Shopping Center Business recently sat down with Cynthia Nelson, senior managing director in the real estate solutions practice at FTI Consulting, to discuss the current retail landscape and tips and tricks for tackling big box vacancies.
Tell me a bit about your outlook on the retail landscape at current.
We’re going through a huge transformation in terms of how consumers buy retail goods and services and it is taking a toll on our shopping centers. Many big box spaces formerly occupied by retailers like Toys ‘R’ Us are going dark. I think we are in the midst of a longer period of transition, but nothing like the ‘retail apocalypse’ some are forecasting. The landscape is changing — I like to call it a ‘retail reincarnation.’
What would be your advice for an owner or a landlord looking to re-lease or redevelop vacant big box space?
Owners and landlords have to be thinking about creative ways to maximize the value of available or vacant space at their shopping centers. The easiest and most straightforward route for filling a vacancy is re-leasing to a tenant that will use the same amount of space. This may not garner much in terms of a rent differential, but it is an easy solve to the problem at hand. On the other end of the spectrum, an owner can elect to completely redevelop the space, which can lead to a big pay off in terms of higher rents. Another option is demising the space and cutting it up into smaller spaces occupied by several tenants. The major consideration should be the risk versus reward — will the amount of investment pay off in additional value for the owner or landlord? This is all happening in the midst of a continuing onslaught of closures and bankruptcies announced by retailers.
As a landlord with a big box space that needs to be filled, what are the first steps to embarking on a plan to fill or redevelop the space?
The first question should always be if there is another user that fits into the space. The larger the space, the more difficult it will be to re-lease. We’ve seen fitness concepts moving into vacated big box space and other nontraditional uses like schools. If there isn’t a user for that space as it is, the second question should be is there demand for smaller retail spaces in a new configuration that works within the physical reality of the space? Lastly, you always need to consider how the space fits into the rest of the shopping center. Am I able to create a diversity of uses that will make my shopping center an attractive place where people can come, spend time and shop? It’s not clear-cut, and it’s certainly not a one-size-fits-all solution.
Landlords have to take a lot into consideration in terms of making an investment in the space available. The capital costs can be significant, and you have to make sure you’re able to significantly increase rents and realize a return on that investment. If there’s a user in tow, the economic calculus is straightforward. Without a user, landlords and owners are going to need to be savvy in meeting and anticipating the demands of the marketplace — in some cases this might mean creating a new destination. For example, at Palisades Village, Caruso Development included a park with Adirondack chairs and blankets as part of its transformation of timeworn retail shops in Pacific Palisades, California.
What is your outlook for the future of the retail industry?
I think mixed-use, for the moment, is here to stay. You see it everywhere — not just in traditional shopping centers. We’re seeing more residential buildings with ground floor retail. More and more, people are recognizing the benefit of having different uses and activities close to where they’re living. The continued availability of excess space makes it more economically feasible where it may not have been considered financially viable in previous years. There will be winners and losers in the industry moving forward, but I think it’s very exciting because we’re going to see some fairly significant transformations at the centers in our neighborhoods and communities.