Retail Repositioning

Take a New Direction to Revitalize Struggling Shopping Centers.

Your suburban retail center's anchor just declared bankruptcy and plans to shutter all of its stores. Meanwhile, two of your credit tenants are considering relocating to the new regional mall, which offers better amenities and more flexible space. To make matters worse, your tenants' sales volumes have fallen consistently during the past year.

While the situation appears grim, it actually is an ideal time to reposition your retail center. Anchors leaving or tenants losing their desirability with customers “creates an opportunity to take a complete look at the real estate,” rather than just rethinking the leasing strategy, says Daniel Hughes, president of Metro Commercial Real Estate in Mt. Laurel, N.J., which provides tenant and landlord representation, property management, construction, and investment sales services for some of the nation's largest retailers.

Repositioning is “critical at a particular point in a retail center's life cycle to keep it competitive from a design and tenant mix point of view,” says Matthew K. Harding, president of Levin Management Corp. in North Plainfield, N.J., which maintains a portfolio of more than 80 retail properties on the East Coast. This is particularly true if newer properties surround the center, as retailers' space configuration needs have changed. “You need to work with the needs of today's retailers,” he says. For example, big boxes generally want their prototypical footprint with minimum frontage requirements, Harding says.

Yet the decision to reposition a retail center is not always clear-cut. It involves thorough analysis, beginning with a close examination of the property and trade area.

Determining a New Strategy

“If the center fits the market, keep it,” but if the market, demographics, or customer needs have changed since the property opened, it's time to reassess, says Richard Tucker, president of Tucker Development Corp. in Highland Park, Ill., which specializes in developing and redeveloping shopping centers. “Evaluate what your property means to the trade area — is it servicing the market?”

“The best time to reposition is when lease renewals don't happen,” says Christopher McGuire, president of Staubach Co.'s retail services division in Dallas. The exception is urban retail center owners who take the initiative to make their properties more upscale, he says.

Although all underperforming retail properties are candidates, centers in good locations with access and visibility benefit the most from repositioning, Harding says. McGuire suggests evaluating your current tenants when deciding whether or not to reposition your property. “If your tenants have declining sales volumes, be concerned,” he says. “That is the biggest trigger.”

But making the decision to reposition is only half the battle; you also must choose the property's new direction.

“The first thing to consider is the customer profile and what tenants will best fit those customers' needs,” Hughes says. For example, if a lot of young families have moved into the area, it makes sense to replace service-oriented tenants with big boxes and category killers such as Wal-Mart and Toys “R” Us. Conduct market studies and focus groups to determine if the demographics have changed, Tucker advises. “Are your customers who you think they are?”

Understanding the market is another critical part of the analysis. “You have to have the pulse of your market,” Tucker says. For instance, what properties surround your location? Is the market mainly commercial or residential? What retail trends are occurring? Is there pent-up demand for certain retail types?

Two decades ago department stores dominated the retail scene, but their status has fallen, Hughes says. Owners faced with large blocks of defunct department store space now turn to category killers to fill vacancies. Converting open-air strip centers to power centers also is popular because land is scarce in many communities. “Smart owners are relocating small tenants to come up with big blocks of space for category killers because they lease lots of space and keep traffic coming in,” he says.

Property owners often obtain municipal approval for their repositioning projects more quickly because they alleviate sprawl as well as help attract more consumers to the area, Hughes says. In getting approval, “It helps to show the [project's] benefit to the community,” Harding adds. Financing is another factor, including rehabilitation, relocation, and buyout costs versus potential rent increases, Hughes says.

The following case study emphasizes how repositioning helped revive a faltering retail center, increased the property owner's revenue stream, and benefited the community.

From Eyesore to Eye Candy

Spring Lane Galleria morphed from the worst-looking retail property in Sanford, N.C., into an award-winning power center by way of a strategic repositioning plan.

Severe vacancy and low investment returns prompted owner Kotis Properties to re-evaluate the 120,000-square-foot property, unofficially called the Ames Center, says William “Marty” Kotis III, CCIM, the company's president. Located on Sanford's west side, the center housed a vacant 60,000-sf Ames department store, a vacant 20,000-sf Big Star grocery store, a 7,500-sf restaurant, and a number of nearly vacant small shops.

