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Time for a Makeover: Retail
Investors/Developers Pursue Redevelopment Over New
Construction
Obsolescence of Older Shopping
Centers Seen as Big Factor in Decrease of Retail
Property Deliveries Forecast for 2008
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| Simon Property
Group is redeveloping the 857,000-square-foot
Coddington Mall in Santa Barbara, CA into an
open-air, high-end retail destination with
grocery, theater, specialty tenants,
restaurants, and a possible residential
component. |
One of the biggest industry trends identified at this
year's International Council of Shopping Centers (ICSC)
Spring Conference in Las Vegas is the increasing
prevalence of "re-do's" among retail developers. More
and more developers and shopping center owners are
choosing to redevelop existing properties as opposed to
buying sites and building new. CoStar interviewed retail
industry leaders and queried its data-rich CoStar COMPS
and CoStar Property Professional modules to uncover some
of the factors driving this trend.
A CoStar COMPS query of shopping centers
50,000-square-feet or larger that have changed hands
since 2000 reveals that the average
price-per-square-foot of a shopping center sale
increased 78% over that seven-year period. Average
capitalization rates on such transactions compressed
from 10% to 7% over that same period, but have remained
relatively unchanged over the past year. Nationwide
commercial land sales of one or more acres since 2000
reveals that both median price-per-acre and the period
of time it takes to close on land have increased
significantly this decade.
When buyers make acquisition decisions, they
increasingly appear to be evaluating property from a
redevelopment perspective, as opposed to selecting Class
A property that can passively benefit from rent
increases year-over-year. In addition, the rising cost
and scarcity of attractive, vacant land may be making
redevelopment more attractive financially compared with
greenfield development. For these reasons, it appears
increasingly likely that investor/developers will pursue
redevelopment opportunities, reversing a trend seen over
the five-year period of 2002 to 2006 when a third-less
shopping centers were renovated than compared to the
previous five-year period of 1997 to 2001.
In a recent interview, Bernard Haddigan, managing
director of Marcus & Millichap's National Retail Group,
identified obsolescence of older shopping centers as a
big factor in why his company forecasts a decrease in
retail property deliveries in 2008. "There is a lot of
aging retail out there, some is lower density, or it may
not be the optimal use of the property. We're seeing a
lot of capital going into tear-downs and
redevelopments," Haddigan said. "For our buyers, we
always evaluate the property's highest and best use, and
especially in infill deals, we're seeing these
properties considered from a redevelopment perspective."
Marcus & Millichap's presentation further showed that
less deliveries will translate into vacancy rates
refraining from increasingly too severely; a factor
supporting a landlord's decision to focus on improving
its current property holdings as opposed to building
new. [To read the entire story on Marcus & Millichap's
presentation,
click here.]
To identify a leading company harvesting added value out
of redevelopments, one need look no further than
Indianapolis-based Simon Property Group, the country's
largest retail property owner. Its current development
portfolio includes more than 38-million square feet in
38 retail centers undergoing redevelopment, expansion or
renovation and 6.6-million square feet in 12 new retail
developments. At a recent investor conference, Simon's
CEO, David Simon, told listeners that the company has
its "largest redevelopment pipeline in the history of
the company," and that it has about $5 billion in the
pipeline over the next five years that is actively being
worked on.
Those levels did not include the 45-million-square-foot
Mills portfolio Simon acquired just before the
conference was held, which it expects will produce
additional expansion / redevelopment opportunities.
The redevelopment dynamic at Simon is underscored by two
of the country's other largest retail property owners,
General Growth Properties (GGP) and Developers
Diversified Realty (DDR). GGP has recently completed
redevelopment or renovation at seven properties, and has
another twenty of those projects in its pipeline; it has
only ten projects in its direct development pipeline.
DDR is in the process of expansion / redevelopment at 21
centers and has ten centers in its new development
pipeline.
Ray Cirz, managing director of Integra Realty Resources'
New York office delivered his take on mall redevelopment
to CoStar, "It's apparent that the days of the enclosed
suburban mall are numbered," said Cirz "Hundreds of
malls have failed or are in the process of failing. Many
malls of the '80s retail heyday are now dying to
increasing competition, changing demographics and an
industry-wide shift towards open-air lifestyle centers."
Cirz explained that many of these mall owners are "de-malling"
(an industry buzz-word for turning a traditional
regional mall into an open-air center) those defunct
properties, "transforming underperforming mall sites
into vibrant centers of retail commerce once again…by
incorporating residential, entertainment, office and
recreational elements into the mix."
Martin Forster, partner in the Pocklington, Pocklington
and Forster (PP&F) Retail Investment Group, one of
Central Florida's leading retail investment brokerages,
told CoStar that, at a recent North Florida ICSC
conference, he and his partner spoke with directors of
acquisition and development of several of Florida's most
well-known retail property developers, who talked in
length about their interest in redevelopment.
Forster said that in times of uncertainty in the
marketplace over the economy and interest rates,
developers take steps to hedge against the risk
associated with new development.
"When you consider that next year is an election year, a
greenfield development's time horizon goes past the next
election. Because of this, you have significant
questions as to what your permanent loan will look like,
unless you hedge that going forward, which gets
expensive. If a redevelopment is started now, it is
realistically 18 months out from being open and tenanted
before interest rates rise." Forster also pointed out
that as most are believers in the "retail follows
rooftops" theory, the current depressed housing cycle
that many markets are experiencing is causing the
developer to go back to where the houses already are.
