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 a public perception of vibrancy — the ultimate success of almost every retail redevelopment project hinges on the tenancy.
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 important, particularly when an anchor space has been vacated or sold back to the owner.
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.
In this sense, retail in 2019 is about so much more than location, traffic counts and demographics within a certain radius. And for their part, tenants in today’s market are also highly attuned to much more than just these traditional metrics, says Ben Brown, a tenant rep specialist at Houston-based Baker Katz.
“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,” says Brown. “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.”
Last winter, Baker Katz purchased the 850,000-square-foot PlazAmericas Mall in Houston, an enclosed shopping and dining destination that was built in 1961. As the property has already been renovated several times over the years, the company is focusing on improving the tenant roster and boosting occupancy, which was at about 70 percent at the time of acquisition.
Fidelis Realty Partners, which recently broke ground on the redevelopment of the 1.1 million-square-foot San Jacinto Mall in nearby Baytown, uses an acronym to identify key focal points beyond the actual shop space. That term is “VAPS,” which stands for visibility, access, parking and signage.
“In redevelopment scenarios, you typically have a mall or center that has been declining for many years,” says R. Carson Wilson IV, vice president of leasing at Fidelis. “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 every retail redevelopment project carries risk, perhaps even more so in the age of e-commerce. In financing these deals, lenders of course 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, visual aids and proof of positive leasing activity can also go a long way.
“When presenting a redevelopment project, it’s important to communicate that you understand all the potential moving pieces,” says Ash Thakore, investor reporting associate at Houston-based Williamsburg Enterprises. “If lenders don’t understand or follow your vision, they will be unwilling to lend on the project. Renderings and proof of interest, such as letters of intent or signed leases, add a level of assurance that the project will be successful.”
Williamsburg recently completed the redevelopment of North Cypress Landing, a 70,000-square-foot center in metro Houston that was originally built to house a Randall’s grocery store. Williamsburg executed leases with Star Mattress & Furniture and Landmark Industries within four months of starting the project, bringing the property to full occupancy in the process.
Construction Challenges
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 before ground breaks can make for a much smoother transition, says Weldon Simons, COO of Weitzman.
“With any redevelopment, you have to work beforehand with existing tenants to get them on board with the project,” says Simons. “In many cases, your challenge is to show tenants how the center will be improved and how it can help them reach their target customers.”
Neal Wade, a Baker Katz associate who specializes in retail acquisitions and development, notes that construction of existing properties can create significant logistical challenges for tenants as well.
“A big challenge with redevelopment projects is keeping tenants open and getting customers in and out of the center safely while construction is ongoing,” says Wade. “You want to minimize disruptions to tenants, but sometimes you have to cut utilities or redirect traffic through a plywood tunnel to protect shoppers from debris. At the same time, you have to keep signage up so customers will know the center is still open for business. It’s definitely a short-term pain for tenants.”
Wade says that landlords will sometimes abate or discount rents during construction months 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.
Simons adds that 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.
Weitzman is leading more than a dozen redevelopment projects throughout the metroplex. These include the 120,000-square-foot Irving Towne Center, the 330,000-square-foot Grapevine Towne Center and the 157,000-square-foor Fielder Plaza in Arlington.
Construction teams can run into other problems that are simply a factor of the property’s age, says Jason Ford, president and COO of Williamsburg.
“In our experience, some of the biggest challenges for redevelopment are related to the lack of and inaccuracy of existing building plans,” he says. “Older properties may have been modified multiple times over the years for various tenants, and without accurate records of previous changes, unforeseen issues are bound to arise.”
Leasing Complications
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
Seritage Growth Properties is underway on a redevelopment project at the site of the former Valley View Mall in Dallas. The new property, Park Heritage, will be a mixed-use development with office, multifamily, hospitality, retail and restaurant uses.
“Another challenge with redevelopment projects centers on varying lease expirations,” says Ford. “This can result in owners having to buy out tenants, operate with varied tenant mixes during the phased redevelopment or wait for leases to expire before starting 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. In the core retail markets of major Texas cities, where vacancy rates are below 10 percent, this can be even more challenging. But it’s the key to adding value to the project, sources concur.
Preleasing, in particular, can go a long way in helping retail landlords obtain favorable terms on any construction loans needed to finance a project. 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.
A Team Effort
Retail redevelopment projects can run the gamut in terms of their size and scope, but the element of teamwork underlies all of them. Effective communication and collaboration between the many different parties involved in a project is critical to managing timelines and budgets.
“Working with great architects and general contractors who have experience with similar projects is the biggest key to overcoming the challenges of redevelopment,” says Simons of Weitzman. “Redevelopment projects present different obstacles than ground-up construction, and it takes a talented team of designers, contractors and in-house staff to make a vision a reality.”
To that end, developers and landlords must be able to clearly articulate their vision for a redevelopment project to all necessary parties, including municipalities, which are often heavily involved in redevelopment projects. They must also be able to tailor their language to the specific area of expertise of each company involved and keep the needs of current and prospective tenants at the top of their minds.
“Perhaps the most important factor to consider in a redevelopment is whether you have the right team in place to execute the plan,” says Thakore of Williamsburg. “Architects, engineers, leasing agents, lenders, property managers — these are all key roles, and one weak link can cause the project to experience significant delays or cost overruns that will quickly eat into projected profits.”
— By Taylor Williams. This article first appeared in the August 2019 issue of Texas Real Estate Business magazine.