Archives for November 2020

An evolving landscape

Since 2017, a total of 13.8 million sq. ft. of retail space has been converted to 15.5 million sq. ft. of industrial space across the country, according to CBRE.
Today, e-commerce and omni-channel models are growing at a remarkable rate. While some of that growth is accelerated by pandemic-driven considerations, a significant portion was already occurring and many of the new pandemic-related changes will be “sticky.” The critical final step in the supply chain—the last mile—has also become a pivotal piece of the development puzzle.

With retailers reimagining their entire supply chain and recognizing the need to fulfill online orders without having to rely on archaic bricks-and-mortar solutions, new development opportunities are emerging for delivery stations and distribution centers within industrial—and increasingly—retail environments. Investors looking at their portfolios are seeing infill as an obvious focus, as the chance to buy and covert existing retail that is failing or vacant often presents a favorable value equation. The same CBRE study noted that out of the 59 retail to industrial projects completed, proposed or underway since 2017, 40 projects were conversions or adaptive reuse.
Whether buying and converting existing inventory, or looking for new inventory, the industrial-retail frontier may be the saving grace for a pandemic-impacted portfolio.

Drawing the lines

What do the contours of this new landscape look like? Where do you draw the lines, and how do you strike a balance between industrial and retail uses? For investors, assessing stand-alone uses is relatively straightforward. However, multi-tenant environments raise the question of how tenants and municipalities will view non-retail uses adjacent to functional retail. Some are mitigating potential discomfort by designing facilities with retail in the front and distribution infrastructure in the back. Inevitably, the success or failure of some industrial-retail conversions will depend on the ability of developers and investors to cultivate the right tenant mix and maneuver the local political environment.
There is also an inverse relationship between opportunity and complexity, which is why malls and inline spaces—where investors may need to have the patience and resources to reshape the tenant mix over time—are more of a long-term play. In the near term, stand-alone spaces (power center inline spaces, large unattached boxes like a former Sears or Kmart space, or B- and C-level malls that have gone dark) may represent the most straightforward investment in retail-industrial opportunities.

Priorities and perspectives

The Wall Street Journal reported higher inventory levels and the accelerating growth of e-commerce, which may require three times as much space as traditional distribution operations that serve stores. This could increase U.S. warehouse demand by as much as 400 million sq. ft. over the next two to three years.
Investors looking for retail-industrial deals should prioritize the same underlying fundamentals that characterize any sound retail opportunity: strong demographics and proximity to rooftops. With supply chain facilities, transportation and location remain critical, even if those fundamentals are not about consumers coming to you, but your ability to reach them.
While familiar retail considerations will inform smart supply chain investment decisions for retail conversions, the development process can be quite different. From site selection to zoning, planning, design and negotiations with tenants and municipalities, investors would be wise to identify a development partner with a proven track record of managing retail conversions and ground-up industrial/e-commerce development from beginning to end.

Revelations and reevaluation

Something that frequently surprises investors is just how economically sound these opportunities can be. Industrial-retail supply chain infill or redevelopment is often the highest and best use of space. Tenants are often willing to pay market rates for quality space in the right environment. In reality, there are many sites out there not suited for residential, hospitality or office. Elevating those sites by configuring them to meet the needs of a rapidly emerging new market is simply good business.
The big picture is that consumers aren’t really spending less, they are spending differently. The question for real estate developers and investors becomes: how do you adapt and take advantage?
Given the fact that many retail investors have long viewed online retail as the enemy, it’s ironic to think that the online market might actually end up being the savior. The convergence of online and bricks-and-mortar—and the supply chain uses required to make that convergence work—has turned out to be more compatible and complementary than many landlords and investors had previously imagined.
Source: “Mixed Retail-Industrial Uses Present a New Opportunity for Investors”

Regional malls, class-B and class-C shopping centers in deep trouble

The pandemic has put tremendous pressure on many shopping malls. Hundreds have lost many of their largest, most important retail tenants as department store chains like J.C. Penney and Lord & Taylor declared bankruptcy and others scale back in the chaos caused by the coronavirus.
The vast majority of class-B and class-C malls have lost at least one anchor tenant, according to research from Green Street Advisors. That adds up to several hundred properties that have lost a significant part of their income.
Trepp has identified more than 100 properties that owners may soon surrender to lenders, more than a quarter of those are regional malls.
“Malls are starting to go back to lenders—it definitely is happening now,” says Thomas Dobrowski, vice chairman for Newmark Group, leading a capital markets group specializing in enclosed regional malls, working in the firm’s New York City office.

More lenders are likely to take action in January and February, after the holiday season is complete. “Most lenders have been willing to work with the borrowers, granting them temporary forbearance to weather the storm,” says Dobrowski. The abatements and forbearance are burning off.”

In past, developers added apartments to active malls

Developers have proposed to redevelop more than a hundred malls into mixed-used properties with apartments—56 of these have been completed and another 75 are in the works, according to a count by Ellen Dunham-Jones, a professor of architecture at Georgia Tech. Another 120 defunct malls have been turned into things like sports areas, movie sounds stages, industrial sites or data centers.
“The properties that have experienced these transitions have traditionally been active malls,” says Dobrowski.
Successful redevelopments of closed malls have often been in strong locations, where the land under the mall is valuable enough to justify demolition and new construction. “What you really have is land—the land has to be appraised at a value that make the demolitions and construction worth it,” says Bob Barone of Partner Engineering, who has worked on many mall redevelopments.
A strong location can make even a complicated redevelopment work. Humphreys and Partners Architects, headquartered in Dallas, was one of the architecture firms that produced master plans for proposed development at Dallas Midtown, a 450-acre new, multi-phase, mixed-use plan that is still opening new phases on the site of Dallas’ old Valley View Mall, which closed eight years ago.
“It’s premium real estate in an excellent location,” says Walter Hughes, vice president for Humphreys.
The hundreds of second-tier malls that are likely to become available for redevelopment may be more difficult. To make sense, a distressed shopping mall would have to be offered for sale a price low enough to allow the new owner to manage it profitably and pay for an eventual renovation. “It needs to be sold at a price that makes sense,” says Dobrowski.
Redeveloping prominent mall sites also require a long list of stakeholders to agree, including local zoning offices and the remaining retail tenants with long-term leases.
“It takes a lot of time. It takes lot of human resources,” says Dobrowski. “Redevelopment of these properties takes years.”

Possible answers to problematic redevelopments

The easiest way to add new apartments to an old mall is to build on the parking lot. If there are many un-used spaces, a mostly-empty lot could become the site of a new, wood-frame apartment building, says Hughes. If all the parking spaces are still needed by the retail, that’s a good sign. An apartment development in an attractive location may have enough demand to support the cost of building apartments over a layer of structured parking or wrapped around a concrete parking garage.
It’s more difficult to turn an empty, enclosed mall building into new apartments. “Remodeling the mall itself for apartments is generally not easy,” says Hughes. “The ceiling height is the wrong height and the floor plate is the wrong depth.”
Some demolition may be necessary. Dealmakers like McAuliffe propose tearing down empty, anchor stores to add new apartments to old, enclosed mall buildings.  “Take any regional mall,” says McAuliffe. “There have been major big box stores and department stores that have closed. Developers are looking to knock down the big boxes to build apartments.”
Source: “Apartment Investors Mull Opportunities in Distressed Malls”