For Open-Air Centers, Everything Has Changed

For enclosed malls, COVID-19 was a game-stopper. For open-air centers, COVID-19 was a game-maker. Their key players—grocery stores, D-I-Y big boxes, home goods providers—were graced with a title that none ever dared claim for themselves: “Essential.” Is it possible that, in two short years, the tenants that lease space and the people that visit open-air centers and the things they do there are now different?

“Everything is different,” said Adam Ifshin, CEO of DLC Management Corporation, which owns and operates 85 outdoor centers comprising more than 15 million sq. ft.

“Tenant demand has changed for open-air. Where they’re coming from has changed. They’re adding stores and moving out of regional malls,” Ifshin said. “Their credit profiles have changed. Average credit quality is much higher than pre-pandemic because a bunch of terrible tenants went away. They’re coming out of it with much less debt. Bankruptcy is off the table. And then you’re seeing demand. You’re seeing that tenants like Burlington can do 700 more stores, Ross 500 more.”

During the 2020 holiday season, when millions of shoppers stayed home instead of flocking to malls, online purchases in the United States grew by 32% to a record $188 billion, according to Adobe Analytics. Online spending was $1 billion every day and on 50 of those days it topped $2 billion. Comparing 2021’s holiday shopping totals to 2019’s, online sales increased by 64% while
in-store sales rose just 2.4%. Most shopping center developers believe that COVID set forth social circumstances that dialed up the omnichannel split between e-commerce and physical retail to a level at which it will remain for the next five to 10 years. Ifshin is one of them, and one of the things he sees this new standard forcing is mall stores moving into his open-air centers.

“Retailers are seeking to reserve space in open-air that is not available yet,” Ifshin said. “Even at the best malls, those midrange tenants can’t stay because the freight is just too high. And they are seeing they can do similar numbers in open-air centers at a lower cost.”

Fred Meno, president and CEO of asset services at The Woodmont Company, is of the same mindset and his portfolio includes malls like the Park Plaza in Little Rock, Ark. along with several power centers.

“Open-air centers have always had a big advantage over malls because of the cost delta. Due to taxes and CAM costs, mall expenses can be three or four times higher than open-air centers,” Meno said. He currently is seeing big box retailers like Big Lots actively expanding into his centers, and he’s also seeing some of his traditional in-line mall tenants moving into open-air.

“Charlotte Russe, rue21, and Aerie are expanding quite heavily. Lululemon is doing very well with a wide expansion that now puts more of its stores into open-air than malls,” he said. “I think we’ll see more of this, but what’s causing a wait-and see attitude is the lag in the recovery of entertainment tenants.
Theaters and rock-climbing centers are still in a bit of limbo because of social distancing, and that’s a really critical category. You’ve got to have that entertainment factor.”

Longtime mall tenants like Banana Republic and Bath & Body Works have been actively seeking spaces in higher-end mixed use centers for the past five years, and their presence in those locations leads more of their competitors to join them. Banana Republic moved out of Scottsdale Fashion Square in Scottsdale, Ariz., in 2017 and moved into the town’s Kierland Commons, a mixed-use center with a spa resort and luxury condominiums above its shops and restaurants. Since then, they’ve been joined by Bluemercury and Athleta.

Jeff Green, a real estate consultant at the Hoffman Strategy Group who advises property owners, retailers, and municipalities, says that high mall costs play a role in whether a tenant stays or not, but who their neighbors are weighs heavier in the decision.

“I don’t think all malls will close. The C and D malls will close, but the A’s and B’s are on unbelievably great pieces of real estate and brands that benefit from that are going to balance that with the cost of their rent.” Green said. “More important is co-tenancy. Bonobos wants to be next to other digitally native brands.” Paul Weinschenk, president of retail at The Peterson Companies, also firmly believes that co-tenancy is the prime consideration weighed by retail tenants considering bases of expansion.

“Co-tenancy has always been an aspect of retail leasing and it doesn’t matter what the category is. Tenants always like to travel in packs and they like to rely on each other to do the underwriting and think it through,” said Weinschenk, who oversees massive outdoor properties such as National Harbor outside of Washington, D.C. and Downtown Silver Spring in Maryland.

Experiential potential

Josh Poag, whose Poag Shopping Centers helped create lifestyle developments fashioned after upscale downtowns with apparel shops, restaurants, and greenspaces, told Chain Store Age that he’s had more conversations with retailers intrigued with the lifestyle environment in the last few months than he’s had in the last few years.

“The head of a large retail chain who I’ve known for years but never had much luck leasing space to came up to me at the ICSC show in December and said, ’You’re one of the luckiest guys in real estate. We’re going to be pulling out of lots of malls in the next two years and you are in the right place,’” Poag said.

Poag’s centers have always shined a light on restaurant rows packed with quality tenants such as Torchy’s Tacos, Grimaldi’s Pizzeria, Bonefish Grill, Gibney’s Tavern, and Pot 28 North Gastropub. Now he says he’s now seeing more power centers and grocery-anchored centers accelerating the number and profile of their food and beverage tenants. A Poag marketing associate conducted a survey in the company’s markets and asked, “What do you want to see from us in 2022?” The top two responses, making up 90% of the No.1 answer choices, were events and restaurants.

