Property Management: Mixing It Up

Rosedale Center

With the 2016 holiday season in full swing, retailers and retail owners across the country are hoping to capitalize on the increased traffic. U.S. holiday sales are expected to rise a solid 3.6 percent this year to $655.8 billion, according to the National Retail Federation, an estimate that bodes well for the retail industry. A strong performance would reflect the sector’s steady recovery from the Great Recession.

Yet some retailers will remain at risk, notwithstanding robust holiday sales. Disruptive forces, led by e-commerce and changing shopper preferences, are forcing retail real estate players to adopt a new property management playbook. Retail owners and managers are taking a fresh look at their strategies for using space, re-evaluating tenant rosters, recruiting higher-performing brands to their centers and overhauling vintage properties.

Although other retail property categories are generally less affected than major malls by today’s dramatic changes, owners of neighborhood and power centers are also adjusting their property management strategies.

A dichotomy between haves and have-nots is at play in the grocery-anchored/neighborhood center category, with properties owned by REITs or other public companies faring best, Egelanian said. “Everything other than that is probably a lower-quality (property), where there are vacancies (and) weaker stores. And in today’s retail world, where you don’t have a lot of growth, those properties could be in trouble.”

For many owners of neighborhood centers, streamlined operations is the top priority, Egelanian noted. “It’s incumbent upon these owners to weed out the least profitable stores and work on efficiency—achieving a low cost of operating and (having) simple buildings that don’t have a lot of frills.”

The necessity retail that is these centers’ stock in trade also affords a reliable customer base and occupancy. Customers are looking for everyday products at good prices and want to get in and out of stores quickly.
“They’re serving the very local community with those day-to-day convenience items. Consumers ultimately need that personal visit,” Spiegelman said.

It also helps that neighborhood centers’ lineups—typically featuring drugstore or grocery anchors and service-related or restaurant tenants—make the category “the most e-commerce resistant of all shopping center types,” Cushman & Wakefield noted in its recent report.

Power centers have also been undergoing a transformation, Spiegelman said. “When the big boxes started to fail in the middle of the recession, the owners of power centers who had these big boxes had to figure out what to do.”

The power center sector has been nicked this year by the closure of 450 Sports Authority stores and by Office Depot’s announced intention to shutter some 300 stores over the next three years. But despite these setbacks, demand for well-located space offers opportunities to backfill vacant boxes with high-quality stores, Green noted.

“It’s surprising how fast some of these boxes have been picked up,” Green added. Specialty retailers like Whole Foods and Total Wine are expanding and looking for second-generation space. Desirable concepts like Ulta Beauty and off-price retailers like the ample footprints available at power centers.

Regarding the landlord-tenant dynamic, Egelanian suggests that demand for off-price retailers gives them leverage when they negotiate pricing with owners. For his part, Spiegelman believes that “no one has it easy. It’s a constant conversation of supply-demand pricing.”

And as Green pointed out, “rents are more focused on the five- or 10-year, fixed-rent deal; it’s a much more balanced relationship.”

Ultimately, a center’s success depends on the quality of the retailers, no matter the shopping center type. But owners are constantly experimenting to determine the right tenant mix for each property as the retail environment changes, Spiegelman said.

“It’s a lot of trial and error, and you have to be willing to make some brave adjustments and changes to survive.”

This is an excerpt from a larger article that appeared in the December 2016 issue of Commercial Property Executive. The full article is available on CPExecutive.com.