Repositioning of Retail Center

[Matt Roth]

Dear BP Community,

What are possible uses/concepts for the repositioning of a large retail center? A center whose complex is continuous/interconnected and is located in a suburban area. 

I'm curious to hear because, without any supporting facts or figures, I believe that the popularity of the traditional retail experience is fading and over the next decade online retailing will take an overwhelming majority of total sale percentage.  This new wave will force anchor tenants to shy away from renewing leases in these retail centers and leaving owners to reposition their asset (provided retailers are unable to successfully modify the functionality of their space).

[Account Closed]

@Matt Roth

There is a lot of uncertainty in retail that it seems you're already well aware of.  Here are a few recommendations:

• As much as possible, if you acquire a retail property make sure that it's located in a great location inside a city.  If retail demand drops 20-30% or more (which is likely), you don't want to be the property owner who owns the oldest, worst-located retail center in town.
• If you have a choice between tenants, choose tenants that are service oriented.  Such tenants include hair salons, nail salons, restaurants, check cashing, etc.  These tenants have the highest likelihood of being viable businesses over the next 10 years and into the long-term and won't have the ability to take their businesses online
• Keep in mind that there is much larger risk for larger retail spaces which are over 10,000 SF because of the difficulty of replacing existing tenants if they vacate.  Spaces that are under 10,000 SF can easily adapt of office space, medical space, and can work for hundreds of types of businesses.  But when spaces are over 10,000 SF, the demand from tenants is extremely limited and there is a big risk of not being able to re tenant vacancies   
• Lastly, it's probably not a good idea to acquire a center that's operating anywhere near it's full potential.  If a center is 100% occupied with tenants paying market rents and it is being sold at a market cap rate, then there is no cushion in case the worst case scenario ends up happening to suburban retail.  If, on the other hand, you acquire a retail center that is 60% occupied, or with rents that have plenty of room to be increased, and the owner is pricing in the property in a way that would allow the investor to make a profit through leasing and raising rents, then you're in a much safer position.  Worst case scenario, if the value of the property drops by 20-30% because of the challenges facing the suburban retail market, at least the profit through your hard work will cover all of the downside