Unlike fine wine, retail properties don’t necessarily get better with age. In order for a shopping center to remain attractive and inviting, it periodically needs to be renovated or even repositioned.
Since 2010, the U.S. shopping center industry has completed an average of 198 renovation projects annually, according to JLL in a research report released early this year titled “Remaking Retail: A Tricky Proposition.”
Seventy percent of shopping centers renovated after 1999 were originally built between 1960 and 1989. Centers built during the 1980s have been the most popular targets for remodeling almost every year since 2003.
So-called “meat and potatoes” retail real estate underwent the most renovation work from 1999 through 2015, according to JLL. Eighty-six percent of shopping center renovations during that period took place at neighborhood, strip and community centers.
In order for a redevelopment, an even bigger undertaking, to be worth the effort, an owner would expect the project to add 200 basis points to a center’s capitalization rate as a general rule of thumb, JLL points out.
What follows are two case studies of shopping center makeovers, one in Kansas City, Mo., and the other in West Des Moines, Iowa, that illustrate the challenges and opportunities owners of aging centers face today.
Red Bridge Shopping Center Reconnects With Community
To Owen and Brandon Buckley of Lane4 Property Group, the owner of Red Bridge Shopping Center in south Kansas City, Mo., the $8 million facelift the property is undergoing is much more than simply a renovation of a neighborhood center that had long suffered from deferred maintenance and high vacancies.
“We believe that bringing this center back to life will have a profound impact on the surrounding neighborhood, which is lacking in retail and restaurants,” says Brandon, vice president of the locally based, full-service commercial real estate firm and Owen’s son. “From the beginning, there has been a lot of cooperation between local government and the neighbors that has allowed us to accomplish a lot.”
There is plenty of nostalgia tied to Red Bridge Shopping Center from the people who grew up in that neighborhood. “While it is common to have opposition from the public with development projects, we were met with open arms and received a lot of support,” says Brandon.
Red Bridge Shopping Center, which spans nearly 150,000 square feet, and the surrounding neighborhoods were developed by the legendary J.C. Nichols Co. in the late 1950s. Jesse Clyde Nichols built Country Club Plaza, which opened in 1923 in Kansas City, Mo., and today is a vibrant retail, dining, entertainment and office destination four miles south of downtown.
J.C. Nichols is known for developing master-planned communities with quaint retail centers tucked into the middle of suburban-style neighborhoods, explains Brandon who has a clear vision for the evolution of Red Bridge Shopping Center.
“We plan to attract a mix of strong local and regional tenants who have proven to be good operators, namely restaurateurs who can attract customers outside of the typical three- to five-mile radius.”
The average household income within three miles of Red Bridge is $91,844, or $14,836 above the national average, according to Esri. In addition, there has been a wave of office development within a five-minute drive of Red Bridge that is attracting corporate tenants.
The office wave includes a $4.45 billion project for Cerner Corp., a healthcare information company, which is expected to create 16,000 new jobs over the next 10 years at its Cerner Trails campus. The first two towers for the planned 4.7 million-square-foot development will open in early 2017.
The renovation of Red Bridge will feature an updated façade with coastal-inspired architecture, new roofs and parking lots, plus fresh landscaping. Centric Projects is the general contractor and Generator Studio is the architect.
Lane4 owns four buildings on the shopping center site — located at the intersection of Holmes Road and Red Bridge Road — one of which is occupied by anchor tenant Lipari’s Sun Fresh Market. The grocer takes up 35,026 square feet.
The other three structures include a 75,000-square-foot building for small shop space, a former bowling alley that is being partially converted to Euston Hardware and a La Petite Academy daycare. However, Lane4 does not own several outparcels located along Holmes Road.
Restaurants, complete with distinct architectural touches, will be a key part of the tenant mix in order to breathe new life into Red Bridge. “We are adding large brick patios with cedar pergolas and large tower elements into a couple of the corner spaces that we have pegged for restaurant use. It is important to create a unique atmosphere to differentiate our center and bring back the feel of a charming neighborhood-gathering place,” emphasizes Brandon.
Years of neglect
When Lane4 acquired Red Bridge Shopping Center in November 2015, the property was 55 percent vacant. “A major factor for the lack of tenants was due to the required capital for new roofs, electrical systems, the parking lot and aesthetics of the façade,” says Brandon.
Lane4 received commitments or signed leases for about one-third of the vacant space prior to the start of the renovation, which began in May and is expected to be complete by the end of October. Euston Hardware, a former longtime tenant now returning and Sofi Cucina Italiana Restaurant will be the first wave of new tenants to move in. In addition, Blue Bicycle Fitness Center, which is already a tenant in the center, is remodeling and doubling its space to 120,000 square feet.
Euston Hardware is a locally owned company that will have four locations once the store opens at Red Bridge. The hardware store originally occupied the center from 1985 to 1997, but moved out as the center began to show signs of disrepair.
