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 92 • SHOPPING CENTER BUSINESS • December 2017 margins, especially with rising labor costs. To date, we made many restaurant bets holding our nose, but they've all worked out so far. CLARK : Collectively, restaurants can act as another anchor in your center. SCB : As you're evaluating acquisitions and redevelopments, where do you see a lot of potential? Where is there poten- tial for new income and new ideas? Ross, you mentioned you see 25 percent of the property is developed, the other 75 per- cent is not — how do you look at those opportunities and how do you evaluate them across your portfolio? COOPER : We continue to evaluate our port- folio to mine opportunities to reinvest. For us, the best use of our capital has been redevelopment because the high quality assets we want to buy continue to be at very aggressively low cap rates. We have a $1 billion active development pipeline, we have what we estimate to be another $2 billion behind it, so for us, we estimate that at this point in time the scope of what we're trying to do is entitle as much as we can on a lot of these properties. It may be a three-, five-, or seven-year entitlement period on some of these properties with more challenging jurisdiction, but the en- titlement to build multifamily, hotels or office, it doesn't necessarily mean we are going to develop it ourselves, but we be- lieve we are creating value on a property by putting the elements in place and then at the appropriate time, determining if it's something we want to sell off or ground lease. In some cases where we feel that the opportunity is right, we'll self-develop with either a part- ner or a third party. We're very focused on creating the value and then determining how we want to capitalize on it. Every property and jurisdiction is unique. HOLDEN : We have 11 malls in our portfolio, and we've been going through a review right now looking at alternative uses (for example residential) in the excess parking area. We continue to seek new ac- quisitions and opportunities in primary markets where rents are low, leases roll, or you've got weak anchors to reposition the asset. RAGLAND : I think one of the great op- portunities in the future is making sure you're working with municipalities to get parking ratios down from five per thou- sand down to four per thousand. If you look at the future, unmanned vehicles are going to be here by 2025 or 2030. What will be the necessary parking ratios at that point? I think that if you're investing in dominant, well-located assets today, they are going to have value for retail and be- yond that as you start densifying the sites in the future. The entitlements that you're securing today, you might actually be able to get much more in 10 years based on technology and automated vehicles. COOPER : It's not just municipalities — it's ensuring that in our negotiations with our tenants that we negotiate down the parking ratios because we all know certain retailers have the ability to restrict your common area. RAGLAND : Our mall development part- ners are actually looking at new parking structures that they are building today and how do they retrofit those parking struc- tures in five to seven years for new uses, so it's a fascinating challenge and oppor- tunity as you look at retail sites. HARVEY : Some retailers are even recog- nizing that parking ratios that they pre- viously imposed are too restrictive. In a new acquisition that is in diligence as we speak we had an interview with a major shadow-anchor retailer who asked us if we would consider changing the five-per- thousand requirement that they had im- posed on their own parking field. We will buy an outlot in their protected area and develop a restaurant. The tenant will get money from the land sale and the benefit of the traffic from an adjacent restaurant. Think about how different that is from how it used to be. The parking hog is now appreciated as a traffic generator. HERRING : The challenge on developing all of these un-used parking fields, whether it's on the mall side or the big box side, are the REA's and the tenant restrictions. These REAs were originally written to act as a shield to protect tenants and land- lords. Now these REAs are being used as a sword to extract unreasonable demands out of the developer. A lot of what is in- hibiting the redevelopment of these dying malls is the REA's that tie together the separate ownerships, which prohibits the developer from doing anything to the mall without approval of the anchors. If I just want to add a little snow cone shack in the parking spot furthest from the mall, I cannot do that without unanimous ap- proval from every party to the REA. That is what is driving down the value of these dying malls so drastically. Malls with re- development opportunities sell at 20 caps because the developer cannot determine how much leverage the department stores will exert. That uncertainty drives down the prices. SCB : Federal Realty has always been very proactive in its properties and redevelop- ing when the time is right. What are you seeing? CARTY : We've been selective redevelopers and developers of mixed-use centers. It's been almost 20 years since our first proj- ect, and it's run the gambit from scrape and rebuild like we're doing at Pike & Rose in North Bethesda, Maryland, and it's been adjacent land where we've added multifamily so we're well heeled in that respect. In terms of our portfolio, we have many years of redevelopment run in terms of future potential to intensify or grow, and a lot of that gets down to choosing the right locations and the right dirt. We Ross Cooper (left) and Bernadette Mussell.

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