From fresh paint to new market positions, shopping centers are pumping in deferred dollars to greet the returning retail dollars.
“When things stay the same, that’s scary,” says Stan Sanchez, president and partner of De Rito Partners, about the shift in the Arizona shopping center marketplace. “There’s no doubt that location, location, location is still most important for retail site selection. The difference is that the market for the location is shifting.”
Sanchez and his company recognized the shift in the markets surrounding properties they own and manage, and post-recession activity is freshening those properties.
“There’s two parts to all the activity going on,” says Dave Cheatham, president of Velocity Retail Group. “It’s not a wave of renovation; it’s a combination of catching up with deferred maintenance and updating properties for the market.”
Gordon Keig, senior vice president at Kornwasser Shopping Center Properties, LLC, agrees, but with a slightly different take.
“Building in a growth area ties up your money for as much as three years,” he says. “Finding a good value in an older property and turning it around is a lot more appealing because you are working with a current cash flow.”
Although the proverbial “location, location, location” is still good, the property’s market has changed. Demographics shifted in Arizona markets from the time many shopping centers were built. Throughout 2013, the media bemoaned the plight of aging shopping centers or predicted the scraping and redevelopment of obsolete retail corners.
“I don’t see that happening,” says Cheatham. “In the Phoenix and Tucson markets, we have challenges with empty big boxes, and those are being adapted to alternative uses. Shopping centers, even distressed centers, are changing to match the market.”
Kornwasser bought the Southgate Mall late in 2012 and has plans to tear down the main building in the 346,000 SF mall then rebuild it with smaller, contemporary outward-facing stores.
“There is shrinking demand for retail space,” he says. “Even with the reduced square footage, we’ll have a more functional, efficient and valuable property.”
At the other end of the spectrum are looks.
“Lipstick,” chuckles Sanchez, “Some properties just need a little lipstick – painting, landscaping and a facelift.”
From De Rito’s platform, Sanchez is involved with upgrading its properties, overseeing enhancements of properties managed and in some cases, running the redevelopment efforts.
“It was more than lipstick for Pavilions (Loop 101, Indian Bend and Pima roads in Scottsdale),” he says. “It was a large-scale redevelopment of the property.”
Countering the downsizing trend, De Rito Partners took the center from 900,000 SF to 1.4 MSF.
“Redevelopment in this market requires innovation and creativity. We changed paving, landscaping and facades,” Sanchez lists the upgrades to the Valley’s original power center. “We’ve got a modern look and changed the property to fit the changing market.”
This may be the most important mantra for retail property owners for the second half of the decade: changing the property to fit the changing market. Keig, Sanchez and Cheatham all spoke of how the market has shifted in the past 10 years.
“We have an interesting situation in the market,” says Cheatham. Velocity is one of the largest retail brokerages in the state in terms of square footage represented. “We have more big box vacancies than anywhere else in the nation, and we’re the best place in the country for small-space leasing activity.”
Small store leasing is going to be very healthy in 2014, he says. Rental rates are still very competitive for lessees, but there are going to be fewer new retail spaces developing. Sanchez sees single-digit retail vacancy rates in 2014. For Keig, the investment is in already-developed neighborhoods.
“In-fill is finally beginning to happen,” he points out. “We’ve heard of it for years, but with financing challenges today, it’s easier to back a project where there is some existing cash flow from current tenants. The project moves faster.”
It’s not just the small shopping centers undergoing facelifts and cosmetic surgery. “We’re going to be re-shaping (Scottsdale Fashion Square)” reports Steve Helm, assistant vice present, property management for Macerich and manager of the 1.9 MSF tri-level Fashion Square. Once city approvals are locked down, Macerich plans construction of a nearly 100,000 SF addition that replaces the current, aging Harkins theaterplex on the lower level by raising a new 12-screen complex to the second level. About 50,000 SF of retail space will be opened up under the new theater.
“Redevelopment is exciting and rewarding,” concludes Keig. “It’s an opportunity to invest in neighborhoods, and the neighbors return the favor when you do it well.”