“Several Euston family members live nearby, so it shows the confidence they have in the area to make a large investment and long-term commitment to open a new location at Red Bridge,” says Brandon.
“Now that construction is underway, we are starting to see a lot of interest in the center from a variety of new concepts, and expect to have another round of new tenant announcements soon.”
For now, Lane4 plans to stick with many of the existing tenants who are largely locally owned, small-shop
retailers. “The tenant mix is inevitably going to change over time as the center strengthens in tandem with the surrounding neighborhood,” says Brandon.
Two towers to be constructed at the northeast and southeast corner of the main square building are the most dramatic and distinctive of the features being added to the existing center. The towers are reminiscent of a Cape Cod look, even though Kansas City is more than 1,000 miles from either coast.
“We didn’t intend to go with that style from the beginning, but that is what it evolved into as we explored design options for the remodel, particularly the tower elements,” says Owen, president of Lane4 Property Group.
“The towers create value from both the exterior and interior of our corner restaurant spaces. They will definitely aid in the visibility of the center, but will also be dramatic from the inside by bringing natural light and 25-foot ceilings into the key restaurant spaces,” adds Owen. “It was important to keep a classic look that would remain attractive for the foreseeable future.”
Another unique architectural detail at Red Bridge is the overhanging canopy with old-fashioned tongue-and-groove boarding, along with the rafter tails along the bottom of the sloped roof. The canopy is a charming alternative to the boxy look common in new construction, says Owen.
“This feature also works well with the patio spaces that benefit by protection from the weather,” he says. “We did not want to change this feature because we thought it would change the historical feel that we were trying to bring back to the center.”
Prescription for success
The importance of attention to detail can’t be overstated when it comes to identifying and executing a turnaround plan for a shopping center, says Owen. The process begins by selecting properties at “Main and Main” type locations in strong neighborhoods with quality schools.
Public safety and security should be the top priority of a shopping center owner followed by the property’s overall appearance. “A clean, orderly and bright center goes a really long way,” emphasizes Owen.
Another area that Lane4 places a high priority on is hands-on communication and cooperation with tenants to maximize sales, even if it means Lane4 isn’t getting a piece of the upside.
“Lastly and very important, we want a center that makes you feel good about being your ‘go-to’ neighborhood center four to six times a week because of great tenants, convenience, safety, and an ambience that the neighbors are proud to have as part of their community,” says Owen.
This renovation project isn’t the first rodeo for Lane4 Group, which has successfully rehabilitated other retail centers developed by J.C. Nichols, including the 240,000-square-foot Corinth Square in Prairie Village, Kan.
The turnaround of Red Bridge Shopping Center is a public/private partnership between Lane4 and the City of Kansas in Missouri. “In working with cities we have realized that it is important to set expectations that we know we can deliver upon,” emphasizes Owen. ”Reputation is everything in this business.”
According to The Kansas City Star, the developers obtained a 10-year, 100 percent property tax abatement, which keeps taxes at their current level and agreed to a $30,000-a-year payment in lieu of taxes. In years 11 through 19, the plan abates property taxes by 50 percent.
“There are always challenges that are unique when dealing with old buildings, so that is where a lot of the risk comes in,” says Owen. “This project is special in the sense that it is probably the biggest turnaround we have attempted to date, but we feel strongly that it fits the criteria of a worthy endeavor based on the fundamentals that support this location.”
Although it’s too soon to know whether the remodeling project has paid off, if past projects are any indication Lane4 Group will see a significant uptick in interest among retailers and restaurants looking to expand or enter the market.
“Due to the particularly poor condition of the property upon acquisition, it has been difficult for many tenants to envision such a dramatic transformation,” says Owen. “That is quickly starting to change as the remodel takes shape.”
Clocktower Square Reinvents Itself Over Time
When Baceline Investments acquired Clocktower Square in West Des Moines in 2013, the 142,000-square-foot property was showing signs of distress. One of the anchor tenants, OfficeMax, was in the process of vacating 28,000 square feet, leaving the retail center nearly half vacant. Originally built in 1983, the property was looking tired and needed a facelift.
The solution was twofold: launch a nearly $5 million renovation and repositioning project that included parking lot leveling, a new façade, landscaping and lighting; and attract a variety of engaging national and local retailers to help increase foot traffic and re-energize the center.
“Clocktower is definitely a repositioning where we really look to have a big impact by spending a lot of money on a renovation and strategic leasing, and by attracting the right tenants to turn around the whole project for not only the existing tenants, but also for the community as a whole,” says Mike Lotte, director of leasing at Denver-based Baceline.
Clocktower’s drawing card
Baceline was not new to the Des Moines market when it acquired Clocktower Square. It already owned two neighborhood shopping centers in the area: Bridgewood Plaza near Jordan Creek Town Center in West Des Moines and Stoney Point Plaza in Southeast Des Moines.
