Reprinted with the permission from The Real Estate Finance Journal
By Richard J. Brunelli
Over the years, R.J. Brunelli & Co. has performed regional retail vacancy studies, most recently examining over 25 million square feet of strip center space in Northern and Central New Jersey. Through first-hand observations of hundreds of properties in New Jersey and discussions with fellow brokers in other parts of the country, 10 primary causes of strip center development failure have been identified. Significantly, most of these pitfalls can be avoided through proper planning and leasing. These common pitfalls and the measures that can be taken to work around them are outlined as follows:
- The Inconvenient, Unanchored Strip. This center typically averages 40,000 to 50,000 square feet. It is not located at an intersection and may have inconvenient curb cuts.
Centers of this size are usually too small to accommodate a supermarket anchor and too large to be filled with the typical convenience stores that succeed in small strips (pizza restaurant, beauty salon, dry cleaner, convenience food store, sub shop, and drug store). It has been found that once a center is leased to convenience-type tenants—and it is hard to go beyond 20,000 square feet in these classifications—it is practically impossible to fill the balance with apparel classifications or other specialty stores that prefer to be in a more focused specialty center. As such, the 40,000 – 50,000 square-foot center often finds itself caught in the middle.
The inconvenient curb cuts that frequently plague properties of this size typically arise from a visibility problem. A curve in the road, a building blocking the visibility of the curb cut, or even a situation where there are numerous curb cuts in the immediate area that are not clearly identified, may prevent the consumer from seeing the curb cut until it is almost too late to pull in. As such, the consumer may find it easier to pass by.
- The Center With No Focus. Retailers going into unanchored strips of under 50,000 square feet usually seek centers where the tenant mix is complimentary. A specialty center with a complimentary tenant mix will pull from a wider radius than a similarly sized property with a mixture of convenience tenants, which pull from a very short radius, and specialty shops. Centers with such a mixed personality are usually doomed for failure, with the specialty shops falling first.
On the other hand, an unanchored 50,000-square-foot retail property can succeed, even if it is located away from the intersection, if it is a focused center. For example, Brunelli recently leased a 40,000-square-foot center with great exposure to a variety of home fashion-oriented tenants. These included stores specializing in bed/bath, mattresses, carpets, tile, fans, picture frames, and juvenile furniture.
Centers featuring a variety of auto after market tenants have also emerged as a viable option. Another possible theme for small centers is a children’s grouping with a toy store and shops specializing in children’s clothing, books, juvenile furniture, and room furnishings. This could be rounded out with a children-oriented restaurant where birthday parties are consistently held.
Today’s typical consumer loves the idea of one-stop shopping. This is especially true for the woman who is working as well as maintaining a home. This consumer who has little time to run from center to center. Developers and brokers should keep the consumers needs in mind.
- The Not-Visible Center. This center could be almost any size. The problem is that 80% of the stores at the site have less than 30% visibility. To discuss this, “visibility” needs to be defined. A freestanding store facing the street, set back a short distance on a flat former cornfield, would have 100% visibility to traffic traveling in both directions on the road. That same store with its storefront and all signing facing only one direction of traffic would have 50% visibility.
If buildings are blocking the view of stores that are further from the street (which is usually the case in a center built perpendicular to the highway) as drivers approach the center, the storefront signs may be visible only for a brief glance as the drivers speed along the highway. The briefer the glance, the lower the visibility rating and most likely sales volume. Most perpendicular centers typically offer 20% or 30% visibility to their tenants.
The only way the visibility problem can be overcome in a perpendicular center is if the site has terrific anchor tenants at the back of the property that can draw large numbers of customers. In that scenario, the satellite stores with poor visibility to the roadway have a better chance of success as their storefront visibility to the consumers shopping the anchors will be passed regularly and typically will offset the problem.
Unfortunately, most small chains and mom-and-pop retailers do very little advertising. Therefore, the visibility of their storefronts and signs to the street becomes their most important presentation to the public. Developers saddled with a retail property that lacks good visibility are advised to create an on going advertising program with the tenants to let consumers know what products and services are being offered at the center.
- The Two-Story, Mixed-Use Center. Developers are often tempted to put a second story on their shopping centers. The cost of constructing a second story is a fraction of constructing the ground floor. As such, developers figure they will be in a win-win situation, in which tenants will be clamoring to get into the upper level at a lower rent while they enjoy increased profits.
