Consumer confidence has been inching up, giving a small boost to retail sales, but until the unemployment rate drops significantly, San Diegans, along with their counterparts nationwide, are likely to continue scaling back their retail spending.
This slow road to recovery means that new retail real estate development is unlikely. Instead, expect to see redevelopment of some existing retail centers, while others will flounder or be converted to other uses entirely.
Any developer proposing to build a new retail center will be challenged by more stringent underwriting criteria by lenders, an uphill battle to get meaningful pre-leasing commitments, especially at the rent levels needed to make the development work, and a lack of affordable prime land for shopping center development. Add in the cost of new construction, and the numbers just don’t work.
As a result, retail developers are turning their eyes toward redevelopment opportunities, and this trend will continue well into 2012.
The International Council of Shopping Centers (ICSC) reported that the United States had more than 7 billion square feet of shopping center space at the end of 2009. Divided by the total U.S. population, this amounts to approximately 23 square feet per capita of shopping center space. This is down from 46.6 square feet, as calculated from the 2007 Economic Census numbers, at which time the United Kingdom had about 23 square feet per capita and Canada had approximately 13 square feet per capita.
With retail square footage outpacing consumer demand, even with no new construction, some existing shopping centers will inevitably disappear.
“If your shopping center isn’t an A or a B, and you don’t have a strategy to position the center for the long term, your center is vulnerable to continued weakness and obsolescence,” said John Hickman, managing director for the San Diego division of NewMark Merrill.
“The key to successful retail redevelopment is to find well-located, infill corners where properties may be near the end of their useful life or have been mismanaged over time,” Hickman said. “Real estate is still about location, location, location. A well located shopping center near a certain density of population that isn’t performing well is a logical target.”
Properties with significant vacancies or in receivership (or worse) that can be purchased at affordable prices are especially attractive. The ability to buy at distressed pricing will allow a developer to infuse capital and get higher rents from new tenants to support the redevelopment.
This expected wave of redevelopment is good news for older communities. Blighted, economically or functionally obsolete properties will continue to be repositioned by developers if the community can support the retail shops.
NewMark Merrill, a retail owner/developer turned redeveloper and property manager, accomplished this with its purchase and renovation of the El Cajon Town & Country Shopping Center, located along North Second Street at Madison Avenue in El Cajon.
Hickman and his colleagues knew this center conformed to the underperforming property profile they targeted. The company purchased the center in 2008 and immediately started securing new tenants.
Simultaneously, Hickman and his team worked closely with the city of El Cajon to get the entitlements they needed to improve the center, and were able to complete the $3 million remodel late last year. Renovations for the 45-year-old, 54,000-square-foot shopping center focused on signage, façade upgrades and redesign of common areas.
After NewMark’s remodeling efforts, Fresh & Easy Neighborhood Market moved in and opened its doors on Jan. 12. The opening was much anticipated by the community, evidenced by a line around the block on opening day.
“The surrounding community was underserved,” Hickman said. “We identified the need for a neighborhood market and purposely courted Fresh & Easy, knowing they would help make the center a success by offering nearby residents a great grocery option. You have to think about the community as an integral component to planning a successful retail remodel.”
The center now also houses Rite Aid, Boost Mobile, Fred’s Burgers, Happiness Nails, Chase Bank and Baskin Robbins.
Usually, city agencies are very willing to work with developers looking to invest in the redevelopment of their communities.
“We were thrilled to have the center purchased and remodeled,” said Melissa Ayres, community development director for the city of El Cajon. “City staff facilitated planning entitlements to achieve NewMark Merrill’s objectives, and the end result of a remodeled shopping center with a new tenant mix is a win-win for the developer and the community.”
Hickman conceded that retail redevelopment is not without its challenges. It can be costly, involve unexpected surprises and existing tenants will need to keep their doors open during the renovation. Ultimately, though, redevelopment can help revitalize an area and bring a community together by infusing new energy and excitement.
Whitelaw is a senior consultant with TW2 Marketing Inc.