“The branding of centers is all about restaurants and events these days,” Poag said.

Sandy Sigal, the president and CEO of NewMark Merrill, is one power center operator who’s long believed that good eats make for better shopping experiences. His Marketplace 99 in Elk Grove, Calif.–anchored by Burlington, Ross Dress For Less, and Hobby Lobby—contains more than a dozen dining spots. On the menu are CreAsian Vietnamese cuisine, Mike’s Diner, Chuck E. Cheese, Kobe Steak & Sushi, and In-N-Out Burger.

Dining is the centerpiece at the company’s Village at the Peaks center in Longmont, Colo., a new age power center whose main entrance is encased by a restaurant pavilion filled by Bad Daddy’s Burger Bar, Fuzzy’s Taco Shop, Ozo Coffee Company, Parry’s Pizzeria & Bar, Pho Huong Viet, and more. Anchors at the center are Regal Cinema, Sam’s Club, Whole Foods, and Burlington.

“The idea for us is that open-air wins when we provide a gathering place, a strolling place, an entertainment place. If you can check as many boxes as possible, you’re going to win,” Sigal said. To Sigal, open-air’s great advantage is that it has a less controlled environment than a mall’s.

“The argument against brick-and-mortar is ‘Why should I drive someplace when I can just go to my computer and have stuff delivered?’” Sigal said. “But we help you leave your home and explore nature, have a nice meal, and walk your dog, as well as shop. That’s a different dynamic. It’s engaging-with instead of selling-to.”

The mixed-use outdoor center

Some 30 years ago, Don M. Casto III bought a piece of land in New Albany, Ohio, about 10 miles from downtown Columbus. It was fairly rural then. Easton Town Center, Chain Store Age’s No. 1 Retail Center Experience last year, is just five miles away from the spot, and it too was empty land owned by Limited Brands founder Les Wexner at that time. Then Wexner moved to New Albany, built the Buckeye State’s second largest mansion there, and turned the quiet town into a trendy suburb. Casto figured that Highway 161 would eventually reach New Albany when he bought it. It did and, last year, the Columbus-based Casto real estate company opened a the Hamilton Quarter shopping center on the property.

The wait positioned Casto’s developers to build a new type of open-air center conforming to the mixed-use standards of today. The first anchor they landed was a home run — a 125,000-sq.-ft. Target. The prime anchor they secured for the site, however, was Ohio State University’s 500,000-sq.-ft. Wexner Medical Center. Opened last year west of the open-air shopping center alongside Highway 161, it gets 2,500 visits a day and the average income of its sizeable staff tops $100,000. Subsequent phases will include 700,000 sq. ft. of office space and 600,000 sq. ft. of apartments. Retail and restaurant tenants at Hamilton Quarter include Hobby Lobby, Five Below, Beerhead Bar & Eatery, City Barbecue, and Wendy’s.

“The design is about convenience between office, residential, and retail. For office and medical center workers and apartment dwellers, it provides everything they need within a quarter mile,” said Eric Leibowitz, Casto’s VP of development and leasing. “I think the end result for us is really a market-driven mix of uses. When designing developments today, everything is about providing convenience to people who are rushed for time.”

Consultant Jeff Green believes that this formula is one that should be adopted by municipalities attempting to cling to retailers — and their tax dollars — in their malls and shopping centers.

“The over-stored nature of brick-and-mortar retail in the U.S. requires that municipalities substitute the loss in retail sales tax revenues with other forms of taxable revenues such as medical centers,” Green said. “However, towns and cities hold on to the notion that new retail can be supported, and in almost all instances that is just not true.”

The evolution revolution

The classes and types of retailers, service providers, health care facilities, entertainment, and food and beverage concepts that will be populating open-air centers look to be plentiful and varied in the coming decade, most developers believe.

“I talk to venture capitalists often and they all tell me that pureplay e-commerce is dying. They won’t finance any start-ups now. From a profitability perspective, they are racing to survive. The cost to them for returned products are greater than the cost of rent,” said Ifshin of DLC. “The successful ones are expanding their retail presences, but if you’re Warby Parker and you have a couple of hundred stores but you need 900 more, you’re not going to be able to find all that space in mixed-use and lifestyle centers. Now you’ve got to go into that center with the Target over there.”

New names — names more often found in malls and town centers — will continue to be moving into open-air shopping centers, which themselves are evolving into new, hybrid forms. Names like Brooks Brothers, Modell’s, and Pier 1 have disappeared and new restaurant and entertainment concepts and DTC brands are taking their places in places they’ve never been before

“New brands triumph and formerly hot ones no longer exist. Markets are changing,” said Peterson Companies’ Weinschenk. “The reality of retail is that it’s constantly evolving.”

From Click here to read the full article.