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Case studies in retail asset enhancement.

It is no secret among real estate owners and asset managers that a successful retail property can be a great source of revenue, appreciation, and professional pride or that regional malls are usually the stars of a retail portfolio.

However, the vast majority of shopping centers in the United States are not regional malls strategically located in major markets. Rather they are neighborhood or community shopping centers, which are anchored by supermarkets, drug stores, or other local chains.

And increasingly, these smaller centers are in trouble. Sales are down, deferred maintenance is apparent, tenants are struggling, and vacancies are up.

Given these difficulties and the economic uncertainties which lie ahead, retail property owners and lenders can no longer afford to be complacent when it comes to the strategic positioning and day-to-day supervision of such properties.

Instead, a well-researched, carefully planned, strategic asset management program is critically needed to address specific problems and opportunities of each center. These plans will steer them back to long-term profitability and away from the increasingly frequent pattern of slow and steady decline.

As the sole equity real estate advisor to New York Life Insurance Company, our firm is responsible for a portfolio of more than $1 billion of income-producing properties nationwide, several of them older neighborhood or community retail centers.

Last summer we began a series of renovation/redevelopment programs at several of our properties around the country, including two of our four retail centers in Georgia: Bellemeade Shopping Center in Marietta and Rockbridge Place Shopping Center in Stone Mountain.

Although the centers are similar size, age, and type of tenancy (including having the same supermarket anchor) and share many of challenges, each center's revitalization program was tailored to meet its distinctive needs.

Bellemeade Shopping Center

Built in 1973, this 57,600-square-foot strip center, which New York Life had acquired through foreclosure, is located 15 miles northwest of Atlanta's central business district in Cobb County.

Upon takeover, the center was deteriorating so rapidly that Treasury Drug, one of its anchor tenants, moved out of Bellemeade and into a strip center across the street. While the move affirmed the strength of Bellemeade's location, it clearly indicated had significant problems.

One of Bellemeade's greatest advantages, however, was its cost basis. New York Life had acquired the center for $24 per square foot. And even with a proposed $9 per square foot renovation program, the center still offered a powerful economic advantage versus the $50 to $65 per square foot investment required for new construction.

Our first step was to address the center's physical problems. The parking lot needed repair and its lighting was insufficient. The center's roof leaked. A drainage retention pond was overgrown with weeds, and the fence surrounding it had not been properly maintained.

More importantly, the center lacked architectural appeal and was in need of a facelift. The project lacked strong street identity, and storefront signage was inconsistent and of poor quality.

A major contributor to all the problems was the lack of hands-on, experienced property management, which is vital to the day-to-day activities of the center, as well as to the leasing and ongoing tenant relations programs.

When New York Life assumed control of Bellemeade, arrearages were poorly controlled, tenants failed to report gross sales, the lease documents were in need of standardization and improvement, vacant stores were poorly maintained, and, as might be expected, tenant morale was extremely low. Things were so bad, in fact, that we projected five out of eight tenants would fail to renew their leases when they expired in 1989. In addition, Winn Dixie was considering vacating its store prior to the mid-1994 expiration of its lease if things did not improve quickly. In developing our analysis, we explored two "what if" scenarios-one of them assumed no renovation, the other projected the results of a proposed $500,000 modernization program. The impact of the two scenarios are summarized in Figure 1. The decision to proceed with the renovation was quickly reached. Figure 2 summarizes how the $500,000 budget was allocated.

While our architect was working on the preliminary renovation plans, we retained a local fee management company to assume both management and leasing responsibilities for Bellemeade, Rockbridge, and our other two retail centers in Georgia.

By putting all our properties in the hands of one local agent, we achieved significant economies of scale, and the management firm's experience with these types of properties proved crucial in achieving the results we sought.

Renovations lasted from May to August 1989. Aside from the facelift itself, the project renovation included installation of a new roof, repair of the parking lot, upgrade of the parking lot lighting, and the addition of new, standard fascia and under-canopy signs. The lighting in the pedestrian walk-ways was improved, a new pylon sign was built at the street entrance, the drainage retention pond was cleaned, and the landscaping was upgraded throughout the center. Management was also able to significantly reduce receivables, improve the reporting of gross sales, standardize hours of operation, impose a tenant signage criterion, upgrade the quality of contract services, and begin competitive bidding among contractors.

As part of the renovation process, it was also determined that the center could physically accommodate an as-of-right expansion capability of 14,200 square feet of gross leasable area. Thus potential incremental value was identified through careful analysis and attention to detail.