“They are two distinct markets,” explains Lotte. “Southeast Des Moines is much more blue collar, middle income. Bridgewood Plaza is located across from Jordan Creek Mall, which is clearly the ‘Main and Main’ for malls when it comes to all of Iowa.”
What attracted Baceline to Clocktower Square is that it is situated in the University Avenue corridor, which is known for its high retail occupancy.
The corridor also boasts a strong daytime population, second only to downtown, according to Lotte. There are over 1,000 businesses within a mile of the Clocktower Square and 82,833 employees within three miles. In addition, 20,000 vehicles per day travel along University Avenue.
The population base is also affluent. The average household income within a three-mile radius is $88,118, well above the national average.
Another compelling factor was that TJ Maxx, an anchor at Clocktower Square, had just invested a considerable sum of money in remodeling its 30,000-square-foot store and facade at the retail center. TJ Maxx had also signed a new long-term lease to remain at the center.
Drawing on its relationships with tenant-rep brokers nationally, Baceline was able to land Fresh Thyme Farmers Market to fill the 28,000-square-foot space vacated by OfficeMax when it merged with Office Depot.
The organic specialty grocer, which competes with the likes of Whole Foods Market, Trader Joe’s and The Fresh Market, picked Clocktower Square to open its first store in Iowa after doing its homework.
“What you get in the University Avenue corridor, as opposed to Jordan Creek Mall, is that you are a little bit more centrally located,” explains Lotte. “So, you are reachable by the vast majority of people in the Des Moines area, and not so isolated out in the southwest corner by Jordan Creek Mall.”
The Fresh Thyme store at Clocktower Square opened in March and is exceeding expectations, according to Lotte, though he didn’t offer any further details.
Two other new tenants are building out their spaces. Phenix Salon Suites, which has about 75 locations across the country, will occupy 5,120 square feet. Trend Transformations, a high-end kitchen and bath showroom, will occupy 2,024 square feet.
Meanwhile, Waterfront Seafood Market, which occupies 8,430 square feet, recently expanded by adding a banquet room and sushi bar.
Baceline has completed 35,000 square feet of new leasing deals at Clocktower Square since acquiring the property, but approximately 40,000 square feet of the center remains unoccupied.
The company is seeking health-oriented tenants to complement Fresh Thyme and would also like to attract more locally based boutique fashion tenants to complement TJ Maxx. A flyer promoting the property shows 15 tenants currently occupy the center with room for at least eight other small shop tenants.
“You can characterize the demographics and psychographics around this center as frugal, but with good average household incomes,” explains Lotte. “Hence, that’s why a company like TJ Maxx does well and why a Fresh Thyme does well. They still have very high-quality products but at a value kind of price point. We’re trying to build on that, and I think that’s really what that neighborhood is about. It isn’t the highest incomes in West Des Moines, but it’s smart incomes around there.”
The hold period for properties Baceline acquires is typically three to five years, but the exact timing depends on a variety of factors including whether a property is ready to sell and local market conditions.
Investors in secondary markets need to exercise patience to achieve the desired returns, advises Lotte, which for a repositioning like Clocktower Square is a leveraged internal rate of return in the mid-teens to low 20s.
“The velocity of leasing isn’t as great as in the primary cities. So, your investors need to be prepared for a little longer hold period than they might experience in the primary markets in the Midwest,” he says.
Baceline, which owns approximately 40 shopping centers around the country, has built up relationships with over 1,000 investors during the past 15 years. These investors range from high-net-worth individuals to family offices to institutional equity players, and many of them are repeat investors in acquisitions made by Baceline.
The company buys both stabilized and value-add properties. When it
acquires an asset for repositioning purposes, Baceline will typically use low leverage, say 50 percent, and then borrow additional money as necessary to complete the renovation and the cost of putting in new tenants, says Lotte.
The renovation and repositioning has paid off with rents at Clocktower Square now 10 to 20 percent higher than when Baceline acquired the center and higher than neighboring centers on University Avenue.
In order for a large repositioning like Clocktower Square to be successful, the site must have “inherently” strong real estate characteristics, says Lotte.
For larger projects, it’s important to have at least one anchor tenant.
Another key ingredient: attractive supply-demand fundamentals.
“For example, in the University Avenue corridor there is no new product being built. The existing supply is 95 percent leased, and there is demand within that market for repositioned retail space. The characteristics have to be all about attractive real estate for retailers,” emphasizes Lotte.
“At the end of the day, it’s all about how attractive can we make this for retailers because they are the ones who really have to have the success to make a successful shopping center,” he adds.
Follow the leader
An apartment complex located adjacent to Clocktower Square is undergoing a major renovation, according to Lotte, who describes the repositioning of Clocktower Square as a rising tide that has lifted all boats.
“So, we make a multimillion-dollar investment, then our neighbor makes a multimillion-dollar investment, and all of a sudden the whole community benefits.”
— Matt Valley