Repositioning Distressed Retail Assets

Posted by on Oct 23, 2012 in Blog | 0 comments

Randyl Drummer from CoStar recently posted a story on their website of the need and recent trend for repositioning distressed assets such as malls and other under-performing retail centers in order to transform them into income-producing properties through alternative uses.  This story really hit home with Urban One as we have been consulting in the retail sector for the past several years now.  For retail properties that have gone dark or are far from meeting original expectations, a major redevelopment, downsizing, changing the tenant mix, or resetting debt (refinancing) are some of the ways to reclaim the particular property’s highest and best use.

As Generation Y and a substantial portion of Generation X are moving away from suburban areas in favor of transit-oriented urban city cores, property owners and developers face difficult choices.  Their malls, retail centers, and suburban office buildings, which were once very lucrative, are now becoming distressed and essentially, obsolete, due to a shift in the market and demographics.  They are now forced to go back and take a harder look at the highest and best use of their properties.  In most cases, the only way to turn these back into an income-positive asset is to “rehabilitate, re-tenant, refinance, and reposition left-for-dead mall properties, or tear them down and start over again,” according to CoStar.  This hypothesis is also in line with Wednesday’s newly released Emerging Trends 2013 forecast and survey by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP (PwC).

According to ULI, “visonary local planners, [property owners] and developers [alike] have a target-rich environment for reconsidering how these “ghost” mall sites can reconnect with future growth in communities. Urban theorists are revisiting the whole concept of piecemeal development of malls, strip centers, housing and office campuses as compact mixed-use projects near transit hubs gain traction.”

Since, re-tenanting, or changing up the existing tenant mix and bringing in new blue-chip national tenants, can be a daunting task and sometimes an unachievable one due to terms of existing long-term leases,  therefore “blighted properties that cannot be re-tenanted with department stores or shops are being converted into churches, office buildings, light-industrial, government buildings, town centers, parks and transit centers, said Jonathan Miller, author of the Emerging Trends study, during a presentation Wednesday.”

ULI Chief Executive Officer Patrick Phillips said “local governments are beginning to show more flexibility in zoning and development standards combined with public-private tools like tax-increment financing, to encourage redevelopment of old malls for such uses.”

“The regulatory and financing structures are evolving in a way that should allow more of these properties to be repurposed in a productive way,” Phillips said.

According to Stephen Blank, chief ULI fellow, capital markets and finance, ”there may be some breakout in certain markets where capital flows into these assets. And there are funds to repurpose them, rather than watching them sit and wither away.”

Our advice to any property owners that may have assets that fall into this category, is to run several different repositioning scenarios to see how each of them effect your incremental return.  Of course, if you need any assistance on this underwriting to determine the highest and best use for your property or portfolio, Urban One is always here, so just let us know.

To read the full story on CoStar, please follow this link: When Retail Won’t Work: Alternative Uses for Converting Former Ghost Malls Back Into Income-Producing Property: Major Mall Makeover, Downsizing and Debt Reset Often Only Way to Reclaim Property’s Highest And Best Use.

 

Images courtesy of Urban One and Regency Centers

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