With the exception of locations in cities or in certain very densely populated suburbs, it has been found that this approach can instead degenerate into a lose-lose situation. Retailers generally refuse to lease second-story space, contending that consumers are too lazy to walk up a flight of stairs. In virtually all cases, this puts the developer in the position of designating the upper floor for office space.
Although this all sounds very logical, problems can arise in attracting tenants for either level. Retailers fear that employees of second-story office tenants will clog the parking lot from 9 A.M. to 5 P.M. every day, thus inconveniencing shoppers and robbing them of potential sales. To make matters worse, office tenants dislike the idea of parking their cars in the spaces that are allotted for retail stores, fearing that their cars will get banged up by the consumers throughout the day.
Of course, in some cases where land prices and population density are extreme, a two-level center can work. But good planning is essential. One approach that has proven successful is to design a facade where the front of the structure appears to be strictly retail—for example, no windows for the office tenants in the front. The entrance to the offices would be limited to the rear, where adequate parking designated for office employees and visitors would be provided.
- The Enclosed-But-Too-Small Center. Enclosed centers in densely populated areas such as New Jersey, the boroughs of New York and Philadelphia proper must have significant critical mass and multiple anchor tenants. This type project will attract enough consumers into the mall area on a steady basis and support the satellite mall tenants, this generating sufficiant rents to make a viable addition to your real estate portfolio.
Perhaps in the snowbelt states, where the winters are especially bitter, consumers may appreciate a small center with a climate controlled mall area. But in the more typical US climate, experience has shown that consumers visiting a small center prefer to park as close as possible to the entrance of the stores in which they intend to shop.
In the northeast, an enclosed mall with fewer than three major department store anchors, or less than 500,000 square feet of gross leasable area, has typically proven to be a disaster. In fact, foreclosure action against such properties has been common place. Currently the thinking is to clear out the few remaining mall tenants and convert the entire mall area into category killers; a wholesale club and/or discount department store with additional Big Box Tenants and to face the entrance’s toward the main parking field. Obviously, a lot of people have paid dearly for that project to get to this point.
- The Center With Too Many Satellites. This situation is a real shame: a center with a great neighborhood location at a strong intersection, yet with an unsupportable ratio of anchor tenants to satellite stores. A reasonable rule of thumb in today’s difficult world of financing and leasing would call for three square feet of anchor tenant for every square foot of satellite store space.
A prime example of a property with too many satellites can be found in a 180,000 -square-foot center recently developed in the Northeast. Built less than four years ago, this center houses a successful 60,000-square-foot supermarket and was designed to accommodate two or three sub-anchor tenants, such as a large variety store or a large off-price apparel store. Being in a neighborhood location, however—as opposed to a more heavily trafficked community location—it has made it impossible to attract such sub-anchors.
All of the convenience uses typically adjoining a powerful major supermarket have been filled and pushed to their limits at this property—for instance, a 2,000- square-foot dry cleaner instead of the 1,200 square feet typically allotted for this use, or a 4,000-square-foot pizzeria instead of 2,400 square feet. Unfortunately, it may be impossible to find suitable tenants for the remaining 40,000 square feet at this center. An experienced developer or a knowledgeable retail broker would have planned less square footage for this site.
- The Unnecessary Center. The unnecessary center can be built with 100% exposure, great architecture, attractive landscaping and signage. The problem: it may be located in an area where there is either, (1) not enough population or, (2) too much competition. As such, this otherwise well-planned center may be rendered unleasable.
While inadequate population is more of a problem than too much competition, it is usually some combination of both that results in the development of the unnecessary center. The only effective way to discover if a planned center will be needed is simple: pre-lease it! If a substantial number of tenants can not be secured before the center is built, it should not be built.
In the wake of the problems of the past decade, most financial institutions now require that substantial pre-leasing take place before construction loans are granted. Indeed, too many loans were granted based on the personal guarantees of developers with strong financial statements who ultimately got caught with too few tenants.
As the banks have learned, a project must be economically feasible based on the merits of the projected secured income, not on the merits of the developer’s financial statement. Market studies alone are not sufficient. In fact, they often make projections that are required to make the person paying for the study happy. The best “market study” is a stack of signed leases that have followed an actual marketing program.
