Finding opportunities in closing retail centers

Whether or not you buy into the theory of the “retail apocalypse” disrupting the retail real estate sector, it is clear that the recent surge in retail bankruptcies and store closings is creating plenty of opportunities for value-add investors.

Retailers have been battered by increased competition from the acceleration of e-commerce and changing consumer shopping patterns. Dozens of retailers ranging from Sears to Radio Shack closed nearly 9,000 stores in 2017 and there are even more closings ahead. According to Cushman & Wakefield, another 11,000 U.S. stores could go dark this year. For example, Sears announced in January that it will move forward with plans to close 103 of its Sears and Kmart stores.

So, what happens to that excess space? That question is giving the real estate industry an intense sense of déjà vu. The Great Recession created a similar seismic shake-out in the retail sector with a flurry of bankruptcies and store closings that sent owners and investors scrambling to backfill empty retail spaces that emerged in neighborhoods, retail centers and malls around the country. It would seem that the lessons learned a decade ago are still very much in play today as investors think creatively about how to recycle empty space.

Investors are tackling the challenge of redeveloping obsolete retail space head-on. Oftentimes, that means throwing out the traditional playbook and coming up with a whole new game plan that includes alternative, mixed-use development uses that run the gamut from apartments and hotels to fitness centers and trampoline parks.

There are thousands of defunct retail properties that are providing a blank canvas for redevelopment projects that come in all shapes and sizes. A group of local developers recently completed the transformation of a former Macy’s department store in St. Paul into a new mixed-use project. The property now includes a practice ice rink for the Minnesota Wild NHL hockey team, an orthopedic clinic, a brewpub and a Walgreens along with other retail and office space.

And in Downtown Providence, R.I., the historic Arcade Providence retail center in Downtown Providence, R.I. has been revamped into a trendy new mixed-use housing development. The top two floors have been renovated to include 48 “micro” apartments, most of which are less than 300 square feet in size. The project also includes a variety of retail and service businesses on the first floor.

Enclosed malls have been at the frontlines for retail redevelopment projects. For example, Macerich has been working to redevelop its struggling Southridge Mall in Des Moines for the past six years. Major changes have included “demalling” the former enclosed mall to an open-air center. In addition, Macerich sold the former JCPenney site to the Des Moines Area Community College for $1 to create a new 65,000-square-foot Center for Career and Professional Development. More recent additions include a new medical clinic and a senior living facility.

According to Cushman & Wakefield, some 200 malls have disappeared over the past decade, and there is a general expectation that those numbers will continue to dwindle. As of 2016, there were an estimated 1,150 operating malls in the U.S. Owners are coming up with a variety of alternatives to traditional retail tenants that run the gamut from churches to industrial distribution centers. Ben Conwell of Cushman & Wakefield predicts that about three-fourths of those “dead malls” will re-emerge as lifestyle centers that offer a mix of live, work, play – and yes –  shopping for consumers.

One of the keys to success is to be able to move quickly to identify opportunities. Investors can leverage tools like Reonomy that provide detailed ownership information for empty retail properties, as well as determine ownership of adjacent properties that could benefit from planned retail redevelopments and revitalization, and in turn impact a broader neighborhood or trade area.

Reonomy offers real-time access to detailed property data that business owners, investors, and commercial real estate professionals need in today’s competitive marketplace. Try Reonomy National for free today.

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