http://www.lloyd-westcord.com/retail_news.htmOne 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."
