Sugar Land, Texas, has thrown its Stetson into the retail redevelopment ring. The Houston suburb launched a pilot program last year—complete with subsidies and aggressive incentives—aimed at redeveloping troubled retail centers. The program underscores one city’s changing focus from new construction to redevelopment of existing shopping centers and retail districts.
Sugar Land isn’t alone in its desire to rebuild retail surrounds. Municipalities around the country are actively looking to forge partnerships with property owners and developers to revive dying areas and attract desirable tenants—and developers are not only answering, but are rewriting retail of their own accord.
Agranular understanding: Joseph Coradino, president of Philadelphia-based Pennsylvania Real Estate Investment Trust (PREIT), is focused on redevelopment. And it’s not just because that’s what his tenants want. “The short answer to what is driving redevelopment is tenants,” he said. “That’s the easy answer. But I think it’s a mistake to approach redevelopment from that perspective. It’s easy to fill space.” What isn’t so easy, said Coradino, is gaining a deeper understanding of an existing asset.
“What we like to do in looking at a redevelopment is get what I call a granular understanding of the property, in which, first, we are looking at demographics and psychographics, but not just how many people are there and how much money they make, but rather digging into the makeup of the trade area. And that’s driven not so much by the customers we’re getting, but by the ones we’re not,” he said. “Second, we take a close inventory of the physical environment of the asset.” That inventory takes into account the changes in shopping habits that have occurred over the years, as leisurely two-hour mall excursions have edited to more of the in-and-out variety.
“That suggests a whole range of possibilities for the redevelopment of a mall,” said Coradino. From turning areas of the mall inside out, to clustering stores into districts of retail categories, to introducing entertainment and experiential retail, “all of it becomes part of a redevelopment strategy that is driven by who the customers are, how they shop, and how we expand our market share within a market.”
Several PREIT properties stand as testament to the powerful results a strategic redevelopment can reap. New River Valley Mall, in Christiansburg, Va., sits about three miles from Virginia Tech, and down the road another eight miles is Radford University. Combined, the two schools are populated by nearly 50,000 students. “None were coming to this mall,” said Coradino. “They were driving by it to go to Roanoke, so we set out a strategy to attract the students, faculty and staff from both universities.”
In addition to a full-scale renovation of the mall, PREIT bought back a Peoples Department Store that was anchoring one end and brought in Dick’s Sporting Goods as well as a Red Robin restaurant. A theater with four screens was shut down and the area is being converted into a food court and, ultimately, a junior college. On March 1, a 16-screen Regal Cinema opened on the property. “The traffic in the mall has seen doubledigit increases since November 2006,” said Coradino. “And we saw the same thing happen in Pennsdale, Pa., at Lycoming Mall.” Never more than 80% occupied, the mall now has a Dick’s Sporting Goods, a Borders and an Old Navy, as well as a complete facelift. Today, Lycoming Mall is 95% occupied.
A significant redevelopment is under way at Echelon Mall in Voorhees, N.J., as a vacant J.C. Penney, Sears and about half the mall are being knocked down in favor of 425 residential units, street retail at grade, and a full-scale renovation. “It’s about a $150 million project,” said Coradino.
Passionate reinvention: Scott Mitchell’s title would tell you that he knows a thing or two about redeveloping shopping centers. The VP of redevelopment for Cincinnati-based Phillips Edison & Co. heads up a division that is determined to make a difference in the communities in which it has a presence. “Our company was founded on the idea of turning around underperforming properties,” Mitchell said, “so we are very motivated by the challenge and we are passionate about making that happen. We feel it’s a win-win situation for us and for the local community to accomplish our redevelopment plan.”
The plan calls for a redevelopment strategy customized for each Phillips Edison project. “We want to first determine our strategy for what we want the property to be when redevelopment is completed,” he said. “Is it still a viable retail location, or should it now be redeveloped as an alternative use? If we determine the location remains viable for retail, then we look at it from a remerchandising strategy in order to effectively compete once again in the market.”
Redevelopment strategies in the company playbook include reconfiguration of a center, adding a big-box and/or an entertainment component, shortening the depths of deep spaces and razing an existing box for multiple retailers. “Some strategies to be successful require financial incentives or participation from the local community, or from the retailer,” said Mitchell.
A recent Phillips Edison acquisition provided the perfect canvas for one of the company’s textbook repositioning plans. Delavan Plaza, a 145,000-sq.-ft. neighborhood center anchored by Pick ’n Save grocery and located in Delavan, Wis., was just 54% occupied at the time Phillips Edison acquired it. “We faced challenges that included filling a former Kmart box, Walgreens went from inline space to a ground lease in front of the center and the competitive retail market shifted approximately one mile west of the center,” explained Mitchell. A new regional development featuring Kohl’s, Lowe’s, Wal-Mart and several national chain restaurants opened nearby, and became the dominant retail center for the area. “But we loved the market and the real estate,” said Mitchell.
