Underperforming retail centers dot the landscape of America's cities, suburbs and small towns. These shopping centers struggle due to changing demographics or simply because something newer, perhaps better, is developed across the street or a few miles down the road, especially in suburban submarkets with low barriers to entry.

In the early 1990s, opportunities abounded for a third-party leasing and management company such as Spectrum Realty Advisors of Atlanta to help lenders reposition foreclosed properties and rescue equity from troubled retail developments. As the market shifted, stabilized and improved, entrepreneurial investors who saw the embedded value of underperforming retail centers gained momentum in metro Atlanta.

New Neighbors Bring Opportunity

Sometimes, that shiny new development across the street equals new opportunities rather than a retail center's demise. Last fall, Spectrum Realty Advisors served as development and leasing manager on the renovation and expansion of a 17-year-old shopping center, Village Green, in West Cobb County, one of Atlanta's fastest growing suburban areas.

As with many suburban developments, Village Green was developed during the early phase of trade area expansion, and until the late 1990s the development of West Cobb shopping center space outpaced demand from the available population base. Historically, Village Green languished at 90% occupancy with a high rate of tenant turnover.

When Cousins Properties, an Atlanta-based REIT developed the retail lifestyle center The Avenue West Cobb directly across the street, new interest surfaced in the undeveloped second phase of Village Green. With The Avenue under development, the opportunity materialized to add approximately 80,000 sq. ft. to Village Green and reposition and remodel its first phase. Spectrum worked with Village Green's owner to realize that opportunity.

Finding the appropriate anchor tenant and tenant mix for the project's second phase was the most important aspect of redeveloping and repositioning Village Green. By using its database to sort potential and preferred anchor tenants by category and required square footage, Spectrum was able to determine which retailers were already positioned in the West Cobb trade area, what categories were underserved and which stores best fit the customer base.

From a long list of potential anchors, Belk, the North Carolina-based department store chain, emerged as a prime anchor as it fit the trade area's demographics and did not have a nearby location — or much department-store competition in West Cobb. With both the remodeling of Phase I and a solid anchor for Phase II with Belk's 65,000 sq. ft. lease, an additional 11,200 sq. ft. of shop space was pre-leased to four retailers prior to the completion of the second phase.

Equally important, remodeling the 100,000 sq. ft. first phase, which is anchored by a Kroger grocery store, required fully renovating the entire exterior, adding new signage and lighting, and resurfacing the parking lot. The results are a much better performing property operating at 100% occupancy with a stable group of tenants paying rents that reflect the quality of the property and the trade area it serves.

As construction manager for redeveloped and repositioned retail properties, it is Spectrum's responsibility to identify and work with architects, contractors and municipalities who understand the potential pitfalls of working with older buildings. Costs to execute renovations are difficult to determine at the project's outset because older structures can and often do have unrealized structural or mechanical problems. As a team, Spectrum must be able to stage the project so that it minimally interferes with existing retailers' operations. Ideally, re-skinning a 100,000 sq. ft. shopping center should take 90 days.

Reaping the Benefits

With Village Green, the owner chose to hold the center, and the property has achieved a 33% gain in value. Additionally, the multi-stage development enhanced the property's value through full occupancy and higher rates.

Investing in underperforming retail assets involves heightened risk, but the outcome of a successful redevelopment with the right tenant mix and anchors yields a substantial increase in value. This type of project allows many owners, especially those with floundering shopping centers, to rescue equity by improving the property's financial performance through higher occupancy and higher rents. The resulting added value enables the owner to refinance or sell the center with a much higher return on the initial investment.

Jonathan D. Barry is president and founder of Spectrum Realty Advisors and CEO of Spectrum Cauble Management. Spectrum provides leasing, property management, development and investment property brokerage services.