January 4, 2022
From small-scale refreshes of neighborhood shopping centers to massive conversions of regional malls, retail redevelopment has become a budding business as seismic forces like e-commerce and COVID-19 have fundamentally altered the ways in which Americans shop, dine and seek entertainment. Yet empirical and anecdotal evidence shows that people still love to frequent brick-and-mortar stores, restaurants and entertainment centers.
According to data from Transwestern, at the end of the third quarter, Dallas-Fort Worth, Houston, Austin and San Antonio all had marketwide retail vacancy rates under 6 percent. Year-over-year vacancy contracted by anywhere from 80 to 130 basis points across the four major markets, all of which also experienced positive net absorption in the third quarter.
While these Texas-specific numbers reflect a steady, sustained rebound for brick-and-mortar retail in the post-COVID era, preliminary data on holiday shopping indicates that e-commerce’s foothold on the market is getting
According to Adobe Analytics, online sales during Black Friday topped $9.1 billion, a 2.3 percent increase over 2021. While that number should be judged against the fact that this year, the public health risk of shopping in physical stores was substantially reduced, it also represents a 21.7 percent increase over pre-pandemic online sales of $7.4 billion on Black Friday in 2019.
In addition, Adobe Analytics reported that Cyber Monday 2022 set a U.S. record for single-day e-commerce sales with approximately $11.3 billion in online transactions. That figure represents a 5.8 percent increase over Cyber Monday totals for 2021 and a whopping 20.2 percent increase over 2019.
Despite these impressive numbers from the e-commerce corner, Seeking Alpha reported that certain brick-and-mortar retailers in the discount apparel, electronics and cosmetics industries all saw increased levels of foot traffic relative to both 2021 and 2019. In addition, sources indicate that anecdotal evidence of healthy traffic levels, both before and during the holiday season, has reinforced the notion that brick-and-mortar and online shopping can effectively coexist.
Weldon Simons, COO at Weitzman, which handles retail rehabilitation and redevelopment projects across the state, says that brick-and-mortar owners have been very encouraged by rebounding traffic levels in the post-COVID era. “The traffic of late has proved that brick-and-mortar retail has survived and is here to stay,” he says. “Seeing that rebounded traffic makes owners want to make that capital investment in their properties.”
The collision of these two social phenomena has been purely Darwinian, resulting in the creation of an evolutionary framework wherein the weakest centers and malls are weeded out in favor of true destinations that effectively check multiple boxes. That could entail combining multiple commercial sectors in a traditional mixed-use fashion or simply adding elements that encourage more browsing, cross-shopping and onsite leisure time.
Whatever the case, retail redevelopment has become an undeniably philosophical business. Concepts such as “vibe” and “identity” resonate the operations of properties that previously served as little more than places to just run errands, grab a bite or enjoy activities with family and friends. Intangibles like pizzazz, street smarts, tech savviness and human intuition lie at the core of most successful redevelopment endeavors.
This paradigm shift in how people consume retail, restaurant and entertainment uses necessitates more thought provocation and creativity from owners in branding their physical spaces.
Sure, the properties with the most desirable locations — and their tenants — will always have built-in advantages in terms of density and demographics. But for most other properties, these sweeping changes across the brick-and-mortar landscape have catalyzed moves to take hard looks at properties and find ways — whether overt or subtle — to enhance them.
Simply acknowledging the potential need to revamp or reposition a property raises a slew of questions for owners. How deep a dive is necessary given the age and condition of the property? Where are the opportunities to add value? What types of lifestyle elements can be seamlessly integrated into the site’s existing infrastructure? How should the tenant mix be adjusted to mesh with the physical upgrades? What are the best ways to activate and brand the property?
These are tough questions. Tougher still: While there’s no singular right answer to any of these queries, there are a lot of potentially wrong answers to them — prospective courses of action whose success or failure can only be measured over time.
Given these pitfalls, as well as the ever-escalating costs of executing a refresh or redevelopment, it’s no wonder some owners delay these decisions as long as possible. In addition, every owner has different financial limitations and capital resources by which to turn vision into reality.
Even so, owners never know when today’s fluid and fickle market could turn on them. For that reason, it’s never too early to start thinking about repositioning options and conducting some basic market analysis.
Terry Montesi, CEO of Fort Worth-based Trademark Property Co., says that the rise of omnichannel distribution in the retail world has been a game-changer in terms of evaluating the potential for redevelopment.