Marketing also played a key role in the turnaround of Bellemeade. A direct mail program to households within the three-mile radius trade area was implemented to promote shopper traffic, underscore the center's repositioning, and further stimulate tenant morale. A cooperative broker mailing campaign was instituted, using an upgraded flyer.

The center also instituted aggressive leasing efforts with early renewal of desirable tenants and aggressive new efforts to reach targeted prospects. Leasing guidelines and market survey information were brought up to date and kept that way. Monthly meetings were held with leasing agents to track activity. To increase community awareness of the new center, pylon signs and landscaping were upgraded. The center was used for designated neighborhood charity events.

Although the renovation was completed less than a year before this article was written, the results are evident:

* Occupancy levels rose from 67 percent at the start of the renovation to over 95 percent within six months.

* Several less desirable tenants were removed, which eliminated loitering and increased tenant morale.

* Four of the five tenants with leases expiring in 1989 renewed at rates 25 percent above their previous rents, going from $7 per square foot to between $9 and $10 per square foot.

* The fifth tenant, which had occupied 1,000 square feet, was denied renewal in favor of a 5,500-square-foot tenant paying a 40 percent greater rate.

* A new tenant, a subscribing office of a cable TV service, was installed, attracting 10,000 customers a month.

Perhaps most significantly, Winn Dixie is considering renewing its lease and expanding its store into 4,000 square feet of contiguous space.

While no independent appraisal has been undertaken, internal estimates indicate that center value has risen from $1.950 million to $3 million.

Rockbridge Place Shopping Center

Located 13 miles east of Atlanta's central business district, the 65,844-square-foot Rockbridge Place had two anchor tenants, a Winn Dixie supermarket and a Big B Drug Store, 11 local tenants, and four vacancies when it was acquired.

Unlike Bellemeade, which was acquired through foreclosure, Rockbridge was financially sound, but its appearance was rather drab and uninviting.

In order to enhance the center's appeal to the public and to compete effectively against the new construction that was popping up all around it, we decided to embark on a program that made Rockbridge aesthetically more attractive.

At the same time, we recognized that whatever we chose to do had to be economically justified. Nor did we feel we could raise the rents significantly, given the competition. As a result, any renovation program had to be within the scope that the economics would justify.

As at Bellemeade, we prepared a "no renovation/with renovatiory' study for Rockbridge to determine the effects of our proposed program (Figure 3).

With a budget of just 100,000, the architects were put to work. (See Figure 4 for a breakdown of renovation costs.) The renovation program was completed in August 1989, and included:

* Placing a decorative grill on the facades of both anchor tenants and new canvas awnings over local tenants' storefronts.

* Installing a new pylon sign at the street entrance and landscaping the curbside.

* Installing new under-canopy tenant signs and lightening the soffits color scheme.

Rockbridge Place's major non-physical problem was security. Local teenagers tended to loiter outside a fast-food outlet located at the back of the property, which was adjacent to a vacant lot. The situation was resolved by hiring a security guard to patrol the area, especially during vacation times.

In addition, we acquired a 0.48-acr undeveloped parcel adjacent to t center, which can support square feet of gross leasable area. In conjunction with the planned renovation, this purchase introduced new flexibility for future expansion.

Throughout the upgrade of Rockbridge, we paid special attention to the needs and concerns of our anchor tenants. Here again, Winn Dixie is considering expansion, and their response to the improvements at Rockbridge has been enthusiastic.

As with Bellemeade, the physical renovation efforts were supported by aggressive leasing activity and efforts to improve community awareness of the center. As a result of these efforts, estimated value of the center rose from $4 million to $4.3 million. These figures do not reflect the potential added value resulting from increases in the center's gross leasable space.


With both renovations, our immediate priority was to enable the properties to compete effectively in their marketplaces, both of which are quite soft and have an overabundance of product.

To a large extent, much of what was done at Bellemeade and Rockbridge was an important exercise in value protection, rather than in dramatic value creation.

Our long-term goal, however, was to identify ways additional value could be created at some point in the future when the supply and demand of retail properties in the region begin to come back into balance. With these renovations, that goal was accomplished on a very cost-effective basis.
COPYRIGHT 1990 National Association of Realtors
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Author:Lauckhardt, Charles; DuFresne, Jeffrey
Publication:Journal of Property Management
Date:Sep 1, 1990
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