After a year when economic headwinds sapped some of the momentum from the commercial real estate market, the prospect of lingering inflation, challenging market dynamics and a potential recessionary cycle have all injected additional uncertainty into an industry that has been, at least until recently, enjoying a post-pandemic surge in activity.
Rising interest rates make getting a high-enough return on equity a more difficult proposition, an occurrence that has simply priced most retail development projects out of the market. Consequently, new ground-up retail development is in increasingly short supply. Considering construction cost spikes, and the fact that residential and industrial projects have been soaking up a sizable percentage of an already scarce and expensive skilled labor supply, it’s not hard to see why development pipelines have slowed significantly.
All of which makes retail redevelopment one of the most interesting—and potentially among the most important—features on the commercial real estate landscape. The retail redevelopment space is not immune to some of the factors that have complicated matters in other areas of the commercial real estate industry, but redevelopment comes with its own unique set of challenges and opportunities. However, the need for redevelopment due to dated properties that need a new vision is growing quickly.
Josh Poag, president and chief executive officer of Memphis, Tennessee-based Poag Development Group
What follows is a brief look at the state of the retail redevelopment market today, including some of the strategies and tactics developers are using to maximize opportunities, elevate environments and experiences, and unlock value.
Trend lines and timelines
For many experienced retail developers, every acquisition they are making is viewed through a redevelopment lens with long enough runways to optimize the process. That starts with buying the right assets at the right price: retail environments that are stable enough that some operational adjustments can ensure that there is no need to push forward with an accelerated and urgent redevelopment timeline. This allows developers to not only proceed in a thoughtful, deliberate and strategic manner, but to put off major redevelopment investments until opportunities can be capitalized in a year or two when markets improve.
The long game
Those extended timelines and lack of immediate pressure not only allow developers, owners and operators to be deliberate when it comes to moving forward with efforts to enhance placemaking and tenant roster updates, but also affords them the critical flexibility required to resolve regulatory and approval issues, and to conduct complicated leasing and tenancy negotiations.
Depending on major tenants and anchors, and on what degree of control and input they have over leasing and design decisions, those negotiations may be smooth and seamless or protracted and challenging. The key, however, is to approach those discussions as true partners, with a level of patience and a shared recognition that legacy anchors, owners and operators alike have a mutual interest in revitalizing and maximizing the potential of their site.
Anchors: a way
Speaking of anchors, another important piece of the puzzle is the extent to which the ecosystem of available anchors is changing in important ways across the industry landscape. A large-and-growing array of entertainment and experiential anchors, from sports to themed entertainment concepts, is emerging, and giving owners and operators new options when it comes to elevating the brand of a center as a true local or regional destination.
Along the same lines, there is growing recognition of the potential that adding new complementary uses to underperforming malls (e.g. multifamily and hospitality) provides some mixed-use synergy and placemaking momentum. While it may sometimes be necessary to rethink layouts and operational mechanics, such as reclaiming parking lot space for a new building, the payoff with increased vibrancy can be well worth it.
The elements above can be seen in action in recently completed redevelopments, as well as projects moving forward in the pipeline now. The Shops at Highland Village in the Dallas suburb of Highland Village, Texas, is an example of a promising redevelopment opportunity with multiple moving parts. Located in a high-growth market, the redevelopment plan for this center included tenancy upgrades, renovations to public spaces and potentially adapting zoning to current trends.
A new tenant mix means that the needs of the center are different and will require some site reconfiguration to improve access and accommodate parking for high-volume restaurants. Improvements can’t just be functional, but need to be aesthetic, such as with new landscaping, lighting and even the addition of an outdoor performance stage. Entitlement work is underway as part of an effort to add a new residential component that will further enhance the site and increase the vibrancy and viability of the project for the next 20 years.
An art, not a science
Because every project is different, there is no one-size-fits-all formula or checklist of how to move forward with a successful redevelopment. Some redevelopments may be dictated by tenancy decisions (both new and existing). Others may be inspired by the opportunity to make key layout or design changes that could improve accessibility and elevate the atmosphere.
Whichever elements ultimately drive a redevelopment opportunity, the best examples encompass multiple upgrades: from new tenants and designs to thoughtful repositioning and infrastructure improvements. The cumulative impact of a series of enhancements, such as aesthetic improvements and strategic tenant upgrades, can reimagine and rebrand a retail environment in a way that not only makes headlines, but also boosts bottom lines in a meaningful and sustainable way.
Josh Poag is president and chief executive officer of Memphis, Tennessee-based Poag Development Group, a mixed-use real estate developer that focuses on retail and experiential retail. To reach Poag directly, email him at email@example.com.