Buying The Right Kind Of Retail By Tony Seruga, Yolanda Seruga And Yolanda Bishop At Isnare.com Ezine Articles

Commercial real estate investing is built on the bedrock of retail and shopping center development. Unfortunately, that bedrock has been anything but solid in the last two years, and it's edged into a cliff over the last 9 months. New construction starts are down, many major "anchor stores" are closing locations, and the sub-prime mortgage meltdown are all providing strong disincentives to break ground on new retail plots. As has been the historical trend for real estate investors, when the market turns this way, it's time to focus your efforts on asset preservation and maintaining existing revenue streams, rather than risking capital in an over saturated market with hesitancy among your major tenant categories.

This isn't to say that you shouldn't be focusing on keeping your mall tenants happy during the up times, but when you're trying to preserve capital, focusing on the lower risk options while biding your time for the economy to rebound is a good thing.

The watchword is redevelopment and recycling. Look at your under-performing shopping centers and look at the demographics of the neighborhoods around them. Is there a particular set of tenants you can attract who'll cater to the neighborhoods in your area? Are there sections of your shopping center that you can improve and get a higher paying tenant to move into?

A second driver for redevelopment and recycling in shopping center acquisition is that there's less and less prime available land that can benefit from a passive management strategy, near to population centers. While the American automobile culture has enshrined the idea of driving across the street to go to the grocery store, the footprint needed for a shopping center has changed, and the demographics and shopping patterns have also changed. There's a lot of retail space out there that was built in the last 20 years that is, frankly, obsolete in terms of the way modern shoppers use a retail space. There are also shopping centers that are prime candidates for redevelopment because of the way the communities around them have changed - what used to be a "fringe location" has now become more heavily urbanized, the stores aren't dense enough with their locations and proximity, and there's not enough parking space for the traffic they take in.

The current demographic trends for retail space in shopping centers and malls is "de-malling" - retail owners are moving away from enclosed malls, and towards open air shopping and entertainment centers. The profusion of "big box" stores like Wal Mart and Best Buy have made the enclosed mall something of an endangered property type. This is a trend we've seen at least three times before; the first time was with Sears & Roebuck company stores in the 1950s, followed by Woolworth's, which passed on to enclosed shopping malls with individual stores, and are now being replaced by today's equivalent of Sears and Woolworth's. This is a long period cyclical trend, and retail commercial property owners are adapting to it, and the demographic trends that drive it, most of which are the result of urban sprawl. As the areas around these "fringe malls" have become more residential, there is a stronger demand for lifestyle centers, where consumers can work, shop and play in one place, serving the same psychological function as the old downtown sections of the 1960s and '70s. Furthermore, as the residential property around the shopping center increases in value, the property tax assessments will rise, and this will put pressure on rents, and may cause the "minimum threshold" business for a tenant to go to unsustainable levels. Rather than try to find new tenants in spots that are just at or over the edge of retail affordability, redevelopment into multi-use space is becoming more viable.

Further incentivising the redevelopment paradigm is that 2008 is a national election year, with likely upheaval in the credit markets. When virgin ground shopping center construction projects take 18 months to complete, they're going past the election, and there's a good reason to play wait and see before investing capital in new development. While new development usually pays off at a higher rate in the long term, in the short term, it's much riskier.

One place where innovative recycling and redevelopment is causing "ground breaking" work is subdividing a commercial real estate plot as part of the "de-malling" process; the usual pattern for this is to acknowledge that your shopping center is no longer the "destination" mall, but a local shopping zone, and to convert some or all of the mall location to residential space, either rental or condominium development. This allows the gentrification effect, and higher residential density to produce an alternate revenue stream while the mall itself adapts and becomes less of a lumbering white elephant. These re-development apartments and condominiums tend to be in high demand for young families and couples and senior citizens, due to the proximity and convenience of shopping and "total life" venues.

Indeed, this trend of integrated living and shopping and entertainment is driving an entire movement in community and light rail development. More planned communities are being built around public/shared parks and green spaces within walking distance with bike and walking paths, and an integrated shopping center that's right on the access of some public transportation. A sample case for this type of development is the western expansion of Salt Lake City. As this type of development spikes demands, more commercial real estate developers are looking to convert dying malls into this sort of space.

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