Retail Owners Bet Big on Makeovers

By Paul Rosta

RECon attendees during a break between sessions on Sunday.

Judging by conversations with a few of the developers and project managers at RECon on Monday, a steady stream of gloom-and-doom headlines has failed to dampen enthusiasm for investment in retail center makeovers. Those at the International Council of Shopping Centers’ annual spring event came to the Las Vegas Convention Center eager to talk deals, redevelopment, technology and the growing overlap of online and brick-and-mortar.

“Brick-and-mortar retail is not dying,” declared Ashlyn Booth, senior vice president & director of retail property marketing for JLL. “I think it’s a very exciting time to be in retail.” During a conversation at JLL’s exhibit space, she discussed the redevelopment of Manhattan Village, a $180 million project that JLL is overseeing in Manhattan Beach, Calif., an upscale beach community and Los Angeles suburb.

Manhattan Village, a Class A property in Manhattan Beach, Calif., is undergoing a $180 million, multi-year renovation. (JLL)

Along with new restaurants, a parcel redeveloped with boutique shops and a parking structure, and medical office buildings, Manhattan Village will host that rarity—a department store that is getting bigger. An expanded 168,000-square-foot store linked by a pedestrian bridge to a new parking structure is scheduled for completion this year. “It speaks to their customers that Macys would want to expand,” Booth commented.

Operators of Class B properties also said Monday that they see opportunity in the evolution of retail, rather than an existensial threat. Starwood Retail Partners, a six-year-old affiliate of Starwood Capital, created a detailed strategic plan for each of its 30 properties.‘We’re very focused on the highest and best use at each property,” explained Laurie Paquette, senior vice president of property management.

In redeveloping The Shops at Willow Bend in Plano, Texas, Starwood Retail brought in Plano Children’s Theater, which occupies a 20,000-square-foot space. Not so incidentally, the presence of the youth performing arts company serves as a magnet, not only for children but for their parents. A gymnastics school at Rimrock Mall in Billings, Mont., serves a similar purpose. Paquette’s takeaway from these new additions to the tenant mix: “We have to change how we look at the space.”

Institutional capital sources are significantly more open to retail than they were at RECon in 2017, reported Josh Poag, president & CEO of Poag Shopping Centers. Most institutional investors Poag speaks with these days are now open to placing capital in the sector, compared to only about one quarter a year ago. The negative press that has scared off so many potential investors may offer a silver lining, he noted; the perceived decline in retail asset values has made pricing more attractive. That increases the chances that Poag will acquire properties in  increasing the odds that the company will go into the acquisition market in the next year or two, he noted.

“Top to bottom, it still feels like things are very healthy,” concluded Kenneth Katz, co-founder and principal at Baker Katz, a Houston-based developer and operator. One intriguing phenomenon is that cap rates for net-leased properties haven’t budged despite rising interest rates, he noted.