News

Making Properties Pop

Pop-ups. They have become a phenomenon in several major cities. From pop-up shops that capitalize on holiday sales to pop-up restaurants that are impressing foodies from coast to coast, this trend is here to stay — even in traditional office buildings.

Today’s competitive real estate market — coupled with increasingly selective tenants seeking work-life balance — is driving many property managers to find creative (and effective) uses of excess space. Businesses seeking commercial office space are no longer solely focused on location, location, location. Location is important, of course, but convenient access to amenities has become a close second. In particular, savvy millennials, and therefore their employers, are looking to incorporate their daily routines into their work-life structure.

Convenience Is King

As corporations look to attract and retain talent in today’s competitive marketplace, amenities are critical. More importantly, in today’s 24/7/365 work environment, convenient access to wellness programs is no longer an option. From golf simulators and yoga studios to blood drives, flu shot clinics and vending machines with healthy, fresh food, offering a one-stop-shop experience is more important to today’s landlords than ever before.

Mobility Movement

Mobile retailers are ideal when it comes to flexible or unused space, and more and more retailers today are establishing mobile shops. > On the landlord side, mobility of pop-up amenities allows for flexibility in leasing with a modest build-out investment. If a potential tenant is interested in space occupied by a pop-up concept, the pop-up can relocate to another vacant space fairly seamlessly, ensuring that building space is optimally utilized.

On the retailer side, space that is a blank canvas equates to options. A “white box” space — often with exposed cement floors, basic light fixtures and no added build-out — makes for a convenient addition of furniture and decor, all of which is easily transferred when a move becomes necessary due to leasing requirements. And starting with a blank canvas allows the retailer or service provider to truly shape the space.

Costly Considerations

Understanding the tenant mix of a region is difficult. Even a temporary retailer can fail when inserted into a tenant mix that does not blend with demographic needs. For a pop-up retailer in particular, knowledge of the desired tenant demographic is crucial. A yoga and wellness studio, for example, could require 20% of building demographics to include millennial women, its primary target audience. Retailers and service providers considering a pop-up concept should outline very specific location “must-haves” when searching for an ideal building. Understanding the industries that the target demographic tends to gravitate toward is helpful to the search.

Case in Point

JLL, a professional services and investment management company specializing in real estate, has embraced several pop-up concepts in the Civic Opera Building, 20 N. Wacker Dr. in Chicago, including Bottom Line Yoga, which offers building tenants a daily schedule of yoga and group fitness classes, meditation, naps, massage, healthy events, a quiet workspace and corporate wellness consulting. JLL also brings in Fooda, a pop-up that serves healthy and well-priced meals from local restaurants. For special occasions, amenities like a chocolate shop or floral boutique are brought in for limited engagements. The property management team focuses on services that make tenants’ lives easier, creating an experience centered on “the whole human.”

Beyond retailers and service providers, “raw space” can be utilized for events, photo shoots and commercial filming.

The Bottom Line

Creative use of space, like pop-up amenities, is a win-win-win — for property managers, retailers and most importantly tenants. When executed well, pop-up concepts can enhance a property’s overall tenant mix while creating a positive and progressive work-life experience for tenants.

Lauren Goggins is founder and director of Bottom Line Yoga ([email protected]). Hope Tate is general manager, JLL ([email protected]).

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News

Experience Counts

BY CSA STAFF

There may be debate among presidential candidates about whether experience is a positive or negative attribute, but for open-air centers, experience is a must. With the ease of online shopping, today’s consumers need a reason beyond the chance to visit their favorite stores to make a trip to their local center.

Centers are responding to this need by providing experiences that cannot be duplicated online, which can range from dining to live entertainment to service providers. They are also aligning their shopping experiences more closely with online offerings, creating an “omnichannel” environment that blends physical and digital retailing. Read ahead to find out what four major open-air center operators are doing to help draw customers for their tenants.

Feeding the Need for Experience

Open-air shopping centers offer consumers more than just easy access to a collection of retail stores.

