This article appeared in the 1996 Fall edition of The Strategic Solution, the newsletter of The Strategic Edge.

 

IS REDEVELOPMENT THE GREATEST

REAL ESTATE OPPORTUNITY OF THE 90'S

 

Shopping center construction boomed through the 1980’s. However, in the late 1980’s and early 1990’s, the shopping center industry went through a crisis. Shopping center overbuilding and the resulting market saturation were compounded by a number of other industry changes.

 

Some of the factors which have caused the deterioration of existing shopping center properties include the following:

 

• Consolidations in the department store industry. This has led to fewer available anchor tenants. Numerous regional centers have, in the best case, two department store anchors owned by the same firm operating under different nameplates, and in the worst case, large, dark department store anchor spaces.

• Chapter 11 filings, especially in the small tenant arena. As a result, there are in-line vacancies and the inability to lease and pre-lease shopping center ancillary space. Many of these corporations operated multiple retail formats designed to attract a variety of consumer demographics and lifestyles.

• Increasing numbers of power retailers and category killers. These power retailers have usually opted to go free-standing or become anchors in new power centers, rather than anchor existing centers.

• Prototype sizes, especially of power retailers, continues to change, usually increasing. Many discount department store and supermarket anchored centers have found themselves obsolete as superstores proliferated. Many power retailers vacate units which were prototypical only a few years ago to occupy larger, newer stores.

• Increased focus on entertainment in shopping centers. Many shopping center owners and managers considered movie theaters and video games in their centers as nuisance tenants or necessary evils. Shopping was deemed to be entertainment in and of itself.

 

Shopping center construction data indicates that shopping centers and shopping center GLA (gross leasable area) were increasing at the rate of 4% to nearly 7% per year in the late 80’s and early 90’s. In the last few years, new center construction has been curtailed with shopping center GLA increasing about 2% per year. Shopping center GLA per capita in the U.S. has continued to increase, but also at a declining rate. In constant dollars, shopping center sales per capita have held relatively steady and productivity, measured on a sales per square foot basis, declined into the early 1990’s and has since been holding steady.

 

Renovation and redevelopment provide the opportunity for developers to revitalize properties which may no longer be appropriate for the market and trade area. Often, a shopping center may have been state-of-the-art and appropriately tenanted when it was constructed. However, its strength and market position may have been eroded by increasing competition, changing and shifting demographics, and tenant vacancies.

 

There are many advantages of redevelopment as compared to new construction. Most obvious, redevelopment shifts, rather than increases the amount of shopping center GLA, thereby not adding to the market’s retail saturation levels. Since the site is already a shopping center site, presumably the approval process necessary for redevelopment is easier than that for new construction. There is a presumption that there is some population density which would be served by the redeveloped property. The developer avoids the challenge of finding prime, well-located real estate ample for a shopping center development.

 

Most importantly, redevelopment allows for a total repositioning of the center. It is not merely a potentially modest renovation or revitalization of the property, but opens up an opportunity for the owner to develop an entirely new strategy for the property. It can be as "clean slate" as new development. What is crucial in redevelopment efforts is to understand the market - its demographics and the competitive framework - in order to develop a winning strategy for the property.

 

One of the more common types of redevelopment today is the "demalling" and conversion to a power format. This is fueled by the increasing number and type of power retailers, the increasing prototype size of power retailers, fewer department store anchors after consolidation in that industry, and fewer credit ancillary tenants with all of the Chapter 11 filings.

 

Gentrification of certain neighborhoods has made renovation of street retailing a viable option. Coalitions of government, civic, and community groups together with real estate developers and minority entrepreneurs have started to make inroads in reclaiming abandoned and abused shopping center properties.

 

We anticipate that redevelopment will continue to be a growth vehicle in the shopping center industry. Growth is fairly flat in U.S. population, retail sales, and disposable income. Further, there are other emerging and growing "shopping" alternatives which do not involve "bricks and mortar" such as mail order and on-line Internet shopping. So, redevelopment and recycling of property is a perfect way to target the market with an appropriate shopping center product while not contributing to the overbuilding. Although redevelopment is anticipated to be a growth vehicle, the ride will be difficult and challenging. The environment which facilitated and promoted an easy development process accompanied by easy money is but a distant and foggy memory.

 

 

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