Los Angeles — In today’s retail environment, adding local food and beverage concepts, entertainment venues and landscaped parks seems like a surefire way to revitalize a dated shopping center. A trickier task is determining how exactly these nontraditional concepts boost the bottom line.
A panel of retail owners and service providers weighed in on this topic at France Media’s sixth annual Entertainment Experience Evolution conference at the JW Marriott L.A. Live in Los Angeles last week.
“This panel started because I’m a bit of a skeptic as it relates to entertainment concepts,” says moderator Joyce Storm, president of Storm Advisors. “Investors don’t like when you discuss entertainment experiences; developers and owners have trouble making sense of where they should put their dollars and cents, time, energy and resources. It’s important to understand what to expect in terms of results from entertainment concepts and placemaking in order to determine the money that should be funneled into them.”
For Steven Levin, founder and CEO of Centennial Real Estate, the challenge and opportunity in reimagining dated, traditional malls to fit the needs of today’s shopper is in the underwriting.
“Transforming a traditional mall into a mixed-use destination provides an opportunity and a challenge for us in terms of underwriting,” he says. “These projects don’t pencil out in a traditional retail development sense. We’re creating a destination, and at the end of the day, we’re looking for a return on the experience our shoppers have.”
“You have to work with a capital partner that is patient and understands that these sort of immersive centers take a long time when you’re doing it right and doing it well,” continues Levin. “It’s not a short-term game, it’s a very longterm game. It’s important to deal with best-in-class operators. Customer engagement is key. People have to feel a connection to your property. That’s why sustainability and branding are critically important.”
Earning Financial Support
When trying to find financing for an entertainment-based retail development, it helps to market the property from a mixed-use lens.
“I’m not going out to finance a retail property,” says Leslie Lundin, managing partner at LBG Real Estate. “One of our projects is a 1.2 million-square-foot mall in California that we’re repositioning. It’s entitled for residential, office, retail and hospitality. There will be a retail component to the property, but when we talk to capital, we explain that the nucleus of service, food and entertainment is going to become something that serves the greater residential community. It’s more of a synergistic experience.”
One of the biggest issues facing landlords today is that tenants — specifically entertainment and food and beverage concepts — are requiring larger amounts of capital infusion in the form of tenant improvement allowances, tenant work letters and rent concessions, according to Storm. This can make underwriting a tricky business.
Jeffrey Berkes, president of the West Coast division at Federal Realty Investment Trust, believes these payouts can be avoided by creating demand at your property and selecting the right tenants.
“Our job is to take a piece of real estate and make it work within the community,” he says. “When you create that need within the space, you’re less likely to be subsidizing or buying out a tenant in order to keep your property full and relevant.”
“With entertainment uses, we’re very sensitive to who the target consumer is,” he continues. “If we’re bringing a tenant into one of our centers, we look very closely at what positive results they will bring to the rest of the development. We want to understand what tenant improvement dollars are being used for, and if the tenant is not successful, if the space will be reusable. If not, we’re going to look for security in the lease. Deals need to stand on their own and the entertainment use needs to do something for the entire property or we’re not going to do it.”
Creating a Cohesive Story
Another key to keeping these costs in check is making sure that the property is cohesive and that each tenant understands their importance within the story of the development.
“A major problem is developers and owners that are just looking to check boxes, not looking to provide a cohesive story at their developments,” says Dan Pelson, COO of Area15. “They’re looking to check the box of experiential retail, anchor tenants, food and beverage, outdoor space for gathering, and they’re going through and adding these items in without context.”
“What you need to think about is the context and connectivity of the experience,” he continues. “Tenants need to understand this, as well, so you’re not having to pay them to go into your project. If tenants don’t understand the context and how they connect with the story of the development, it’s going to be a hard sell and it might not pencil out financially.”
Creating a cohesive story for one’s development can be achieved through proper landscaping and sense of place.
“Landscaping and placemaking can be critical in energizing a property,” says Julie Brinkerhoff-Jacobs, president and executive senior principal of Lifescapes International. “The garden environment is a way to help owners monetize their space because it keeps people on-site longer and wanting to come back for more.
“One of our recommendations at a retail center we worked with was to put the parking structure as close as possible to the initial experience of entering the property. You want shoppers to get out of their cars and be immersed in the project as quickly as possible.”
Making malls work in today’s environment requires a keen eye and the ability to shake off traditional retail practices.
“There is a way to make malls work, but it requires a big reset,” says Storm. “People are running away from malls because the department store-style model is not working. If you can figure out how to reposition your anchor buildings, which really are well-built, they can easily be converted into something like an office building that reinvigorates the space. Then, you’re able to spend more money on entertainment uses.”
“It all has to work together and there has to be a reset in valuation and what you’re paying for it,” she continues. “It’s unfortunate for the lending community, which has to experience a valuation reset, but that’s just the way it is and that’s how we’re able to make these projects a reality. If you’re working with old school capital, today’s market is tough.”
— Katie Sloan