“We see the need to provide experience as a complement to our retailers,” said Daniel Taub, president of Tarrytown, New York-based DLC Management Corp. “Each type of retail project requires its own set of amenities and experience offerings.”

DLC directly manages 115 properties representing about 20 million sq. ft. of space in the eastern half of the U.S. and Texas. Of these, 114 are open air. Complimentary Wi-Fi, as well as various types of restaurant options and entertainment/experience venues, are becoming popular amenities.

“Food and entertainment are playing more of a role in all retail product types,” said Taub. “You provide dinner or an entertainment venue to augment and supplement the retail-driven format.”

In addition, Taub said food can serve as a center’s anchor at certain times of the day. This is leading even some non-power or lifestyle centers to open food-centric components.

Grocery-anchored centers are also continuing to seek out and provide service-oriented tenants, said Taub. >

“You can’t get your hair or nails done online — yet,” commented Taub.

DLC operates a former enclosed mall that has been converted to an open-air multi-faceted center called Randhurst Village in Mount Prospect, Illinois. The 1 million-sq.-ft. property illustrates a lot of the trends discussed by Taub.

“There are power center, entertainment, lifestyle, grocery, entertainment, food, convenience and retail components,” said Taub. “There are different opportunities for different times of the day and week.”

Retailers serving different components of Randhurst Village include Jewel/Osco, which serves as a grocery anchor, as well as Costco, Home Depot and an AMC cinema.

Modern Times

Today’s open-air centers are responding to the omnichannel age with amenities that supplement and also go beyond digital retail offerings.

“We have found that our grocers are looking to add courtesy lanes outside the fronts of their stores for customers’ convenience in picking up orders that have been placed online,” said David F. Collins, EVP portfolio management of Oak Brook, Illinois-based InvenTrust Properties Corp.

“Having a digital presence for our centers and their stores has been key — either via a shopping center website or accurate Google mapping,” added Collins. “If our stores are correctly mapped and in proximity to the customer, we can capture that shopping visit.”

However, not every amenity that open-air centers are offering is designed to fit into an omnichannel strategy. Collins said InvenTrust is focusing on providing a “sense of place” with such features as gathering spaces with seating.

InvenTrust operates 110 multi-tenant, open-air shopping centers comprising 16 million sq. ft. of retail space in 24 states.

“We have a blend of approximately 60% power centers and 40% grocery-anchored centers, with concentrations around metro areas that include Dallas, Houston, Austin, San Antonio, Atlanta, Raleigh, Orlando and Denver.” said Collins. “As we acquire open-air centers in high growth markets, we are reducing our portfolio locations in non-strategic markets.”

For example, Collins said InvenTrust is redeveloping Bryant Square Shopping Center in Edmond, Oklahoma, later this year.

“It’s a 35-year-old center with a first-rate location,” said Collins. “Improving the layout and enhancing the merchandise mix will help us maximize our return on this investment.”

Clicks to Bricks

Irvine, California-based Irvine Company Retail Partners is also observing the omnichannel revolution, finding its way to open-air shopping centers.

“We’re seeing more Internet retailers expand their brands by adopting a physical store,” said Dave Moore, president of Irvine Company. “At our Fashion Island center we added Bonobos, the online men’s retailer, in a 1,085-sq.-ft. store that gives customers a chance to touch and try on the product before placing an order in-store that’s delivered to their door. Conversely, brick-and-mortar stores are expanding their online presence.”

In addition, Moore said food remains strong, with more diverse casual and quick-service concepts coming to regional and community centers. He also cited a growing consumer interest in experiential retail.

“Anything that turns the experience of browsing, trying and buying into something more fun and exciting will play a role in the retail of the future,” said Moore.

Irvine Company maintains a portfolio of 41 open-air centers encompassing approximately 8.8 million sq. ft. Locations are mainly Orange County as well as Northern California, with ground-up development under way both north and south. Los Olivos Marketplace is under construction in Irvine and set to open in March, while Santa Clara Square Marketplace in Silicon Valley is under way for completion in fall 2016.

Los Olivos Marketplace has Whole Foods Market, 24 Hour Fitness and Spectrum Montessori School as anchors. A part of the Irvine Spectrum business district, Moore says it illustrates the company’s approach to developing planned communities with a grocery-anchored center as a key component.

