As 2018 gets underway, retail real estate finds itself at an odd juncture.
According to CNN, more than 6,700 stores either closed or announced plans to close in 2017, leading many to consider last year to be the beginning of the end for brick-and-mortar shopping. Yet a new report from Tennessee-based retail advisory firm IHL Consulting Group notes that for every company that closed stores in 2017, there were nearly three companies opening new stores to offset it.
Whether you believe retail is dying or evolving, there’s no arguing that the inability of certain tenants — mainly apparel-based department stores — to compete with e-commerce has caused millions of square feet of retail real estate to be returned to the market.
Owners of these properties face the challenge of backfilling these spaces with tenants that aren’t likely to share the same fate — restaurants, gyms and entertainment concepts. But when it comes to backfilling a big box or anchor space with an entertainment concept, merging the existing space with the design requirements of the tenant can be a major headache for landlords.
With 58 million square feet of project designs under his belt, Randy Stone, associate principal at Dallas-based architecture firm Omniplan, knows that every entertainment project has different spatial requirements. The primary dilemma that both architects and developers face with these projects involves whether to scrape the existing structure or to revamp the structural grid in place.
“When you’re repurposing or backfilling a big box, you first have to determine whether to tear it down, take off the top floor, retrofit the existing structure or force the design of the entertainment component into the existing structure,” says Stone. “You have to do your due diligence and have testing labs come in and find out what the structural grid can support.”
Adding a ropes course to its lineup of activities generates additional revenue for Cinergy, but also requires minimum ceiling heights of 22 to 25 feet.
Stone adds that traditional big boxes don’t usually work for entertainment tenants, which have smaller overall footprints but want clear-span, open-environment layouts. As such, he says, many theaters and entertainment concepts must design smaller facilities in order to fit in marquee locations.
Tenant Perspective
Jeff Benson, founder and CEO of Cinergy Cinemas and Entertainment, is currently experiencing firsthand the difficulties of introducing his concept into vacated retail spaces.
Cinergy, which offer laser tag, ropes courses, bowling and arcade games in addition to movies, food and beverages, is in talks with three malls to bring the concept to their anchor spaces. Cinergy would remodel the existing space in two of those malls if the deals close.
“The challenges of bringing an entertainment concept into an existing retail space are immense,” says Benson. “Columns and ceiling heights are usually the big issues. Sometimes you can work with them and sometimes you can’t, so the location really has to have the demographics to justify the cost of remodeling the space.”
Cinergy currently operates centers in Copperas Cove, Midland and Odessa, with another location under construction in Amarillo. The company has also closed deals to open centers in El Paso and Tulsa, Oklahoma, over the next several years.
“Our Tulsa center is backfilling an old theater and ajacent retail space and installing bowling and amusement,” says Benson.
“This requires careful consideration of the column grid and spacing. Our new-build prototype facilities are about 90,000 square feet, so it’s a big floor plan to retrofit into an existing space. We’d rather just scrape the existing structure and build from scratch.”
Vacated anchor spaces at malls make good locations for entertainment concepts, says Venture Commercial’s Larry Leon, a specialist in tenant representation for restaurant and entertainment retailers.
“Entertainment concepts typically go into malls for parking and a climate-protected place for families to line up,” says Leon. “These concepts often draw from huge circles and space their units 15 to 20 miles apart.”
Developer Perspective
From entertainment giants like Main Event and Topgolf to niche operators like Glowzone and Kidzania, there’s no shortage of competitors in the entertainment retail space, and each concept is its own beast in terms of spacing and design.
“One of the biggest challenges of leasing for entertainment tenants is that they don’t have consistent requirements,” says Gar Herring, president and CEO of The MGHerring Group, a Dallas-based owner, developer and manager of retail properties. “You can do build-to-suit projects for these users, but some want to buy and some want a turnkey deal, so you really have to be flexible.”
Preliminary design challenges aside, retail owners that opt for entertainment anchors should also be prepared to subsidize capital improvements to those spaces.
“Most entertainment tenants today require heavy tenant improvement investment by the landlord in the $200 to $300 per square foot range,” says Venture Commercial’s Leon. “Owners have historically been reluctant to provide this level of improvement dollars, but recently, they’ve come to realize the importance of these tenants to the overall mix, as well as the necessity of filling their big box spaces with tenants that will draw lots of people.”
Because the requirements of entertainment users vary so much from concept to concept, they often struggle to provide blueprints and prototypes to developers that want to feature them as anchor tenants. In addition, evaluating these users on traditional retail metrics can be misleading because there’s little benchmark data for them. The lack of comparative data can also muddy the waters when it comes to financing construction of build-to-suit projects, as well as acquiring stabilized properties anchored by entertainment tenants.
“Cap rates on centers anchored by entertainment users are just not as well-known,” says Herring. “You might get more cross-shopping with an entertainment anchor, but some developers still see the grocery anchor as a safer bet because exit cap rates on those assets are very straightforward.”
Parking Wars
If there’s one issue that every source interviewed for this piece agreed on, it’s that parking is a major point of contention in the world of entertainment retail. Whether it’s a theater, bowling alley, arcade, mini theme park or some combination of those concepts, they all tend to use large blocks of parking spaces for long periods of time.
While freestanding locations have only city codes to adhere to, operators of entertainment centers in malls and shopping centers routinely spar with landlords and other retailers over parking. Parking represents a co-tenancy haggling point for entertainment tenants vying for old spaces and a key challenge for architects tasked with designing new spaces for these users.
But despite all these potential headaches for tenants and landlords alike, in this day and age, very little retail product is insulated from e-commerce. For the time being, entertainment is a rare exception, so it just may be worth all the headaches and hassle.
— Taylor Williams
This article originally appeared in the January 2018 issues of Shopping Center Business and Texas Real Estate Business.