that to reality. Architects who find their way into the corporate real estate world or the development world do so probably because they’re more focused on the business side.
REBO: About 75 percent of your firm’s project portfolio involves some combination of retail and mixed-use, and this conference is set against the backdrop of retail store closures. What ails the retail sector right now and how does the industry remedy the situation?
Berta: It’s not the end. You’re always going to have people that will go buy products and go to stores. Retail includes gasoline, eating and going to see a movie. It also includes going to see, feel and touch something.
One of the challenges that we face as a society is how e-commerce has come along into the retail sector. It’s really interesting to watch. It’s absolutely not the death of retail. It is evolving and has to evolve, but it’s not the death.
You see a lot of vacancy. One of the structural things is that the vacancy has to get replaced. Maybe it’s replaced with entertainment or office or residential. Residential is going into traditional malls, some of which are going to be torn down and replaced.
REBO: So the highest and best use may no longer be traditional retail?
Berta: It’s a matter of what is the highest and best use now. E-commerce is not necessarily the reason stores are closing now. A lot are closing because they just haven’t kept up. They’ve been exposed.
It’s a different world today in how people look at making purchases and how they live. Millennials are spending less on stuff and more on experiences. It’s not just about retail; it’s how we as a society are living our lives. We still believe in retail, but it needs to be mixed-use and have an experiential component.
REBO: Our readers in the Midwest know about one of your bigger projects, The Shops at Big Deahl, a 500,000-square-foot mixed-use development in Chicago’s Lincoln Park area. Can you bring our readers up to speed on where that project currently stands?
Berta: We are securing financing right now. We bring the equity, manage the design and construction, and deliver the property. We’ll own the property and be the landlord, effectively.
We’ve selected rock-climbing gym Planet Granite, a company we’ve courted for some time, as one of our entertainment tenants. It fits well within the demographics of the area. The company just merged with Earth Treks, which is a much larger company. We’re hoping to get that project started here soon in fall 2019; it’s a 45,000-square-foot standalone climbing facility. It will be the first phase of the project. If all goes according to plan, the entire project will come to fruition by 2020.
REBO: Another cool project of yours is the recent completion of District Brew Yards, the conversion of a former photography studio in Chicago into a brewery collective showcasing three different breweries. What was the inspiration behind this project?
Berta: That’s a small project, but we’re really excited about it. We worked with Burnt City Brewing, which was a tenant of ours. The concept is a shared brewery with three brewers. We have 21 different taps. The idea is for small brewers that are able to move from that home brewery into a more full-time brewery.
District Brew Yards is exciting because of the environment it gives for not only beer drinkers, but we also offer food and games for that experience. It’s accessible on the Chicago Transit Authority’s Green Line at the Ashland stop. A brewery district is starting to form in that area.
REBO: What is the difference between a brewery, a brew pub and a taproom?
Berta: A pub is what we’re all used to, a bar where you can get food or watch TV. A brewery is an industrial complex of actual brewing capacity with kettles. A taproom is a place where the public can come and consume what’s brewed onsite.
District Brew Yards is a collection of the brewery, taproom and pub all in one. It’s 18,000 square feet. When you walk in the door, you see the kettles behind a glass door. There are coolers where you can buy a four-pack or a six-pack. You can self-tap a beer.
— Matt Valley, Kristin Hiller and Taylor Williams