Pacific Retail Capital PartnersPacific Retail Capital Partners
Pacific Retail Capital PartnersPacific Retail Capital Partners

How to Unlock the Value of Well-Located Retail

Retail real estate has undergone a structural dislocation driven by consumer preferences and lifestyle changes. For innovative retail owners and managers, there is an opportunity to acquire select, exceptionally located properties at discounted prices, and unlock value through an integrated strategy of master planning, parcelization, densification and localized marketing. Truly transforming retail centers into high-performing, well-planned, mixed-use experiential centers that draw in shoppers, add vitality to a local community, and become regional destinations is the key to long-term stability and value creation.

Improving Market Fundamentals for Retail

Over the past few years, the retail sector has not performed as well as other property types due to changes in consumer preferences and related factors, such as department store obsolescence, store closures, and pressure from rising e-commerce sales. In response, lenders have been more cautious, tightening credit standards and reducing liquidity. As a result, values have dropped, but the extent has varied by quality with the malls most at risk of closure having the greatest cap rate expansion. At the same time, underperforming, capital-deprived retail centers that fail to serve customers are prime targets for adaptive re-use due to their location and trade area.
Today, a strong U.S. economy is driving increased retail sales and stabilizing market conditions. The historically low unemployment, rising personal incomes, record household wealth, and increased consumption in the U.S. have given consumers more discretionary buying power.
In fact, the U.S. Census Bureau data shows that U.S. retail sales topped $6 trillion at the end of the first quarter of 2019 and grew by 3.6% year-over-year, according to JLL.
With limited new supply of retail space due to restrained construction, and stability from stronger sales, total net absorption of retail space has been positive and availability rates have declined since the U.S. financial crisis with overall retail vacancy at 4.4% at the end of the first quarter of 2019, according to JLL. At the same time, rental rates are up 5.4% since last year.

Changing Consumer Preferences Drive Tenant Mix and Services

Leasing activity by non-traditional retail tenants – food, beverage, fitness, health and entertainment – is on the rise. There has been a shift from the old Mall 1.0 merchandizing mix to a new Retail-led 2.0 version that addresses an increase in demand for off-price brands and experiential retail and less store space for traditional department store anchors and apparel-based tenants. Retail-led properties are at the forefront of this shopping evolution and offer customers dynamic shared spaces, added conveniences and community centers.
The new tenant mix is changing the traditional concept of anchor tenants. As a result, the large box allocated to, and often owned by,
the anchor department store now offers landlords an opportunity to densify and repurpose for multi-tenant use. Pacific Retail Capital Partners (PRCP) acquired The Galleria White Plains, 25 miles north of New York City, in 2016, due to its premier location and the potential to better serve the robust trade area and community by enhancing the retail and service offerings over time. With anchor tenant Macy’s pursuing a corporate plan to optimize and monetize its owned real estate portfolio, PRCP acquired and leased-back Macy’s anchor building, ensuring PRCP is well-positioned to control the tenant mix and future growth opportunities at The Galleria.

Chart: Evolving Customer Preferences

With increased competition for the non-conventional tenants who are actively in the market for space, PRCP created an innovative program to generate a leasing pipeline of food and beverage tenants. The trademarked culinary contest, Taste for the SpaceTM, was launched at several retail centers, including The Shops at South Town in Sandy, UT near Salt Lake City. More than a dozen local culinary businesses in each market competed to win 6 months free rent, a $50,000 investment and a turn-key dining space. The successful competition attracted over 1,000 attendees at each event, led to permanent leases with each winning food purveyor as well as executed leases with nonwinning competitors.
Another factor affecting the retail mix is e-commerce. The rise of online sales has impacted sales in physical stores. Yet, e-commerce is still a small portion of overall retail sales and only represents approximately 10% of total sales. The more noteworthy trend is that successful retailers have realized that there is a symbiotic relationship between in-store and online sales and striking a balance is key to sales growth.
Brands are finding value in having a physical presence since an overwhelming number of shoppers still prefer an in-store experience and evidence shows that a physical store increases online traffic, according to the ICSC March 2019 Industry Insights report. Therefore, an omnichannel strategy that incorporates digital offerings, home delivery/instore pickups, pop-ups, or new layouts of physical stores and showrooms allows retailers to track and analyze consumer preferences and buying habits while increasing benefits to shoppers and enhancing brands.

Unlocking Value Through Transformation

While e-commerce is expected to grow, it cannot offer consumers a sense of place and there is an opportunity to reimagine and transform retail properties into unique experiences. There are many well-located, under-managed, under-performing centers in the U.S. where value can be enhanced by densifying the center, transforming the tenant mix and repositioning the property.

Master Planning, Parcelization, Densification

It’s clear that the tenant mix and design must align with shoppers’ preferences. Gen Z, Millennials and Baby Boomers have different lifestyles and shopping motivations, but all are seeking out denser, less auto-dependent neighborhoods with ready-access to transit, dining, and retail that support leisure and entertainment interests. In fact, the April 2019 ICSC Industry Insights revealed that 78% of U.S. adults would consider residing in “live, work, shop, play” environments that have a variety of housing, workplaces, shopping, dining and recreational outlets for entertainment all within proximity to one another.
To reinvent an existing lifestyle center or mall, the original masterplan should be revisited. The rights, obligations, easements and entitlements established when the property was first developed may need to be amended to allow for changes to the site and tenant mix. A thorough assessment of the existing retail footprint may reveal higher and better uses.
Malls were developed on acres of prime real estate near major population hubs and today, redesigning these retail centers into favored mixed-use properties for living, working and playing builds significant value. Increasing the density and adding other property types may require parcelization, the creation or accretive disposition of outparcels, so that developers with expertise in a variety of property uses can build on the underutilized land.

Retail-led, mixed-use properties in select, prime locations can deliver the experiential benefits that retailers are striving for. With a focus on assets that combine retail, office, healthcare, residential and more, PRCP properties will not only be preferred destinations and vibrant community hubs that attract consumers and local residents, but also provide investors with a transformed investment that provides long-term income growth and the potential for positive appreciation.

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