CREJ - Retail Properties Quarterly - August 2017
Multistore closures commonly force landlords to watch the lights go out on their anchor tenant(s), leaving behind the overarching question: What does a landlord do with large retail vacant space? For larger retail centers that hold strong co-tenancy and are positioned in an area with attractive traffic counts, the task of replacing an anchor tenant or big-box space has proven to be easier than property types with different circumstances. Replacing tenants in a successful and busy center sometimes can be accomplished with simply finding other national tenants looking to close a gap in their geographic market coverage. Many of these new tenants come from the discount-focused arena as the market appears to shift in that direction for brick-and-mortar locations. However, the list of active and potential tenants across the board is irrefutably not what it once was and is forcing many owners to look for nontraditional or more complicated and expensive solutions. In the situation of large grocery or department story vacancies, many times the only viable solution is to look at demising the space into two, three or four units. The resulting spaces tend to appeal more to the desired footprint of end users and generate a higher per-square foot rate than if left as-is. Some of these replacements may even be the national retailers that historically would look for larger footprints, but now are looking for smaller and more specialized stores to stay viable in the market. Target, Toys“R”Us, Kohl’s, Best Buy and Whole Foods are just some of national tenants considering smaller store footprints in new locations. One element that should not be overlooked by landlords and owners is that demising larger units often comes with a surprising price tag. Whether in the cost of construction or the cost of downtime, landlords do not always find it worth it or feasible to demise a space even if the result is a more diversified property with higher per-sf rates. The fact of the matter is construction costs are painfully high, the pool of qualified contractors is painfully low, and there are extreme backlogs and delays throughout the planning and permitting process in many municipalities. The costs to split just the electrical/heating/cooling systems and address restrooms in vacant units has been an obstacle proving to be a stopping point for more than a few of my clients. On top of this, due to the deep baydepth design of older stores, it often is not feasible to demise big boxes into smaller units without the result being unattractive for traditional retailers looking to maximize their storefront widths. Without a similar, ready-to-takeover tenant, many property owners decide a full redevelopment is the only solution. Experienced and wellfunded property owners may decide to retain and complete a redevelopment themselves. However, many owners realize this is not realistic for them. As a result, with the holding costs and complexity of these projects, their only option is to sell their retail asset to an experienced developer.
A few local examples of long-time retail locations redeveloped or slated for redevelopment include: • The recently closed Kmart property on Alameda and Broadway, which is in planning for redevelopment into a mixed-use property with as many as 350 multifamily units. • The 2015 teardown and redevelopment of the Office Depot on Hampden and Yosemite into a 100,000-sf-plus indoor Edgemark Self Storage location. • The former Safeway on Hampden and Happy Canyon slated for a repurposing into a multitenant, high-end retail and restaurant destination. Often redevelopment in the short-term is not a viable solution due to costs, poor location, surrounding market saturation, and lengthy rezoning and planning/approval processes. When this is the case, landlords must bite the bullet and look for nontraditional users for their traditional retail space. These often are less desirable uses with lower credit and lower rates. Most owners have the obligation to keep income coming in, whether long term or short term, to keep their redevelopment project afloat or simply prevent a loss of the property to their lender. These users are frequently event centers, churches and trade/charter schools, among others. Landing one of these tenants to a poorly located retail property is not always the kiss of death. Some remain long-time tenants at a very low cost of replacement from previous tenants. As the retail market evolves, we will continue to see many of the retailers we have known our entire lives go dark, and there will be new retailers in the market we could not imagine in the old landscape. However, I believe retail is not dying, only evolving. As an industry, we have proven we can evolve with these ever-changing markets and have the determination and creativity to keep retail viable, even if on a new path.