Shopping Center Business

DEC 2017

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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INSTITUTIONAL INVESTORS 88 • SHOPPING CENTER BUSINESS • December 2017 fill space and what is the cost to do so. It still comes back to location: do you have the center that the tenants want to be in and consumers want to shop in? We be- lieve that we do and we work to integrate our properties into the community — we want them to be people-centered spaces. That is why we focus on regionally domi- nant and urban-oriented, in-fill properties that provide value and convenience to the community as well as significant en- tertainment and restaurant components. VALERO : I second Cathy. We do have a problem — we have been through prob- lems before. I remember in 1986 my boss at the time call and said, 'Walmart is com- ing, this will destroy neighborhood shop- ping centers as we know them.' During the recession of the early '90s we all felt that real estate was ending, shopping cen- ters were looking bleak. Our industry is re- silient and has the ability to come around and find solutions to market change. This time, it's a different kind of change. I don't know what the future is holding — every few days something different is happening, especially with regard to tech- nology. I am convinced that if you're in the right location, good operators will find solutions, whether it's retail or mixed-use retail and multifamily. We all agree on one thing — people are not going to sit at home all day. They need necessities such as hair stylists, nail salons, doctor's visits, enter- tainment and physical activities. As long as we create a pleasant and convenient environment where people can go to for these activities, we will be successful. COOPER : I think what Mr. Valero said about the speed of change and the need for adaptability is spot on. Adaptability is key when we're investing in properties. If the highest and best use of a particular property in a tertiary market is a power center, then we don't want to be there holding that property if a couple of vacan- cies pop up and you don't have a backup tenant to put in. If you have below mar- ket leases in infill locations, chances are that the ability to create value is there, whether it be an alternative retail use, or some other higher and better use. One of the things that we really like about our product in the open air space is that we only develop about 25 percent of the total acreage of the property, so you have 75 percent of the property that is not income producing. With the rate of change with Uber and self driving cars, we're already seeing parking ratios coming down and that really gives us the opportunity to build another outparcel, whether it be an- other restaurant or an urgent care facility in more infill locations, non-retail, hotels, multifamily. For those high-barrier-to-en- try, dense markets, we think that there is an opportunity to create value as change continues to come. MUSSELL : We're advising our clients by pointing to the successes that we have in our current portfolio. We do have some shopping centers in our portfolio that are performing well and we're able to show them that there are still some categories that are successful today — food and bev- erage, health and fitness and beauty are doing well, as well as grocery. When we're looking at shopping centers for acquisi- tion, if they don't have those categories that are doing well, we look at if it's a lo- cation where we can put more food and beverage or services in but it has to be a long-term, viable retail location. SENEMAN : Where there's distress, there's opportunity. SCB : Let's talk about the distress a little bit. We discussed distress about five or six years ago at this roundtable, but it was a different kind of distress — you were buy- ing properties that were a bit down on their luck, but you could lease them up and create value. It's a little different to- day. Gar [Herring], you are taking a very contrarian play, some might say, with your investments in buying older malls. Can you tell us about that? Are you seeing these as retail uses? HERRING : We're looking at the death of malls as an opportunity to repurpose good real estate into more viable uses. The good news is a lot of these malls were built at the intersections of busy highways with good access and visibility. If a dying mall is located where the better demographics have moved away, and that part of town is going downhill, then there isn't an opportunity there to redevelop. If the dying mall is on good real estate, then the value of land for other types of uses — hotel, multifamily, seniors housing, medical, educational, office — is substan- tially higher than the land value of a mall. That's when we know that's an opportu- nity we can capitalize on. The challenge is that you have to wait until the mall is sufficiently ruined. In other words, if the net operating income is $5 to $7 million, the purchase price of the mall will be so high that dollar per-square-foot of land is too high to redevelop into something else. Once the net operating income gets down to $2 million and you're buying the mall at a cap in the teens, now the per-square-foot price makes sense to accumulate the other anchors and develop the whole project. We can sell the entitled land to different developers for other uses and keep the remaining retail portion for ourselves. That's how we turn a dying mall into a new master-planned mixed-use project that can become a new, vibrant project for the city and their residents. (left to right) Gar Herring, David Harvey, George Fryer, Lauren Holden and John Crossman.

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