“When we look at a retail site, we consider the extent to which it is strategic for retailers from an omnichannel delivery standpoint,” he says. “For example, does the space lend itself to buying online and doing curbside pickup? Most legacy retailers will likely need fewer stores in the future than they have today, and part of redevelopment is rightsizing or re-envisioning the existing retail. So that’s a new filter that we’ve added to our analysis.”
But on a broader level — and as is usually the case in real estate — every property comes with a different story and profile, and therefore typically has a unique impetus behind the decision to revamp or redevelop it.
“While there’s usually not a seminal moment or obvious catalyst, neither is the decision to pull the trigger on a redevelopment done on a whim, mainly because there’s no ‘one-size-fits-all’ approach to these projects,” says Simons. “It’s all about conducting market research to determine whether or not a redevelopment makes sense.”
As a management and leasing agent for owners, Weitzman usually assists its clients in tracking and analyzing market data and trends to determine the answers to this all-important question. “It’s a real ‘boots on the ground’ effort between owners, general and subcontractors and leasing teams, and all those groups have to come together to make that decision,” says Simons.
Weitzman recently completed the rehabilitation of Willow Bend Market, a 175,000-square-foot center in Plano that was originally built in 1997. The centerpiece of the project involved the reconfiguration of the anchor space, which is occupied by grocer Tom Thumb. Other upgrades designed to enhance the center’s aesthetics included the installation of new LED lighting on buildings and in parking lots and new landscaping features.
As part of the project, Weitzman also enrolled tenants in its proprietary digital marketing program, a move intended to minimize disruption brought on by construction and keep businesses operating at peak levels. Simons says that this sort of cooperation and communication with tenants is key to the success of any repositioning effort.
“Talking to tenants in advance about the work you’re going to do, providing renderings of the redeveloped center, phasing the jobs so traffic can continue to flow through the property — tenants really appreciate all of these forms of communication,” he says.
“Existing tenants are usually excited because they know that the project will enhance their businesses, which also makes that the time to sell the sizzle of the project to new tenants,” Simons adds.
Sources also say that preliminary due diligence normally entails an assessment of shifts in a variety of economic and demographic factors, including construction costs, traffic patterns and consumer spending.
“In terms of evaluation, there’s a lot of data that we utilize to create models and outputs of how we want to focus our time, energy and resources,” says John Hardaway, partner at Triten Real Estate Partners, which is perhaps best known for the M-K-T mixed-use redevelopment in Houston’s Heights neighborhood. “You don’t just parachute into a new market and start redeveloping. You really have to have a finger on the local pulse and trends to hit it right.”
Triten is in the midst of converting the 300,000-square-foot shopping and dining development formerly known as Market Square Mall in Plano into a mixed-use destination that is known as Assembly Park. Current plans call for about 300 residential units, 200,000 square feet of creative office space and about 17,000 square feet of “right-sized” retail and restaurant space. Completion of the project is slated for late 2023.
Hardaway says that the Assembly Park redevelopment represents a project in which the long-term added value to the community can be clearly quantified and articulated, which is key to securing municipal support. That collaboration with city planners and officials was critical to this particular project, which required rezoning to support the multifamily component.
“Once the municipality realizes that the asset in question is truly declining in value and that decrepit retail begets crime and declining residential values — then they’re more willing to get behind a group that’s willing to invest time and resources in a redevelopment,” he says.
As is the case with renovations and refreshes of neighborhood centers — in other words, private-sector projects — the success of large-scale redevelopments that can involve multiple owners and the public sector can hinge on quality communication and cooperation. “The same way different sectors feed off of each other in a mixed-use environment, developers and municipalities have to work together to make project economics pencil,” notes Hardaway.
With projects that do require public-sector collaboration — especially those that involve older properties — infrastructure is a key consideration.
“Municipalities typically have governances that allow them to help on the infrastructure side, which is vital when you’re dealing with sites whose streets and sidewalks are of much older construction,” says Hardaway. “The bottom line is that a lot of these projects are not financially viable without some sort of public-private partnership for infrastructure.”
“Infrastructure is the foundation and starting point of any retail redevelopment,” adds Montesi. “It’s within that context that you ask a lot of important questions on everything from new access points or turn lanes to technological support for 5-G networking. And since those pieces of infrastructure impact the public experience, municipalities tend to be involved.”
Trademark recently purchased Lincoln Square, a 470,000-square-foot regional power center in Arlington, with plans to convert the 45-acre site into a mixed-use development with office and multifamily uses. To facilitate the redevelopment, Trademark entered into a 30-year partnership with the City of Arlington to invest $150 million into the property over the next six years, with the city committing $14.2 million under the terms of the agreement.
