Owners need retailer commitments and deep pockets to redevelop centers (7/28)
Jul 28, 2009 3:48 PM, By Jennifer Popovec
Expansions, location drive redevelopment
Many shopping centers across the nation are struggling with rising vacancies. The ongoing recession has taken a toll on even the strongest of retailers, forcing many retailers to close stores, seek bankruptcy protection or, worst, liquidate entirely.
Retail vacancies have been rising for several quarters, even at well-located centers. On a national basis, the vacancy rate for community and neighborhood centers was 10.0 percent at the end of the second quarter 2009—the highest it's been in 17 years according to Reis, a New York City-based research firm. The vacancy rate is expected to increase over the next four years, reaching 12 percent in 2012 before it drops to 11.2 percent in 2013.
Many shopping centers are going through transformations because they've lost anchors and small shop tenants. Owners with empty space often believe expanding and reconfiguring the center is the only way to preserve value, yet few of them are tackling speculative redevelopment projects because the current economic environment has stalled retail expansion. They are waiting until they have lease commitments in hand.
But, there are fewer retailers to backfill empty space, especially big box space vacated by retailers such as Linens 'n Things, Circuit City, and Winn-Dixie. Even growing retailers continue to be cautious about their expansion plans, committing to fewer store openings in 2010 and negotiating favorable leases.
"There are fewer redevelopment opportunities because retailers are being very cautious with their capital," says Don Casto, a partner with Casto, a Columbus, Ohio-based retail owner and developer. The firm is focused only on redevelopments that are driven by expanding anchors. "When the capital markets were easier, we did 'defensive' redevelopments—if you build it they will come—but we don't do that now," Casto says.
Casto is certainly not alone; in fact, much of the redevelopment activities today are tied to anchor tenant expansion. In Boulder, Colo., for example, Regency Centers Corp. is in the middle of a redevelopment for Crossroads Center, a 133,139-square-foot neighborhood center anchored by a Whole Foods and Barnes & Noble.
Whole Foods' desire for a newer, larger store was the catalyst for the center's redevelopment, according to Matt Booth, vice president and regional manager for Regency Centers. "Whole Foods was already extremely successful in the center, and the Whole Foods team thought it could be even more successful in a larger format," he explains.
To accommodate Whole Foods' expansion from its existing 39,000-square-foot location to a 65,000-square-foot store, the Jacksonville, Fla.-based REIT relocated Barnes & Noble to a freestanding building within the center's footprint. It demolished an old movie theater and liquor store for the new bookstore, which will occupy 30,000 square feet, a 50 percent increase over its old store. The newly expanded Whole Foods is scheduled to open in October 2010, while the Barnes & Noble will open in August 2009.
In addition to Crossroads Center, Regency Centers is tackling a far more complex redevelopment project in Brea, Calif. The 229,000-square-foot center, Brea Marketplace, is situated across the street from Brea Mall in a dense, infill location within Southern California, according to Erwin Bucy, senior vice president of investments of Regency Centers.
Bucy says Regency Centers was willing to move forward with the redevelopment of Brea Marketplace, which was only 60 percent occupied prior to the redevelopment, because of its unique and desirable location. "Tenant demand is stronger for infill locations," he says.
Regency Centers was able to sign Target, Sprouts and Beverages & More! as anchors for the center and demolished about 70 percent of the existing center to make way for the new tenants. Target will open a podium store this October, while Sprouts and Beverages & More! already are open.
At 358,000 square feet, the redeveloped center is much larger than its original footprint. Moreover, the center should be 100 percent leased shortly after Target opens, Bucy notes. "The goal is to make a B asset into an A asset by increasing the credit quality and increasing the strength of the tenant mix," he says.
Even tenants are taking a leap of faith when they commit to a center that is scheduled for redevelopment. "Our regional and national retailers want to make sure that, as a landlord, you have the ability to continuously re-invest in the centers," says Jodie McLean, president and chief investment officer at Edens & Avant. The Columbia, S.C.-based retail property owner and developer has several properties under redevelopment currently and is funding most of them through cash or existing lines of credit.
Although the capital crunch makes it difficult to fund projects, many owners feel the current environment is ideal for redevelopment. "It's foolish not to look at your assets and figure out how to create more value," says Regency's Bucy. "A lot of centers are encumbered with older leases with low occupancy costs and by redeveloping assets, you can increase income and improve value. Even today, there are very clear financial reasons for redevelopment."
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