- The Center That Is Too Deep. This condition usually occurs in small strip centers where an inexperienced developer tries to cram as many square feet as possible onto five acres or less. Typically configured in an L-shape, this problem center can house anywhere from 10,000 to 50,000 square feet of gross leasable area.
After the developer proudly announces that every last square foot possible has been squeezed out of the planning board, he or she finds a broker who delivers the bad news: In small strips the typical store size needed is 1,200 to 2,000 square feet. Because the minimum frontage that most stores can live with is 20 feet, it becomes impossible to deliver stores less than 2,000 square feet when more than 100 feet of depth exists.
Using the example of a 30,000-square-foot center, the problems of a site of this type are magnified in the corner, or crotch, of the L. This section has between 5,000 and 10,000 square feet of space with 30 feet of frontage. Stores flanking the corner have depths of more than 100 feet. To make matters worse, immediate parking is usually nonexistent in this corner area.
Often the only tenant that will consider going into the crotch is a health club. To attract such a tenant, the developer may have to essentially “give the space away,” in addition to building out the club and typically putting in a pool. Although a health club can be a fine anchor for a small strip, the developer should weigh the economics of such a deal in advance of construction. Equally important, the developer should take great pains to scrutinize the financial and operating history of the health club. Although the industry’s failure rate is not all that different from that experienced among restaurants or among mom-and-pop retailers, the developer usually has a good deal more at stake due to the high up-front cost of building out the space for this special use.
All things considered, developers who are in the planning stage are best advised to design centers with not more than 70 feet of depth. If possible, all of the stores should face the street. As all too many developers have discovered, a fully leased 30,000-square-foot center can be a lot more profitable than a 45,000-square-foot center with a 30% vacancy factor.
- The Center With Too Little Parking. Different centers require different parking ratios. It would be safe to say, however, that an appropriate rule of thumb would be that five spaces should be provided for every 1,000 square feet of retail space. Four of these five spaces should be directly in front of the store, as opposed to around the sides or in the back.
Small strip centers that are convenience-oriented can usually work well if four rows of parking are provided between the storefront and the street. This scenario creates a setback of about 160 feet, however, sometimes only two rows of parking are necessary. Although exposure considerations may override parking considerations, a configuration with only one row of parking across the front, and the a balance of parking at the sides and the rear, should always be avoided unless the center is a home-furnishings center, for example, where a very low parking requirement is necessary.
Another key consideration is the thorny issue of employee parking. It is often argued that the spaces in the back are best suited for employee parking. Unless the developer writes leases that require the tenants to force employees to park in the rear, the employees will park in the front, as close to their store’s front door as possible—gobbling up spaces that should go to shoppers. Further complicating this issue is the fact that most retailers would prefer that their personnel enter through the front door so as to curb the pilferage that may result from employees entering or exiting through a rear door.
Unfortunately, this is a problem without any easy solution. At best, one should encourage employee-designated parking to be located as far from the front doors of the stores as is reasonably possible.
- The Inconvenient Convenience Center. Picture a densely populated suburb with local arterial roads carrying significant traffic. These arterial roads, which serve to tie together various subdivisions, are met by other arteries, with traffic lights situated at each intersection.
The most convenient place to locate a convenience center in communities with a road system of this type is at intersections where a light will allow for right and left turns onto either of the arteries. But when a community is already developed, all four corners are usually taken up by gas stations, fast food restaurants, and convenience centers built by people who had the foresight to purchase the land at some early stage of the community’s development.
What follows in such situations is the development of middle-of-the-road sites where small strips are built, often on speculation, and then leased to unsophisticated mom-and-pop retailers who live in the area. If there already is a dry cleaner, convenience store, video store, bank, and sub shop in the center on the corner, the same lineup of tenants at the inside location –where left-hand turns may be inconvenient, if not impossible—will have a very difficult time competing.
Sometimes these middle-of-the-road centers work because a developer has found a piece of property with a lot of frontage, and has lined up powerful tenants that can compete with the corner location because of their size. For example, a Blockbuster Video in 8,000 square feet will certainly outdraw the more conveniently located mom-and-pop video store in 2,000 square feet.
But such cases are in the minority. Unless they can attract a dominant tenant of Blockbuster’s type in the pre-leasing phase, developers are best advised to steer clear of middle-of-the-road convenience centers along community-oriented arteries.
**Sign up to our newsletter and receive free exclusive content from Grupo 4S and a discount to our seminars. Send an e-mail to email@example.com