“It will be a daily-needs center for those living and working in Irvine Spectrum,” said Moore.

Community Ties

Especially in urban areas, open-air centers are connecting to customers and the surrounding community.

“Definitely anything that makes the customer experience better is a priority,” said Debora Overholt, VP retail and principal broker of Miami-based Swire Properties Inc. “Food and beverage are a big part of the tenant mix, and there are more multi-use entertainment spaces. Also, centers are providing mobile apps and other technology offerings that make the customer comfortable.”

Swire operates nine open-air, mixed-use centers totaling 31.3 million sq. ft. This includes five centers in mainland China, including a 1.3 million-sq.-ft. center in Beijing, and three centers in Hong Kong. In addition, Swire is in phase one of developing Brickell City Centre, a 5.4 million-sq.-ft. center in the Miami downtown financial district with 500,000 sq. ft. of leasable retail space. Brickell City Centre offers several amenities that tie it closer to its shopper base.

“We have a direct connection to the Miami public Metromover transportation network, which runs through the city for free,” said Overholt. “There is also an advanced valet service, which is very common in Miami.”

Featuring open-air retail space on three levels of podiums, a fourth level of podium dining space, and office and hotel space, the center is anchored by Saks Fifth Avenue and will offer a mix of luxury premium retailers with a significant food and beverage presence.

Additional tenants include Stuart Weitzman and Lululemon. In addition, Mexican luxury cinema operator Cinemex will open its first-ever U.S. location there.

“We will have a lot of first-in-the-U.S. tenants,” said Overholt. “It’s a unique feature that fits Miami’s international culture.”

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FINANCE

Retail bankruptcies and the circle of life

BY Kenneth A. Rosen

The last several years have seen numerous chapter 11 bankruptcies with the most recent being The Sport Authority. It may seem counterintuitive, but bankruptcies are a sign of vibrant industry and give rise to new opportunities for those who know where to look.

The Sports Authority is the most recent example, but other bankruptcies the past few years have included Border’s, RadioShack, Circuit City, Loehmann’s, Coldwater Creek, Mandee Shops, Frederick’s of Hollywood, Body Shop, Cache, Dots, Love Culture, Alco Stores, Ashley Stewart, Deb Shops, Syms/Filene’s, Fortunoff’s and Anna’s Linens.

Today there is a new breed of lender to retailers. No longer are the only options for financing traditional lenders such as JPMorgan Chase, Citibank or Wells Fargo. Hedge funds have entered the lending business and so have specialty lenders that are more comfortable lending to retailers- and particularly comfortable with the risk of having to liquidate retailers. In addition, in the last two decades we have seen more retailers acquired by hedge funds as portfolio companies. Such owners have a greater willingness to acknowledge when a company is broken and when the cost of repair is not worth it. Therefore, they just cut their losses and move on to the next investment. Finally, as the cost of chapter 11 bankruptcies (professional fees, especially) has increased and the likelihood of a successful restructuring has declined (perhaps due to fierce competition), more retailers are being liquidated than are being reorganized.

We see more retailers today making a valiant attempt to find a buyer as a going concern; but, then commencing a chapter 11 case wherein the goal is a speedy liquidation.

Liquidating a chapter 11 debtor’s inventory now is a big business. Liquidators fiercely compete for the right to conduct “GOB” sales. The purchase price of the debtor’s inventory may go up at auction in increments of one-tenth of a cent. It is not uncommon that inventories will yield close to 100% of the debtor’s cost. Part of the reason is “augmentation.” A liquidator can be permitted by the Bankruptcy Court to bring in additional inventory to the debtor’s stores just for the liquidation and going out of business sale. And, the Bankruptcy Court can authorize a liquidation sale or going out of business sale at the retail sites despite prohibitions in leases to the contrary.