In announcing the acquisition and redevelopment plan, Trademark noted that the deal aligned with a key municipal economic initiative that centered on rejuvenating certain urban pockets. Infrastructural investment, whether in roads, sidewalks, utilities or public transit access, fits within that larger agenda of rehabilitating well-located urban districts with real estate projects that meet important needs of the community. These needs include quality housing and chic dining and entertainment concepts.
Trademark is also redeveloping The Galleria Mall in North Dallas. While Montesi declined to offer specific updates on that project, he stated that leasing activity within the retail, restaurant and entertainment segments has been strong, both in terms of new deals and renewals. And given the company’s new vertically integrated penchant for multifamily development, it’s likely that the project could be repurposed to feature a residential use.
“Malls are very expensive to deconstruct and reconstruct,” says Montesi. “Fortunately, most municipalities understand that multifamily rental developments allow a lot of the value that vibrant mixed-use settings offer to be harvested.”
Like everything else on the planet, retail repositioning projects in today’s world are subject to rapid, rampant fluctuations in costs, whether for materials, marketing, financing or other inputs.
“Time and market conditions are two of the biggest pitfalls in this business,” says Hardaway. “As we see in this environment of massive inflation, costs have skyrocketed in the last 18 months, which is about the average amount of time that elapses between the design and underwriting phases to the start of construction. We’ve also seen certain asset classes, like office, struggle to return to pre-COVID performance levels during that time.”
Other common hurdles that owners face, regardless of the size and scope of their project, include disruption to tenant operations during construction, renegotiating leases based on post-redevelopment changes in rent and insightfully rebranding their properties to align with what the community wants. To be sure, these are all pitfalls rather than launchpads to greater traffic and sales.
When considered as an alternative to ground-up development, retail redevelopment carries other unique challenges — and opportunities, says Lacee Jacobs, senior vice president at Houston-based Midway.
“The community around a site that’s established already has an idea of what it is, so you not only have to encourage people to come to a new place, but to come back to a place that they feel like they already know,” Jacobs explains. “So that’s a different challenge relative to a ground-up project. But it can be an advantage for developers because people are curious — they know the site and are curious to see what you did or didn’t do with it.”
As opposed to ground-up development, another advantage with retail redevelopment lies in the speed of beginning the outreach and tenant recruitment process, Jacobs adds.
“As for curating tenants and getting community feedback on how to curate that mix, we can usually start that process sooner with redevelopments than ground-up projects,” she says “With ground-up projects, one of the biggest challenges is really getting tenants to see the vision, whereas we as the developer have been seeing and living it for years.”
“But with an existing project, people have that familiarity — some kind of experience or association with the site that they can start with,” she continues. “That allows us to show them certain features or aspects of the plan on Day 1. That also allows tenants to grasp the vision more easily, as opposed to with a ground-up project where all you have is dirt.”
Midway recently acquired the former ConocoPhillips headquarters campus in Houston with plans to modernize the existing office space on the 70-acre site while also adding new retail, restaurant and hospitality uses. The campus will subsequently be branded Watermark at District at Woodcreek, a name that pays homage to the site’s extensive acreage of lakes, green space and walking trails.
Jacobs notes that this project represents a more modest attempt at reimagining the site in that it maintains its traditional feel and functionality as an office hub. Midway expects to add about 30,000 to 50,000 square feet of retail and restaurant space and is pursuing a tenant mix that aligns with the demands of working professionals.
This typically entails users in the fast-casual and fine dining spaces, as well as in service-oriented retail. The food-and-beverage components will be specifically curated to fit with the layout and ambiance of a water-centric site with established on-the-ground walkability.
From COVID-19 to supply chain snarls to inflation-induced interest rate hikes, uncertainty and disruption on a global scale have been the name of the game for nearly three years now.
Yet through all the turbulence, American consumers have seemingly recognized the importance of continuing to spend on soft goods, services, luxury items and entertainment — albeit at different paces and in different proportions.
With the aforementioned macroeconomic factors putting heavy pressure on the occupancy and operating costs of brick-and-mortar retailers and restaurateurs, the willingness of consumers to spend money within their establishments is more than just a saving grace — it’s the lifeblood of survival. The extent to which that trend can be sustained through the critical holiday shopping season could set the stage for a continued rebound in 2023.
And especially in Texas, brick-and-mortar retail owners and operators remain encouraged by the same fundamentals that have always guided their success: exceptional in-migration brought on by business-friendly policies and an affordable cost of living at the residential level.
Against that backdrop, the decision to pull the trigger on minor or major capital improvements to a property becomes a little easier.