Surplus Retail Property in the Northeast
While owners and developers are redeveloping, expanding and beginning to plan new developments across the Northeast, property surpluses created by the recession remain. Where are these surpluses? How will they be disposed of? Chain Store Age asked Andy Graiser, co-president of A&G Realty Partners, to talk about disposition today in the Northeast. Graiser is a property disposition expert with more than 25 years of experience with retail real estate.
Characterize surplus retail real estate in the Northeast.
The surplus is virtually non-existent in A and B locations. C and D locations, however, still have a lot of surplus. Landlords are starting to redevelop these older centers. The improved properties can attract new tenants especially with the significant demand in today’s market. So the C and D surpluses are declining — slowly.
What is the disposition process?
Each retailer requires a different strategy. The key is studying the retail business model and thoroughly reviewing the real estate portfolio — leases, markets, shopping centers and competitive real estate.
Once you understand the portfolio, you know where the values are, and you can gauge the costs involved in terminating the leases. You must also evaluate how landlords and retailers will react to opportunities presented by surplus real estate.
How are landlords and retailers reacting today?
Limited new development plus good demand from growing retailers in all sectors — and from non-retail businesses such as health care — have caused rents to rise in A and B locations. Landlords will negotiate lease terminations, down-sizes and subleases for these locations. Landlords continue to work with retailers in C and D centers. They don’t want to lose occupancy there.
Optimizing Shopping Center Portfolios
Optimizing retail store portfolios and optimizing shopping center portfolios seem like two different things. In fact, the two tasks have similarities.
“To retailers, optimization is getting store deployment across the marketplace right,” explained Mike Makinen, COO with MPI, Mall Properties Inc., New York City. “We have a similar strategy. We have a mix of retailers within our shopping center portfolio, and we try to optimize the assortment of retailers, restaurants and service tenants within each center.”
Achieving that requires a shopping center owner to know where its retailer customers want to locate. “The goal is investing in properties in sync with their expansion plans,” Makinen said. “For instance, we operate Bayshore Town Center in Glendale, Wis., which covers Milwaukee’s North Shore market.
“Retailers interested in Milwaukee will want a store in the West, South and North. Our location in the North covers several affluent towns. It is the obvious choice for a Milwaukee expansion.”
Real estate plays a key role in optimizing retail store portfolios. Stores must have enough square footage but never too much. Portfolios must also match the number of stores across regions to customer demand.
“Portfolio optimization means reducing or adding store square footage and matching merchandising and inventory to customer demand in a trade area,” said Kenneth Katz, principal with Houston-based Baker Katz.
“Right-sizing is a real portfolio optimization issue,” agreed Jeff Green, president and CEO of Jeff Green Partners in Phoenix. “I’ve seen retailers get side-tracked by competitive issues. Competing drug stores, for instance, sometimes make decisions about maximizing market share and maintaining competitive advantages. That can be dangerous. You can cannibalize your stores if you put too many into a market.”
Green noted that national retailers use technology to model trade areas and match the number of stores to demand.
“Technology enables us to understand customers better today — especially customers with loyalty cards and an address on file,” Green continued. “Retailers can see that a customer in a Chicago neighborhood has no children and a large disposable income. Using that information, retailers model demand and determine the right size, best locations and an appropriate number of stores for a trade area.”
On the surplus property side, retailers pare down square footage. “Retailers might try to negotiate a rent reduction,” Katz said. “At certain points in the cycle that works, but not now. Landlords today won’t reduce rents — there is too much tenant demand for space.
“Second, retailers can reduce the size of existing stores — which often doesn’t work. It’s difficult to redesign an interior to accommodate another retailer — if the landlord doesn’t object. Better to build smaller stores going forward.”
Finally, continued Katz, a retailer might relocate to smaller stores and dispose of a portfolio of large stores.
In today’s competitive retail environment, making the right decisions about adding and disposing of retail square footage is a key element in retail success.