“More subdued,” was how one source described the second day of dealmaking at ICSC New York. Calls were still being made and some round tables were occupied, but the floor produced a more muted hum—the flurry of activity marking day one appeared indeed to be winding down. On day two we were privy to a handful of insights, shared below.
- Virtual downsizing is growing. Retail tenants who are struggling or who may have qualms about the future of a specific store can restructure their lease using a virtual downsizing component, says Excess Space Executive Managing Director Al Williams, who adds that virtual downsizing has been a very active part of his firm’s leasing business this year. In virtual downsizing, a tenant offers to stay in a space, but only occupy and pay for a portion of it. The landlord then decides whether to physically partition the leftover space. “Landlords are being more flexible with retailers for now,” says Transwestern Vice President Richard P. Rizzuto. For 2017, Williams expects a large in-progress retail merger to bring “massive business activity” to his sector if it gets approved.
- Subdividing mall space can be profitable. Subdividing big-box space and re-tenanting can increase mall incomes in multiples, says PREIT CEO Joseph Coradino. In one example he brought up, a 240,000-sq.-ft. Strawberry was subdivided into a 100,000-sq.-ft. anchor space and the rest turned into restaurants and smaller retail. “In one situation, we had 10 new stores take the place of a big anchor, and those stores are doing 1.5 times the volume of what was there originally,” Corradino says. Food and entertainment now occupies 15 percent of PREIT malls’ footprints, he adds. “Ten years ago in most malls, food and entertainment tenants were in the low-single-digits.” The typical conceptualization of anchors is changing, he continues, as it no longer has to be a department store. For instance, a beauty salon in the mall that may have trouble hitting its own revenue-per-person marks, but drives considerable traffic to nearby stores, is a keeper.
- Densification brings opportunity. Urban densification provides investment opportunities for retail assets, says Midwood Investment & Development COO Mehul J. Patel. Midwood, for example, is actively getting out of the shopping center space in suburban areas through both straight sell-offs and 1031 exchanges, and pushing that capital into downtown mixed-use retail. “We believe there is real future growth in downtown retail, and we see high street retail as being most resilient,” Patel says.
- There are two types of consumers in the U.S., and not in the way you think. Americans’ shopping behaviors differ from region to region, according to Ami Ziff, director of national leasing at investment firm Time Equities. Those who live in the gateway cities can shop at their convenience, surrounded by plenty of store choices and easily reached by e-commerce fulfillment centers. But in tertiary markets (and even in some secondary ones), consumers may have to drive an hour to get to the nearest strip center, and supply chain logistics have not yet been sufficiently built up to reach them through online delivery. Time Equities is working to reach the latter consumer, acquiring strip centers and enclosed malls and rehabbing them with aesthetic and experiential features that appeal to specific communities. Customizing a property to fit local community needs is key, Coradino agrees. “Malls used to be homogenous 10 years ago. We are finally past that. We are trying to make them unique to their communities,” he says.
- Tenants get more involved. Retail tenants are becoming more actively involved in the deal negotiation process, taking on what Rizzuto calls “internal brokerage roles.” When faced with high rents, they are increasingly running demographics studies to ensure their rent outlay is worth the expense. “Retailers are being more diligent in controlling spend,” Williams says.