Retail Investment Is All About Adding Value To A Revamped Shopping Experience

Retail throughout the country is going through growing pains. Redevelopment is turning old, tired malls into retail destinations. Two West Coast investors are finding ways to bring customers back to malls and shopping centers by reinventing the shopping experience.

Pacific Retail Capital Partners focuses on value-add core plus space and prefers opportunities that lack active management, but the retail property has a clear reason to exist, according to Pacific Retail Capital Partners managing partner Steve Plenge. The firm, which manages about $1B worth of assets, brings active management and focuses capital to improve sales and net operating income over a general period.

When it redevelops a property, PRCP brings in new design and entertainment concepts. At Shops at South Town in Salt Lake City, Plenge said the firm is adding entertainment concepts and a theater. Digital screens throughout the mall provide live feeds, art and additional interactive content. An interactive kid’s wall (above) has been particularly popular.

“We try to do something that is a bit more cutting-edge on the retail end,” Plenge said. “Since we’re a smaller firm, we have the ability to be more focused on the headwinds in the retail world and continue the evolution of retail.”

Plenge said the firm typically prefers Class-B to Class-B+ malls lacking attention where the firm can bring relevant design to the mall. PRCP typically redoes the restrooms, adds family restrooms and transforms food courts into curated food halls, often with local food operators. Its Paseo Nuevo mall has hosted events, such as College Night Out (above right) and a fall fashion show (above left).

Other options PRCP has considered include adding multifamily, hotels and medical offices to its redeveloped properties. A lot of REITs focus on national retailers, but PRCP prefers bringing in local retailers and food services to create more of an eclectic group.

PRCP holds assets nationwide, including New York, Chicago, Jackson, Miss., New Orleans, Salt Lake City, San Jose and Santa Barbara.

Transforming Sears And Kmart

Seritage Growth Properties is taking a different approach by purchasing Sears and Kmart stores across the country. The firm, formed in 2015, now owns about 266 assets, according to Kacy Keys, Seritage Growth Properties senior vice president of development Western region. Half are connected to malls while the others are standalone.

The core business strategy is to recapture a certain percentage of a Sears store and, in some cases, retaining 50% of it. In some circumstances, Seritage will create a mixed-use development with multifamily and office. The firm will look at a Sears or Kmart having relatively low rent and redemise the space to double, triple or quadruple the rent.

The firm has a broad range of assets from Class-A and trophy assets in Santa Monica and La Jolla to Class-B and some Class-C locations in the Central Valley. Oftentimes the Class-B and Class-C locations have stores that perform better in the Central Valley and the firm retains those stores as a Sears or Kmart.

Each location is its own puzzle and how Seritage approaches the site depends on the local market and where the property is in relation to the mall entrance, Keys said. She said her firm might add a bowling alley, theater or an entertainment-themed retailer like Dave & Buster's.

“Our boxes, in some instances, do quite well converting to an entertainment concept,” Keys said.

Other conversions include food uses or a combination of uses like an REI with a Whole Foods. She said the firm also may break up a box into something other than just a gym concept or bowling concept to try and diversify the tenant mix. In Santa Monica, Seritage plans to turn a Sears into a mixed-use development.

Keys said her firm works with mall operators to improve synergies and the overall success of both property owned by Seritage and the mall.

The Future Of Retail Is Not Bleak

Despite talk that retail is faltering, both Plenge and Keys expect retail to remain strong as the industry continues to evolve.

“The shopping mall is a 20th century model, and now we’re going into a 21st century model,” Keys said. “When people go out, they want it to be an experience.”

There are still plenty of retailers where the customer cannot exclusively shop online and has to go to the store to get what they need, such as a Ross Dress for Less, Keys said.

A lot of the issues with retail are not just related to e-commerce, Keys said, but customers are simply bored with traditional shopping.

“You will probably see fewer malls, but you may see more creativity in what you have,” Keys said.

Retail is still a tangible asset because people still want to go out and be social, she said. Business is good for Seritage, and the firm is extremely busy. Keys said there is no shortage in demand for retail.

“We really see the diversification of uses as adding a lot of value and power to the real estate that we have,” Keys said.

Retail will be connected to smartphones going forward, Plenge said. The industry is going through an evolution. In the ’90s, catalog sales made up 10% of retail sales, but no one thought this would result in the demise of retail, he said.

Holiday sales in 2016 were up 4% to $658.3B with online sales up 12.6% to $122.9B compared to 2015, according to the National Retail Federation. Online sales made up about 19% of the sales during the holiday season. The NRF expects retail sales will increase 3.7% to 4.2% in 2017 compared to 2016 with online sales expected to increase 8% to 12%.

“I think the statements that e-commerce is totally going to destroy retail are completely false,” Plenge said. “What you’re seeing is e-commerce is causing the evolution to occur more quickly.”

E-commerce retailers are learning they must have a brick-and-mortar presence. Amazon is one of the largest online retailers looking for physical locations.

The demand for retail will continue; the bigger challenge for retail is the department store is no longer relevant. Plenge said Macy’s is responsible for its own demise. It spent billions of dollars buying back shares instead of investing in its stores. It took a regional department store model established by stores like Robinsons-May and homogenized the stores nationally.

“It took a long time for [Macy’s] to fail, and we’ve finally come to that day of reckoning,” Plenge said.

These old Macy’s sites will provide opportunities for redevelopment like creating multifamily or adding a TJ Maxx or theater instead, he said.

Plenge said he is not worried about CMBS weakening the state of retail. His firm sees these as opportunities to acquire decent assets at a significant discount. Many properties are overleveraged and can provide opportunities for investors willing to buy debt.

Find out more about the future of retail at Bisnow's National Retail: West Coast Series on March 28 in Los Angeles.