The shopping center's location on three converging highways “makes it a convenient place for people to stop and shop on their way to and from work,” Kotis says. Although Sanford is considered a small town, the population within a 10-mile radius of the center exceeds 52,000 people, and the average household income is more than $52,000. “Most of the higher-end neighborhoods are on the west side of Sanford,” Kotis says. “The fact that the center is located on the affluent side of town is beneficial, because it has shoppers with more disposable income.”

In making the repositioning decision, Kotis considered several revitalization plans. The easiest involved lowering the rental rates to retenant the center. Performing a minor facelift or large-scale renovation within the original configuration were two more ideas. The most drastic plan was demolishing part of the center, renovating the storefronts, and reconfiguring the space to accommodate big-box stores.

Since turnaround prospects for the original configuration were limited, Kotis Properties tackled the complete repositioning plan. The company chose a power center because it “wanted more anchor tenants … there was too much small-shop space in the center, and the vacancy rate was high,” Kotis says. “The power center format gave us credit tenants occupying the majority of the space, less headache and risk associated with the small-shop space, and a very financeable center.”

The project began with the demolition of 45,000 sf in the middle of the center, which included the grocery store and small-shop space, to make room for a new 47,000-sf grocery store. A 5,000-sf space and three 1,200-sf spaces also were constructed. The former anchor location was divided into three stores of 23,500 sf, 9,000 sf, and 30,000 sf. All of the storefronts received a new brick façade with a covered walkway. The restaurant remained in business during the project, but it also received significant renovation.

The project encountered a unique financing challenge. Kotis used a permanent financing lender for part of the center and a local bank for the rest, but each needed separately subdivided collateral. “This required subdividing the property along the walls of adjoining space, or zero lot line subdivision,” Kotis says. Unfortunately, the local development ordinance required a certain distance between buildings and landscaping between subdivided plots, which forced the owner to petition the planning department and city council to amend the ordinance. “Based on our success in redeveloping the center, city officials were glad to help,” but they required a reciprocal easement agreement so the center would not act like a divided property, Kotis says. Subdividing and using the easement agreement worked so well that it is now Kotis Properties' standard practice.

Landscaping was an essential part of the repositioning plan: “While we drastically changed the appearance of the buildings, those buildings sit several hundred feet off the road,” Kotis says. “There was a sea of parking with just a strip of grass at the road. Without landscaping, the center would have looked odd.” At the time, Sanford didn't have a landscaping ordinance, so the owner designed the center based on the ordinance in Greensboro, N.C., where its office is located. “Our voluntary use of landscaping and the ability of the residents to see its importance paved the way for a new landscaping ordinance” in Sanford, which now requires trees near roads and in parking islands, Kotis says.

Retenanting efforts began during the renovation. Kotis prepared marketing materials featuring a rendering of the completed property and sent them to hundreds of retailers and brokers, showcased the project on a local television show, held open-house meetings, and placed large signs on the property.

Kotis targeted anchor tenants first. Since Sanford lacked a high-end grocery store, Lowes Foods moved into the 47,000-sf space. “This Lowes is not only high-end, but 8,000 sf to 10,000 sf larger than any other grocer in town,” Kotis says. Office Max and Pier 1 Imports took space in the former Ames location. “Office Max was a good fit because there was no large office supply store in Sanford,” he says. W.B. Joyce Restaurant occupies a 10,000-sf end-cap space, and smaller tenants include a veterinarian, a bank, Dollar Zone, Check 'n Go, and Great Clips. “Tenants were attracted [to the property] because of the strength of the neighborhood, competitive rents that took advantage of the existing building, and the proximity to the open-air mall,” Kotis says. Although 30,000 sf has yet to be redeveloped, occupancy of the completed portion is 95 percent.

“The community has thoroughly embraced the center,” Kotis says. “The neighbors feel this center is in keeping with the upscale image of the residential areas.” In fact, the center received the Lee County Best Appearance and Landscaping awards after it opened. Rents also jumped from $2 per square foot to more than $9 psf for anchor locations; small shop rents doubled from $6 psf to $12 psf. “The property went from a dog and eyesore to our top-performing center,” Kotis says.

Gretchen Pienta

William T. Adams, CCIM, CRB, is owner of Adams Realtors in Atlanta. Contact him at 404.688.1222 or Pienta is associate editor of Commercial Investment Real Estate.


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