Due to the shortage of land in many areas of the country, the increasing challenges involved in obtaining entitlements for ground-up development, and the evolution of shopping center design, many retail developers are focusing their efforts on redevelopment.

Redevelopment offers many advantages not found in ground-up development. The entitlement process, nearly always cumbersome in new development, is simplified in redevelopment because a broad base of community impacts, including traffic and noise mitigation and infrastructure needs, has already been addressed in the original development process.

Redevelopment projects also have an existing customer base because they are typically located in built-out infill areas, making them more attractive to retailers who, with their scaled-back expansion plans, are often hesitant to locate in newer suburban areas that have not yet reached full density.

And finally, in ground-up development, it can be challenging to convince the community to support the conversion of large open spaces into commercial and retail use. In the case of redevelopment, the community is less hesitant, because the space has previously been dedicated to retail.

The acquisition

Despite its many advantages, there are also special challenges with redevelopment. Since we specialize in redeveloping and revitalizing failed shopping centers, it is critical that we thoroughly evaluate a property prior to acquiring it to determine why it is not performing and if the needed changes are viable and economically feasible.

Many centers fail due to their lack of coherent tenant mix, so it is essential before purchasing a project to determine what users are in place and if it is better to keep them in their current locations or relocate them. Additionally, tenants of the existing center may own their own buildings or have significant investments in their leased facilities, complicating the relocation and/or buyout of existing tenancies.

Before making a land purchase, it is also important to find out how the municipality and surrounding community perceive the existing center and to determine if they will support the needed changes, since so much of the redevelopment process involves reconfiguration or de-malling.

The underwriting of a project for repositioning must include attracting new user interest and analyzing the costs associated with the reconfiguration, including demolition, tenant relocation, development of new structures and site improvements.

The Construction Process

After the land purchase has been made, another set of challenges arises. Redevelopment is like putting a complicated jigsaw puzzle together with the relocation of utilities, reconfiguration of parking fields and development of new buildings occurring simultaneously. It is a challenging exercise to ensure that the construction staging process proceeds with as little impact as possible on existing tenants.

During construction, it is important that existing retailers stay open for business and that their customer base not be lost during the renovation. To maintain a center's image, we post signs asking customers to “please excuse our dust” and announcing the arrival of exciting new tenants, but more importantly we reach out to the community and keep them informed about the transformation of the project. To ensure access to existing tenants, parking fields are kept open on a rotating basis and entrances tunneled for visibility as well as for safety precautions.

Case Study

SLO Promenade, MBK Southern California's redevelopment in San Luis Obispo, is a prime example of a project that contained all the typical redevelopment challenges. The City of San Luis Obispo, located on California's Central Coast, is a smart growth community and has done a tremendous job of preserving its downtown. However, developing raw land on the outskirts of downtown has been challenging.

The area's growth policies had made it difficult for large, destination retailers to receive entitlements and enter the market. As a result, residents were driving more than 40 minutes away to find these kinds of retailers.

The Central Coast Mall, located about two-and-one-half miles from the city center, had enough space for larger retailers, but was poorly configured and unsupported by major anchors. The mall was anchored on one end by Gottschalks Department Store and Embassy Suites on the other. In between was a host of small stores whose business suffered because there was no draw between the two anchor tenants.

Even in its peak years, the center achieved only an 80% occupancy level. We began the process of finding out if the city and community would support de-malling the dysfunctional enclosed mall and allow us to reconfigure it and bring in new users.

We worked with input from city staff and the community to design a center that would be compatible with the nearby Downtown Centre, thus winning approval for the new project. By tearing down the entire enclosed center between Gottschalks and Embassy Suites, we converted the mall into a vibrant, open-air community shopping center bisected by a landscaped pedestrian walkway with outdoor space dedicated to public art.

With this new design, we were able to bring in high-quality new destination retailers, including Bed, Bath and Beyond, Staples and Cost Plus World Market. We also expanded the existing Gottschalks space from 80,000 sq. ft. to 120,000 sq. ft.

During construction, Embassy Suites and Gottschalks remained open for business, as did about 30,000 sq. ft. of pad tenants, including shops and restaurants, so we had to ensure that their customers always had access to parking areas. We created a phased construction process for the entire parking area so that ample and proximate parking was available at all times. If we had to close drive aisles during construction, we put up directional signs and hired traffic directors to reroute customers into open parking areas and entrances with safe access.

And in consideration of Embassy Suite's 100% satisfaction guarantee policy, we limited our construction hours around the hotel so as not to disturb hotel guests. While this was a challenge in terms of our construction schedule, it is one we met successfully.

The redevelopment of the mall, now renamed SLO Promenade, was so successful that the 250,000-sq.-ft. center was already 95% leased even before it reopened. It is currently 100% leased. It is an excellent illustration of the challenges inherent in redevelopment as well as the advantages that innovative infill opportunities can present to developers across the country.

Andrew Trachman

Andrew M. Trachman is president of MBK Southern California Ltd. He joined MBK in 1984 and has been involved in more than $350 million worth of development and acquisitions since joining the firm.