Pulling Space Out of a Hat

  • Published in SCBlog

How to create space in submarkets and shopping centers by reshaping the landscape of today's properties.

 

MisiavegBlogThe great recession technically ended in the second quarter of 2009. Yet, sluggish growth continued through 2010 with retail sales and consequently retailer interest in new stores not increasing until 2011. This new demand was good news for owners and developers of retail space, but for retailers, as a result of little or no new retail development since 2007 when the recession began, they were faced with a new reality of little to no available prime retail space. Adding to this challenge was the reluctance of developers to initiate new development until the pace of the recovery crawl solidified, and lenders were willing to establish new sources of financing.

So, with retailers large to small, local to national, start-ups to established brands, all looking for new space and with little space available, how are expansion opportunities created where seemingly there are none? It's simple – create space (out of thin air) that, on the surface, doesn't seem to exist. Retail real estate brokers, although academically not magicians, have had to do what seems impossible. Through invention and creativity, space must be created to meet this new demand. This is, in essence, the new normal.

Retailers and restaurants, from local to national and small-format to big box, are changing their footprints. While some are getting larger, most are consolidating and compressing into smaller spaces. In some cases, space reserved for future expansions has become a bargaining tool for retailers in return for concessions as landlords seek to create space. In this game of "musical chairs" where larger tenants are shifting into smaller spaces, there's opportunity.

Best practices for landlord and tenant representatives must now include an up-to-date understanding of this new approach. Like clairvoyants, landlord and tenant representatives must know in advance where market trends will ultimately expose opportunities and proactively have conversations with junior and big box real estate representatives to leverage potential space.

"Carve-outs" and add-ons offer another way to create space by way of restructuring, reorganizing or re-entitling existing parking fields. Many anchors, with parking availability now larger than parking requirements, are creating, then selling or leasing, outparcels within their parking lots.

In addition, new urban planning and parking codes pervasive in today's marketplace allow for far fewer parking spaces than zoning codes of previous generations. Property owners and tenants may apply for new zoning designations that allow less parking creating the opportunity to build space. Critical to this approach is the need for landlords and their representatives to be well versed in restrictive and operating easement agreements (REAs/OEAs) of each shopping center in order to determine permissible expansion. A solid understanding of control areas, no-build areas and tenant lease exhibits, as well as zoning code, is critical before attempting this rabbit trick.

The expansion of existing space offers an additional way to create new opportunities. Many landlords and tenants are too quick jump into a facility move when space is under- or over-sized. The answer may be found onsite. Expansion is often possible by moving the rear or side walls or adding a second floor. Regardless of pursuit, full attention must be paid to tenant exclusives, OEAs and other landlord obligations.

Underperforming tenants also offer another opportunity to create space. By approaching these tenants, landlords may offer an early lease termination or a buyout. This is an effective way for a higher quality tenant to assume the space and upgrade the merchandising mix, credit value, term and/or NOI of the property. Landlord and tenant representatives must be vigilant in their communication with existing tenants to determine their sales history and performance and identify possible vulnerability or weakness. Information on tenant sales metrics, occupancy costs and credit quality are readily available in today's marketplace. These tools help landlords determine short- and long-term vulnerability and, consequently, opportunity.

Not to overlook the most simple and obvious way to create space – natural lease or option expiration. Once the term is up, a world of space options is available. Yet, open communication between landlord and tenant representatives is key to identify opportunities in advance, and the appropriate marketing strategies.

Many existing tenants seeking to downsize are subleasing space. This symbiotic relationship allows a new retailer to gain entry into the marketplace while enabling the current tenant to dispose of unwanted space. There is an added advantage for these tenants in that as sublessors, they continue to control the space potentially eliminating opportunities for their competitors and/or sustaining their market dominance. However, it is important that real estate professionals be aware of exclusives and/or landlord rights with use changes.

Outparcels offer another opportunity. Consider purchasing or leasing outparcels that are underutilized by outdated or functionally obsolete occupants. For example, older restaurants, gas stations and banks can often be repurposed to improve the retail landscape – and instantly add curb appeal and newer tenants to the shopping center.

Identifying space for expanding retailers used to be a simple hunt for "space for lease" signs followed by calls to potential landlords, developers and their leasing representatives, typically resulting in a subsequent deal. But that's not the reality of today where only "in-the-know" representatives are equipped to create space out of thin air.

— Andy Misiaveg is a partner with The Shopping Center Group. He has completed more than $500 million in retail transactions in his career with clients such as Bed Bath and Beyond, Ross Dress for Less and Chipotle. He can be reached at andy.misiaveg@tscg.com.

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