Forster agreed with Cirz on the ongoing "de-malling"
trend and shift towards open-air lifestyle centers.
"Developers are seeing that by taking their old malls,
knocking down much of the core (which was a major CAM
headache due to energy costs), and turning them into
lifestyle centers, it's possible to experience better
profits."
In addition, he explained that today's consumer and the
way the market has grown demands such a change, "As
urban sprawl has caused the population grow around these
regional retail centers that were once on the outskirts
of town, the 'live-work-play' dynamic that lifestyle
centers offer serves the consumer's desire for a town
center that can meet all their needs for shopping,
entertainment, dining, and sometimes even living and
working in one place." Forster pointed out that owners
are realizing they can create profitable, mixed-use
communities out of the traditional, single-story
shopping center design of twenty years ago that is an
inefficient use of acreage, by repurposing to create
street retail with residential or office components
above.
The PP&F Group also invests in buying retail centers on
its own, and Forster shared a rhetorical example of the
financials his group has seen in putting centers it buys
through a major renovation process, "To make it easy,
lets say we pay $3 million to acquire a shopping center,
and then we spend $800,000 to $1 million in changing it
from an undesirable property into an attractive retail
environment. We can then increase rents by 100% in many
cases, and that revolutionizes our income statement.
Now, we bought it for $3 million and it's worth $6
million; I don't believe margins like that are available
on greenfield developments." From a retail investment
brokerage perspective, Forster did say that
redevelopments are more challenging, as assemblage of
adjacent parcels comes into play.
John Orrico, president of Purchase, NY-based National
Realty & Development Corp., a retail property owner and
developer with a portfolio of 105 shopping centers in 20
states, and the company that last year bought department
store retailer Lord & Taylor, explained that executing a
redevelopment project isn't necessarily less costly than
a new build. In a redevelopment, a developer has to deal
with demolition and remediation costs, environmental
cleanup issues existing today that weren't an issue
decades ago, and property assemblage -- dealing with 'NIMBY'
neighbors, and sometimes even the "ugly word of eminent
domain."
He also went on to explain redevelopment pros: "With a
redevelopment, we circumvent the time frame and pain
involved in the approvals for a new build, we keep some
cash flow out of existing tenancy, we're turning
financially distressed real estate into a viable asset
again, and best of all is the impact on the community.
The revitalization, reinvestment and recycling of real
estate is always good for a market and a community, it
supports the tax base and it has that mushrooming effect
of reinvigorating everything around it."
Orrico offered several recent and current examples of
properties in New York, New Jersey and Connecticut that
the firm had redeveloped through "de-malling", rezoning
land, expanding, or simply renovating. NRDC's most
current example of this is the site of an operating
150,000-square-foot, stand-alone Lord & Taylor in
Stamford, CT. NRDC is expanding the property to 300,000
square feet in order to accommodate a new
190,000-square-foot Lord & Taylor prototype store, a
60,000-square-foot Whole Foods, and an additional 50,000
square feet of compatible retail tenants.
The Lord & Taylor prototype store is an execution of the
company's $500-million store renovation plan, which
involves a new (return to its classic) brand image,
exterior and interior renovation and rebranding that
requires additional space for an improved product
offering. A review of CoStar stories on retailer
expansion plans over the last few months reveals a
similar trend among other retailers that have focused on
rebranding, renovation or expansion of existing stores
in hopes of improving sales. Just a few of retailers
that fall into this category include, Payless Shoes,
Victoria's Secret, Ann Taylor, SteinMart, Pottery Barn,
DSW, Jo-Ann Fabrics, Fred's, and JC Penney.
LaVelle Olexa, SVP of sales, promotion and advertising
for Lord & Taylor, said store renovations are an
essential part of the retailer's constant courting of
consumers. "It is always necessary to work to engage the
customer by reflecting trends of the times and those
aspects of retailing that keep the customer interested."
She further explained design elements, aside from
expansion at some stores, that will be changed in Lord &
Taylor's renovation plan, "We want the store to reflect
our image and cater to the consumers' busy lifestyle;
which translates into creating an extraordinarily
welcoming entrance, changing interior colors and design
elements, wider aisles that are easy-to-navigate, an
edited product selection, clear and easy-to-read
signage, and clear vision across the store." Orrico
echoed Olexa's opinion, stating "I think the whole
retail industry needs to continually reinvent itself. I
don't care who you are. You always have to be out there
at the cutting edge and reinvent."
Reza Etaldi, president of Irvine, CA-based REZA
Investment Group, a leading Southern California retail
investment advisory firm with a multi-billion dollar
transaction track record, had more to say about the part
the consumer is playing in driving the redevelopment
trend. "In response to the fact that today's consumer is
increasingly finicky and impatient, retailers are
following the exact same strategy as retail property
owners, they're focusing on building up their base and
constantly reinventing themselves in order to keep
market share by keeping the consumer interested. "
Commenting on the statistic that a third-less shopping
centers were renovated over the past five years than the
previous five-year period of 1997 to 2001, Etaldi said,
" I think what's happened is that a lot of developers
rushed in during the 1990's, buying at discount prices
and repositioning centers. Then, cap rates started going
down, which meant they couldn't make sense out of doing
that anymore and focused on new development. Now they're
getting to the point where new development is getting
tougher and tougher, construction costs, land costs and
availability, are all factors into owners and developers
going back to buying what we call 'hidden jewels',
diamonds in the rough."
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