Malls of the Future Will Have Dentists and Discounts
The only sure thing is ch-ch-changes. Retail real estate is undergoing a reinvention for comparison-shopping Millennials. We got the deets at Bisnow's third annual Retail Real Estate Summit. Speaking of ch-ch-changes, we invited David Bowie to our event.
He didn't show up. But more than 350 did come tothe Swissotel Chicago. The biggest change in shopping centers: non-traditional tenants like medical office and entertainment bringing much needed foot traffic in today's world of lower sales and online shoppers.
Pine Tree Commercial co-founder Peter Borzak spent the downturn holding his team together. These days, he's considering changing his ringtone to "Every Day I'm Hustlin'" while he balances new development projects and the firms existing portfolio (it's developed or acquired around 65 shopping centers). Today's developers are tryingless parking and new uses to drive traffic and offset land costs. On the resurgence of CMBS loans, Peter says they can be like selling your soul to the devil, but those oh-so-good terms make you grit your teeth and bear it.
GK Development founder Garo Kholamian acquires small market malls and open-air centers, with a portfolio around 4.5M SF. He says people waiting for a big wave of distressed retail properties to hit the market may never see them materialize. In today's two-tiered market, NNN leases are trading at aggressive cap rates, but below that lies a wide-open field of undesirable asset s. In open-air centers, Garo is seeing primarily service tenants as shopping becomes more experiential. The longer your customer stays, the more likely they will shop (picture a mom dropping her kids at the dentist then catching a movie).
Structured Development founder Mike Drew believes in sticking with what you know, and he has 1M SF in the North/Clybourn submarket. His latest project, New City (JV with John Bucksbaum and JP Morgan), will feature 425 SF of retail--including Mariano's and ArcLight Cinemas, 60k SF of public plaza, and 280 apartments. He sees the benefit of tenant synergies in the neighborhood, where families can take their kids to school and the doctor under one roof. CBRE is securing a $175M construction loan for New City, Mike says, and rates in the 4% range show that the lending markets have started to loosen.
The type of tenant hunting for space is reflective of today's value-driven consumer (Ross Dress For Less, TJ Maxx, Mariano's). Inland Real Estate Corp, an Oakbrook-based REIT that invests in open-air shopping centers--about 15M SF--across the Midwest, is seeking JV development projects and has capital to put wheels in motion (partly thanks to institutional partners), according to EVP and CIO Scott Carr. Lower sales are a fact of life today, Scott says, and retailers are revising their prototypes and welcoming new non-retail neighbors that bring a built-in customer base. Did you know Inland has done two swimming pools in its shopping centers?
CBRE EVP George Good says that despite Cook County's rising property taxes, Chicago remains on every investor's Top 10 list. The huge disparity in asset pricing based on quality is beyond anything George has seen in his career, with high-quality assets priced at or above 2007 levels. People may be talking in cap rates, but they are valuing investments in IRRs. Buyers are interested in yield over a period of time. Location and tenancy matter much more than shopping center format, and this year capital should flow back into lower quality assets with value-add potential, he tells us.
The Chicago and national retail outlook panel was moderated by Ira Fierstein, co-chair of the leasing practice group at Seyfarth Shaw. Ira agrees with George, noting an uptick in sales of shopping centers with development potential. Instead of mussing up your stylish new outfit at a groundbreaking, buy the frog shopping center, give it a smooch (and some tenant restructuring), and behold your prince.
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