Retail Redevelopment

Got Vacant Space? Think Inside the Box

The good news about tough economic times is that they breed ingenuity. Leasing specialists in retail and other property sectors need to think “inside the box” –- the vacant big box, the empty warehouse, or the small office building abandoned by the busted start-up firm. By thinking short-term instead of long-term lease, entertainment instead of shopping, farmers market instead of vacant lot, that space –- particularly in well located areas –- may be suited to new opportunities.

Backfilling Space

Landlords faced with grim prospects for finding large, long-term tenants should consider the development of new, creative uses for space including pop-up retail venues, theme parks, entertainment centers, children’s play areas, and other “people-intensive” activities, some of which may require only a short-term lease or permit.

Pop-up retail is a trend catching on across the country because it helps anxious landlords fill spaces that have sat empty for months. It also provides retailers with a way to create a store with little overhead. These transactions usually have simple leases and do not include profit sharing. Halloween stores, which generally lease space from August to November, are the most common type of pop-up retail establishments, often taking over mall spaces left empty by electronics, furniture, and other large retailers.

Last year, Spirit Halloween Stores, one of the largest pop-up retailers in the country, operated more than 900 U.S. locations, according to Acon Investments, which owns the brand as part of Spencer Gifts. Many of them transformed into ToyZam! Stores, another Acon brand, and remained open through the holiday season. Spirit Halloween locates stores “in power centers, strip centers, free-standing stores, major downtown retail locations and in major malls surrounded by a national retailer mix, such as big box discount department stores and electronics stores … in communities with a population of approximately 50,000+ in a 3- to 5-mile radius with a car count of at least 25,000 cars per day. Good visibility from the major traffic road is a must,” according to the company’s Web site.

Traditional retailers also are trying out pop-up retail for a variety of reasons, such as testing new markets without a major commitment or taking advantage of vacant spaces they could not otherwise afford. Toys’R’Us, for example, opened 600 Express pop-up stores and 10 FAO Schwarz pop-ups during the 2010 holiday season, according to RetailingToday.com. The pop-up trend offers advantages to many types of retailers, as well as landlords, according to RetailingToday.com columnist David Berliner: “For example, an online business that has clearance items or inventory that it does not want could open a physical pop-up store to sell these goods. If landlords adopt and execute such a strategy, it should help them bring a new level of excitement to their properties.”

Family entertainment or themed attractions are another idea for large, vacant retail buildings. Typically, these tenants look for safe, high-quality environments, often in regional malls. Merlin Entertainments Group operates 63 themed attractions in 14 countries, including SEA Life Centre Aquariums, Legoland Discovery Centers, and Madame Tussaud’s. Similarly, family entertainment centers such as X-Scape are backfilling anchor stores in regional and strip malls. X-Scape provides indoor entertainment, a restaurant and sports bar, a ride and game area featuring amusement style rides, go-karts, mini bowling, laser tag, bumper cars, mini golf, and arcade games. Children’s museums, gyms, or indoor play spaces are also popular tenants.

Signage Opps

Despite some zoning obstacles, signage remains a viable alternative to make money in real estate, especially in prime advertising locations. While some cities have taken steps to ban off-site advertising, others are increasingly turning to signage development agreements as a way to supplement existing revenue during very difficult financial times. These agreements give property owners the right to erect and maintain off-site signage for a set period of time in exchange for a share of revenue. Depending on the location of the signage, one development agreement can mean hundreds of thousands of dollars for a city over the life of the agreement, and millions of dollars for the property owner. In negotiating development agreements, billboard companies and property owners often have more success when they capitalize on creative billboards that enhance the urban streetscape or use “green” signs, especially when there are digital components to the sign.

If outdoor signage isn’t possible, property owners can go indoors. Zoning codes rarely, if ever, regulate signage not visible from the public right-of-way. Signage on elevators, parking structures, urinals, and interior walls can produce significant revenue and add a fresh “hip” feel to unused space in a building.

Undeveloped Land

For vacant land, creative land use options vary, including farmers markets, urban gardens, and parking and vehicle storage. A great example is the development of bicycle storage and repair centers popping up near bus and train stops. Mobis Transportation Alternatives, for example, has opened Bikestations, bike storage facilities near public transit facilities in a number of cities. They offer secure bicycle parking, repair services, and showers for cyclists heading to work.

Entitlement Issues

Obtaining the proper permits for creative land uses can be tricky. Even if it is assumed that only a simple tenant improvement permit would be required for the new use, alterations or improvements to buildings may trigger a review of the building’s conformance with all current building, fire, plumbing, and electrical codes. Changing a retail space to a amusement park-like use could also trigger environmental review. The local government may consider these uses more intense, or worry that the project will create additional traffic impacts or demands upon public services, triggering environmental or other discretionary review. If the temporary use is subject to zoning restrictions (for example a farmer’s market or a swap meet), a lengthy governmental review and approval process is typically required. Additionally, creative uses can meet with community resistance, especially if vocal neighbors make their opposition known to the local officials.

If a proposed use will require a substantial investment, it is important to consult with a land use attorney, the appropriate local government office, and the surrounding community to avoid problems.

Ellen M. Berkowitz is a partner at law firm Manatt, Phelps & Phillips, LLP, which represents clients in the development of residential, mixed-use, industrial, and commercial projects.

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