Betting that Delavan Plaza was close enough to the new development to benefit from a different merchandising plan, Phillips Edison went to work. The company razed the former Kmart box for Tractor Supply Co., Dunhams Sports and Slumberland Furniture. Dollar Tree expanded within the center and took the space formerly occupied by Walgreens. “We are now finishing the new storefronts and facade work, resealing and re-striping the parking lot, and upgrading the pylon signage,” said Mitchell. The center achieved 97% occupancy within six months of the acquisition.
The Delavan Plaza redevelopment played out in a way that Phillips Edison prefers—rejuvenating through remerchandising, as opposed to changing uses entirely. “When the location is good real estate and remains a viable retail location in the market, we feel confident of success,” said Mitchell. “It is more difficult when we determine the strategy is an alternative use, such as office or medical, due to associated costs and issues like construction and uses.” Sometimes, he added, communities or retailers opt not to participate financially in a redevelopment plan for a center—and the desired plan will stall.
That is happening less and less, as communities such as Delavan, Wis., Christiansburg, Va., and Sugar Land, Texas, are becoming increasingly eager to help developers revitalize distressed centers. “We are seeing numerous instances where cities are imposing tougher restrictions on approving new development, especially when an anchor wants to leave an existing center and relocate within the same market,” said Mitchell. Cities may approve new development only on the condition that the retailer first renovate or improve the space it is leaving in order to make the site more attractive to retailers that will take second-generation space. “We make a point to meet with the city officials and the director of economic development,” said Mitchell, “as we want to work together for a successful redevelopment—and the communities welcome that.”
Home Depot Projects Lower Profit in 2007
Atlanta, The Home Depot Inc. said Wednesday it will pump $2.2 billion into improving its business this year even as it expects lower earnings and slim sales growth. Home Depot said that for fiscal 2007 it expects sales growth in the range of flat to an increase of 2%, a decline in comp-store sales in the middle single digit percentages and an earnings per share decline of 4% to 9%.
Including the effect of a 53rd week in its fiscal year, consolidated sales are expected to increase by 1% to 2%, and earnings per share are expected to decline by 3% to 8%, Home Depot said.
CEO Frank Blake told investors at Wednesday’s conference that like last year, “2007 also will be a difficult year.” But he said it will be a year of focus on Home Depot’s priorities and a year with “hopefully less noise.”
The “noise” was apparently a reference to the investor furor over former CEO Bob Nardelli’s hefty compensation in light of the company’s lagging stock price. Nardelli resigned in early January after six years at the helm of the company. He took with him a severance package valued at $210 million.
To improve its business, Home Depot said it will invest $2.2 billion this fiscal year in key priorities, including the opening of 115 stores. The investment includes $1.6 billion in capital spending and $600 million in expense.
Home Depot said it will recruit master trade specialists, simplify its staffing model, use more technology to aid customer service, and redesign employee compensation and reward plans. It also will invest in new merchandise and review its pricing strategies. Additionally, the chain will spend money on customer loyalty programs, direct-ship programs, credit programs and other specialty sales initiatives.
Federated Plans Name Change
New York City, Federated Department Stores on Tuesday said it would ask shareholders to approve changing the company’s corporate name to Macy’s Group Inc. A vote to amend the corporation’s charter to accommodate the new name will be held in conjunction with Federated’s annual meeting on May 18. If approved, the company will be known as Macy’s Group Inc., effective June 1. The move comes on the heels of the company changing most of its store nameplates to Macy’s.
“Macy’s Group is the appropriate name for our company, given that about 90% of our sales involve the Macy’s brand. That said, Bloomingdale’s is—and will remain—a very important part of our company,” said Terry J. Lundgren, Federated’s chief executive. Federated Department Stores also said stronger sales at established stores and lower costs drove a 5% rise in fourth-quarter earnings. For the quarter ended Feb. 3, net income rose to $733 million from $699 million the prior-year period. Sales fell 4% to $9.16 billion from $9.57 billion, as the company shuttered 80 “duplicative” store locations. Comp-store sales rose 6.1% in the quarter.
During the quarter, Federated lowered its selling, general and administrative costs 11% to $2.31 billion.
The company also announced a $4 billion increase to its stock buyback program and said it will immediately repurchase 45 million shares for $2 billion under the plan.