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Page 24 — Retail Properties Quarterly — August 2019 www.crej.com S hopping centers and malls have had quite the meta- morphosis over the past 50 years. Once upon a time, malls sprang to life in sub- urbia, converting quiet little com- munities into centers of major com- mercial and residential develop- ment. Just as this development was taking off, charming mom-and-pop businesses began to close because consumers preferred malls for con- venience, as well as their social gathering place. Today though, consumers miss the community feel of those charm- ing town-center small businesses. They don’t prefer “cookie-cutter” shopping experiences or lifestyles. Practically every “House Hunters” episode on HGTV chronicles a cou- ple wanting to “live within walking distance of shops and restaurants.” In fact, Alberta Development Part- ners’ Promenade at Castle Rock is being developed around this con- cept. I recall a roundtable discussion I led several years ago on lifestyle centers. The topic was “Lifestyle centers: New concept or an 80-year- old idea whose time has come?” The International Council of Shop- ping Centers describes lifestyle centers as specialized centers that have “upscale national-chain spe- cialty stores with dining and enter- tainment in an outdoor setting.” Except for the outdoor setting, that description sounds much like a shopping mall. With the more recent move back to open-air spaces, how are we using those timeworn shopping malls that provided modern conve- niences and housed a large portion of our childhood memories? According to a Credit Suisse study, e-commerce made up less than 1% of total retail sales in 2000. By 2018, that percentage had risen to nearly 10% and it continues to grow. As consumer preferences change, malls are closing across the coun- try and Colorado is no exception. Southglenn Mall opened in 1974, closed in 2005 and the land is now the Streets at SouthGlenn outdoor shopping center. Aurora’s Bucking- ham Square was open from 1965 to 2007, before being demolished. The space is now a thriving outdoor shopping cen- ter. Englewood’s beloved Cinderella City mall is now a bustling mixed- use development with government offices, residential space, retail and more. However, demolition is not always the solution. Today, we’re finding unique and creative ways to repurpose shop- ping mall buildings. • Changing the form and func- tion of the shopping mall. According to a recent Shopify.com article, more than 1,875 fashion retail- ers shut down in 2018, and nearly 10,000 closings are projected for this year, thanks, in part, to the surge in online purchases for these goods. The closings represent a 53% increase from the number of fashion retailers that closed during the Great Recession in 2008. These stats have prompted many forward- thinking mall developers to reshape the form and function of existing centers. Consider the typical mall with four anchor department stores, numerous fashion apparel retail- ers nestled in between each anchor store, and a food court near the center. The “new” mall features department store anchors that are roughly half the size of the previous version and carry basic items, illus- trating the fact that many consum- ers are purchasing online instead of in person. There still will be a hand- ful of fashion anchor stores inside the building, but many of those store spaces will be replaced with the modern conveniences consum- ers expect today (i.e., grocery store, nonchain restaurants, special event space, fitness spaces, child care for “parents’ night out” time and coworking space). Additionally, many digital retailers are opening stores inside malls to allow consumers the opportunity to touch and feel products before they purchase. We have worked with several of these clients and this trend likely will continue locally and nationally. New retail spaces also feature “experience sharing” areas for Instagrammers who love to snap and share photos as part of their shopping experience. Efficiency is a key to modern con- sumer trends and retailer building specs. If you walk into nearly any new or remodeled retail store in metro Denver, you’ll notice self-serve kiosks and online-order pickup shelves. Enclosed malls are also adding climate-controlled outdoor spaces that include areas for eating, conven- ing and recreation. As reported by community planner Urbis.com, malls are responding to changing consumer demand by transforming rooftop space into dining experiences and/or parks. • Repurposing the mall. Many malls have shut down without the inten- tion of reinventing the space for changing consumer tastes. While some malls unfortunately sit empty, others are finding new life as distri- bution centers, multifamily proper- ties and even schools. According to a recent Colliers study, large distributors, including Amazon, are taking over mall space around the country. Malls typically are located within close proximity to major roadways, on large parcels of land and in heavily populated areas. These spots are ideal for dis- tribution centers. Malls also have abundant parking, which is desir- able for large distribution centers with many employees. A prime example for adaptive reuse of old malls is the Highland Mall in Austin, Texas. Austin Com- munity College reengineered the mall into a modern campus and regional workforce development center. According to University Business Magazine, “at the epicen- ter of this space is the ACCelera- tor, a high-tech learning lab with over 600 desktop computers, study rooms and classrooms.” From the corner “dime store” and local gift shop next to the mom- and-pop restaurant, to the enclosed mega-centers with national chain stores and a food court, to today’s open-air lifestyle centers with a mixture of small businesses, national chains, a variety of res- taurants, coworking space, medi- cal facilities and community lawn space for entertainment, the retail sector is responding to changing consumer lifestyles. s Local shops, national chains vie for consumer dollars Mike Willingham Vice president, Maxwell Builders Michelle Meunier Photgraphy Promenade at Castle Rock six-county Denver metro area. We also saw a negative 12-month net absorption, of approximately 62,000 sf and spaces are sitting on the market for an average of 8.7 months before being backfilled. Asking rents are dropping, tenant improvement allowances are increasing, and land- lords are starting to be a little more aggressive in their pursuit of ten- ants and the deal packages for them. Prime real estate locations are hot, and in the very best locations there seems to be a never-ending sup- ply of new concepts willing to try their luck. For everything else, there appears to be a large gap between what landlords are asking and ten- ants can realistically afford, hence, I feel this gap is not going to narrow any time soon. What I believe to be lacking in today’s market is good old-fashioned optimism by the majority of res- taurant entrepreneurs, as they are looking toward the future. Of course, if the automotive industry saw their labor costs go up 110% over the last 10 years, like the tipped minimum wage that goes into effect Jan. 1 here in Colorado, there would be a few less car manufacturers in the world today and they would probably lack a bit optimism as well. s Hudgins Continued from Page 18 less in the CMBS market. This struc- ture has allowed CMBS lenders to compete with life insurance compa- nies by offering aggressive loan con- stants that can only be achieved by eliminating all amortization. This is a structure that has been well received by borrowers who want to maximize their cash flow, but also want to reduce their “debt pressure” in the event of an economic downturn. Even though this is a very attractive strate- gy, since CMBS lending still has some well-known downsides, our team stresses the importance of choosing CMBS lenders based on strong rela- tionships and trust. • Debt funds. For borrowers that have become “gun-shy” of the CMBS market due to poor servicing experiences with master servicers post-securitization, debt funds have become a very viable source of per- manent financing. Most investors are aware that debt funds have become a huge force in the construction and bridge lending spaces; however, many don’t realize that there are debt funds in the market making perma- nent, balance-sheet loans. Similar to CMBS lenders, debt funds offer permanent loans with interest rates that are more expensive than life insurance companies, in exchange for their willingness to lend at higher leverage points (but without having to work with a CMBS lender). • Conclusion. Overall, life insurance companies are typically our recom- mended source of long-term retail debt because their loans don’t usually require reserves or structure around major tenant lease expirations, and they also have far less potential for post-closing problems. During the term of a life company loan, there are no events of default associated with debt-coverage ratios as long as the borrower is making timely payments, no re-margining risk, and usually no ongoing net worth or liquidity cov- enants. There also is a more signifi- cant alignment of interests between a life insurance companies and bor- rowers, as life insurance companies strongly prefer not to take properties back for regulatory reasons (account- ing charges in the life company industry). Life companies also are nimble and allow borrowers to oper- ate properties with minimal lender oversight or approvals. s Essex Continued from Page 1 Construction Trends