7th Ave./Courtesy of DAVIS

Tenants Turn Right-Sized Up

As the market shifts, more retailers are trying to find the most efficient balance of inventory, staff and size, according to Anita Blackford, senior vice president of leasing for Carlyle Group’s Metrocenter Mall. She’s seeing the theory in practice as Metrocenter fills its voluminous 1.3 MSF.
“We’re seeing strong opportunities for local businesses to get a foothold in a mall environment,” she reports. “We’re seeing smaller stores, and that’s a reflection of lingering economic concerns.” For Metrocenter, this creates opportunities to more closely align with its changing market. The mall’s owner is also opening space to community groups and non-profit organizations. The changes in space demand helps facilitate this unique service.
Traffic in Metrocenter is up 10 percent over last year. “Our shoppers are different than some other areas of the metro,” Blackford says. “I’m seeing three generations of families coming into the mall together to shop and be entertained.”
“Right-sizing for efficiency” is what experts are calling the shift in store sizes working its way through shopping centers and malls across the nation.
“While retailers are cautiously optimistic about the coming year, their customers are still worried about jobs and the economy,” Blackford says she hears merchants say.
“The thing about ‘right-sizing,’ is that it doesn’t always mean ‘getting smaller,’” says Steve Helm, assistant vice president, property management for Macerich. Helm is responsible for managing Scottsdale Fashion Square. “Some stores are growing.”
Bath & Body Works and The Limited, Helm says, know space needs and customer demands. The stores reduced footage, which allowed Scottsdale Fashion Square to convert the space for another store. On the other hand, Victoria’s Secret moved its spin-off, Pink, into a space opening up when another store resized, then Victoria’s Secret grew to take over Pink’s former space. Other changes include Hugo Boss relocating across the mall into a flagship-sized store to make way for its women’s clothing line. Then, lulu lemon leased the former Hugo Boss store. A resized Ann Taylor store left a space for Pink and the new Johnny Was.
The right-sizing trend is something other shopping center managers and owners are seeing across the state.
In one extreme version, Kornwasser Shopping Center Properties LLC is going to tear down more than 200,000 SF of an obsolete enclosed Yuma mall.
“Southgate Mall will be more a valuable property in a smaller, reconfigured design,” says Gordon Keig, senior vice president for the mall’s owner.
Right now, Southgate has nearly 350,000 SF. After the demolition and new construction, Keig says the total square footage will be closer to 310,000 SF. Right-sizing for efficiency is so crucial in this effort that a new lease for the retained 50,000 SF former Dillard’s will not be signed until the old mall is gone.
Kornwasser’s Yuma tenants are not necessarily down-sizing in the conversion. A space holding a former J.C. Penney’s store is now home to an expanded Burlington Coat Factory.
“Reducing the square footage of a property is sometimes necessary to meet a changing market,” says Keig. “It actually makes the property more inviting and will generate more sales per square foot.”
“The future for shopping centers is shifting,” says Blackford. “We’re going to see different mixes of uses where once was once just shopping.”
She expects to see medical clinics taking space in malls and in the space around malls, residential or assisted living developments, possibly even hotels.
Jennifer Davis Lunt, president and managing partner of Davis Enterprises, has seen a different type of “right-sizing” trend.
“Some smaller businesses are coming back from working out of homes and garages with confidence to lease space,” she says.
However, she says that in many cases, the businesses are taking less space than they might have before the recession.
“The square footage a store leases is credit-driven,” she says. “Local businesses are leasing, but the size of the store is affected by equity—a number the recession impacted for many. On the corporate side, we’re not seeing down-sizing, but we are seeing additional locations leased.”
Just as Kornwasser sees more value from less space, Davis does as well.
“At our Seventh Avenue and McDowell Road (Phoenix) property, we had to demolish an old convenience store,” explains Lunt. “Even though the renovated historic building didn’t change its size, we needed additional parking for new tenants Starbucks, Pei Wei and Side Bar. Losing the footage from the other store made the project feasible and more valuable.”
Davis Enterprises has another example of right-sizing, an old fast food and floral shop at 4700 N. Central Ave. in Phoenix. The area wouldn’t support a casual-dining or fast food outlet in that configuration.
By adding new dining space in an addition — and maintaining historic character with its unique front window — the building was right-sized for a sit-down restaurant.
“The property had character, but its size and configuration were not usable in today’s market,” Lunt explains. “With the increased space, Hulu was able to open and has been quite successful. We fit the space to the tenant’s needs.”
The biggest impact of “right-sizing” comes from the excessive number of empty big boxes in Arizona — the national leader in big-store vacancies.
“Some big boxes are being divided,” explains Dave Cheatham, president of Velocity Retail Group. “But it can be difficult to divide a big box. The rent drives that decision. With per-foot rents still depressed, a landlord may do better renting less than the full space and leaving a portion of the building vacant.”
“We did that with a couple of Mervyn’s for Hobby Lobby,” says Cheatham. “At Paradise Village, for example, Hobby Lobby pays for 50,000 SF of the 73,000 SF space. It did not make economic sense to divide off the remaining space and lease it.”
This is causing creative uses for former boxes. Velocity sold an old Albertson’s in Gilbert to Leading Edge Academy, which is now constructing a second floor and converting the grocery into a charter school. In Tempe’s Emerald Center, a former furniture warehouse store is now a day spa on one side and a shooting range on the other.
“We’ve got to be creative with the big boxes,” says Cheatham. “And get them off the market.”
Creativity is the watchword for shopping center owners as store spaces are resized to the right fit for the post-recession tenants.