Given the magnitude of this real estate downturn, it’s easy to forget that not every retail center that ends up in distress is a victim of bad timing. Some centers would likely have ended up in trouble anyway because of poor site selection and misguided leasing efforts.
The Shops at Atlas Park, a 400,000 sq. ft. lifestyle center in the Glendale section of Queens, N.Y., provides a particularly heartbreaking example. By all accounts, the property is a beautiful and well-designed retail venue, featuring an elliptical park in the center of the site, white stucco buildings, lush architectural detail and a pedestrian-friendly layout.
When the developer, New York City-based ATCO Properties & Management Inc., first came up with the idea of turning a former 10-acre industrial site into a retail center, the local community couldn’t have been happier.
The Shops at Atlas Park was supposed to create hundreds of new jobs and capture sales tax revenue that had long been going to nearby Nassau County. Historically, Glendale has been under-retailed, so local residents did their shopping in Nassau, which has an abundance of malls.
"It was a very thoughtfully conceived project," says Gene Spiegelman, a retail broker in the New York City office of commercial real estate services firm Cushman & Wakefield. Spiegelman showed the center to some of his retail clients during the center’s pre-construction phase. All of his clients opted to lease space elsewhere, though Spiegelman did not say what was behind their decision.
"A lot of care was put into creating that lifestyle center, and the former owner did a very good job and worked very hard," explains Spiegelman. "It’s a beautiful property. If the center didn’t perform, it was not for the lack of trying."
Wrong place, wrong time
What happened, however, according to Spiegelman and others, is that ATCO over-reached. Glendale is a predominantly lower middle-class neighborhood. The median household income in the area is approximately $44,255, significantly lower than the figure for New York City as a whole ($55,980) and for the rest of the country ($52,029), according to the U.S. Census Bureau.
But ATCO hoped the center’s village-like atmosphere and collection of upscale tenants would draw shoppers from all over Queens, including the wealthier neighborhoods of Forrest Hills and Middle Village.
The leasing team targeted retailers such as White House/Black Market, a fashion chain serving women 25 and older; Coldwater Creek, a specialty retailer of women's apparel, gifts, jewelry and accessories; New York Sports Club, a fitness center chain; as well as Starbucks. Given their price points, these are not the kinds of stores Glendale residents would normally frequent.
Like many of its peers in the development community at the time, ATCO also decided that it was unnecessary to lease the entire property prior to opening. When the $200 million center opened its doors in April 2006, it had commitments for only 168,000 sq. ft. of space.
The problem was that the Shops at Atlas Park offered no easy access from the highway, notes Spiegelman. Shoppers outside the neighborhood felt that getting to the center was too much of a hassle, especially when they could go to the much larger Macerich Co.-owned Queens Center mall in nearby Elmhurst, Queens. Those factors alone made it difficult for the property to succeed.
"Ultimately, it was a [well] executed project that was out of context with the surrounding neighborhood," says Spiegelman. Even when the project was under construction, some experienced brokers questioned the center’s size and ambition.
Yet, it wasn’t unreasonable for ATCO to build an upscale lifestyle center in a working-class neighborhood because in the heady days of the mid-2000s, the lifestyle format was considered to be the solution to the drab malls built in the 1970s and ’80s. (Ironically, lifestyle centers have since shown to be among retail properties most vulnerable to the impact of recession.)
The company’s task was also probably made easier by the fact that ATCO had owned the site on which the Shops at Atlas Park is built for more than 85 years.
Then the recession hit and the mix of tenants at the center made less sense than ever, according to Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based retail consulting and investment banking firm. Davidowitz, who grew up in Queens, says the demographic makeup of Glendale makes the local economy particularly vulnerable during downturns.
In a largely working-class neighborhood, many were at risk of losing their jobs or being relegated from full-time positions to part-time when the recession hit in December 2007. They also had less access to credit than people in wealthier areas, notes Davidowitz.
The Shops at Atlas Park was never fully occupied, and by 2008 existing tenants started leaving the center. Some tenants, such as furniture seller Bombay Co., left due to bankruptcy. The center’s current occupancy level is not readily available, but as of March last year, it was reported to be at 60%.
No easy fix
By February 2009, ATCO had defaulted on its $128 million loan from French banks Societe Generale and Calyon and the lenders decided to foreclose on the asset. The banks and their appointed receiver, Paul F. Millus, of Snitow Kanfer Holtzer & Millus LLP, brought in commercial real estate services firm CB Richard Ellis to manage the property in May 2010.
In the meantime, Societe Generale and Calyon are planning to put the Shops at Atlas Park on the auction block within the next two months. Last week, it looked like the center might secure a buyer in McCaffery Interests Inc., a Chicago-based firm that specializes in underperforming urban real estate. By Friday, however, McCaffery opted not to pursue the acquisition.
"We thought there was an ability to fix it,” says Daniel McCaffery, president of McCaffery Interests. “But negotiations broke down."
McCaffery would not reveal the reason for the breakdown in negotiations, but claimed it was not over price considerations. He said there appeared to be one other bidder for the asset, a fact that Paul Millus, the receiver, confirmed. Millus said the other bidder was currently negotiating with the lenders and waiting for the foreclosure sale to be completed.
In Davidowitz’s view, a prospective buyer of the Shops at Atlas Park could reasonably expect a 40% to 50% discount on the bank’s original investment. The surest way to make the center successful would be to overhaul the mix of tenants at the property, bringing in value-oriented big-box tenants such as Wal-Mart, T.J. Maxx and discount shoe retailer DSW, as well as supermarket chain Aldi, he says.
These are the kinds of chains that fit well with the demographics in Glendale and that would also be a better draw for residents outside the immediate trade area, emphasizes Davidowitz.
Millus, without naming specific retailers, has expressed a similar view. “Obviously the [original] vision was somewhat misguided,” he notes. "I think the proof is in the pudding in that the center can’t really support high-end tenants, but it can support quality stores. It’s got a great demographic. I can say we are looking forward to a very bright future for Atlas Park once the ownership changes."
The challenge is that retailers such as Wal-Mart and T.J. Maxx require up to 200,000 sq. ft., but the zoning at the Shops at Atlas Park limits most stores to 10,000 sq. ft. Larger stores are allowed only if the bulk of their space is located below grade. In New York City, zoning changes are difficult to obtain, says Spiegelman. The problem is that the retail center offers limited value in its current format.
"If somebody [new] comes in, there is a lot of work to do," says Davidowitz. "The whole thing is wrong; you can’t do these high-end stores in Glendale. I would put in Aldi and T.J. Maxx and Family Dollar and Dunkin’ Donuts. It’s the kind of place where you’ve got to sell pizza slices for a dollar. California Pizza Kitchen [one of the current tenants at the property] is a wonderful company, but I don’t think it fits there."