Retail liquidations provide opportunities for other retailers and for suppliers to retailers. Liquidators must line up a flow of merchandise very quickly. The time between when the liquidator wins an auction and when the liquidator commences sales can be just a few days. So, suppliers of goods can reach out to the major liquidators (often known well in advance of the auction) in order to offer goods to the liquidator contingent upon the liquidator winning the auction. This is an opportunity for the supplier to sell goods – especially goods manufactured for the debtor or for retailers similar to the debtor. Of course, one retailer’s bankruptcy is another retailer’s opportunity to buy debtor-owned goods in bulk at prices well below cost. Chapter 11 debtors, their banks and liquidators all like an opportunity to sell early and in bulk.

The purchase and sale of leases of retail space in bankruptcy cases today is a big business. Despite a lease having language in it stating that the lease is not assignable, or is not assignable without the landlord’s consent, the Bankruptcy Court has the power to permit the assignment of the lease. The Bankruptcy Court also will review any use restrictions in light of the assignee’s intended use and decide if the intended use violates a use restriction. And, note that Courts, banks and creditors committees usually favor assignments if they result in sale proceeds that increase the recovery to creditors- which means that close calls may be decided in favor of the debtor and assignee rather than the landlord.

Retail bankruptcies present an opportunity for a retailer that is anxious to enter a market to achieve almost instant critical mass by purchasing a group of leases all at once while avoiding the expense and time of seriatim lease negotiations over time to ramp up. The savings of management time and negotiating costs (legal fees) can be substantial even if the leases are purchased at a price equal to market rents. The Bankruptcy Court can enter an order protecting the assignee from disputes over arrears, over use of the premises and against claims by third parties — which also is of substantial value.

Once a retailer files a chapter 11 bankruptcy petition, it has a finite amount of time before it must either affirm the lease or else reject the lease. “Rejection” simply means that the debtor is allowed to disavow its obligations under the lease. The typical time period is nine months from the date of bankruptcy. But, a secured lender will be very conscious of the time that it would take to sell off its collateral in the stores. As a result, the lender may require that an inventory liquidation program begin far in advance of the nine month anniversary so as to be out of the stores by the nine month anniversary.

No prudent debtor would assume a real estate lease unless it knows that it definitely will be continuing in business or that it has an assignee lined up to purchase the lease. Consequently, each day that the bankruptcy case grows older, the debtor (and its creditors) grows more anxious to find someone who will pay for an assignment of the leases. The opportunity that this presents to a potential acquirer is that the debtor’s options to the acquirer’s offer may decline with the passage of time. And, no debtor or secured creditor ever wants to pass up getting something in favor of risking getting nothing. “A bird in the hand….” Further, bulk bids for multiple leases are extraordinarily tempting even if on an individual basis the leases justify a higher aggregate price.

There is more to a retailer than inventory and real estate leases, though. Intellectual property (trademarks, copyrights, patents, logos, customer lists) can have value and may be purchased separately from the inventory. The “Loehmann’s” and “Coldwater Creek” names are good examples. A former competitor’s intellectual property may be valuable to a buyer that has a similar customer base as that of the bankrupt retailer. We also have seen examples of intellectual property being acquired for internet and catalog usage. Not 100% of the public knows that a retailer filed a bankruptcy petition or that the retailer actually was “dark” for a period of time. They just know that they recognize the name.

And, warehouse/distribution machinery and systems that have very little value if removed often can be acquired at a fraction of their purchase price. Better yet, a buyer may be able to acquire the underlying lease for the premises and step into a turnkey warehouse/distribution center.

Finally, timing is everything. No landlord wants a dark hole – especially during the fourth quarter of the year. As a result, landlords may provide concessions to an assignee that can move expeditiously in getting open. The flip side of that coin is that the purchaser of a lease will pay less if it cannot open in time to capture a major season.

While it always is distasteful to prey on a carcass, the parties with a stake in the outcome of the debtor’s bankruptcy usually welcome a buyer’s interest and the purchase price of the assets purchased may be a bargain.


Kenneth A. Rosen is chair of Lowenstein Sandler's Bankruptcy, Financial Reorganization & Creditors' Rights Department. He focuses on Chapter 11 reorganization, out-of-court workouts, financial reorganization, and litigation.

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