Lease difficult spaces wisely, not hastily, specialist advises at RECon

The failure to differentiate between the two, particularly when developers and brokers are under pressure to fill vacant space, is a frequent reason for the decline of a shopping center, Egelanian said at a session titled "Leasing Strategies for Difficult Spaces," at RECon.

“You’ve got to understand whether you’re a commodity center or a specialty center,” Egelanian said. “And if you start throwing stuff in, then you risk building a Frankenstein. It’s easy to do, but you'd better not, because it is going to make things worse.”

To avoid such missteps, real estate professionals need to understand a property’s surrounding demographics and trade area, among other factors. They also should look at psychographic information in order to determine the differences in two seemingly similar sets of demographics. Two households that both report income of $100,000 per year, for example, may have completely different spending habits, depending on occupation, the number of children in the household and similar factors, he added. Additionally, developers need to assemble a merchandising plan, which is a mix of art and science, he said.

Commodity sales make up about 85 percent of all U.S. purchases, and those retailers are typically found in convenience centers, such as drugstores or grocery-anchored properties, or at power, lifestyle and community centers, he said. Generally, they serve populations living within three miles. Meanwhile, specialty retailers, which account for roughly 15 percent of total retail sales, are gravitating toward regional town centers, malls and outlet centers serving populations within 100 miles, Egelanian said.

Given the overblown concerns about e-commerce ruining retail — Egelanian pegged Amazon.com and other pure-play e-commerce sales at about 3.7 percent of total retail sales annually — it is understandable that landlords are focused on adding specialty retailers to centers. But the number of developments that can support this type of retail exclusively is dwindling. Egelanian is projecting that the amount of mall and open-air center space in the U.S. will fall to about 5 billion square feet, from roughly 8 billion square feet today. The number of malls in particular, which has already been pared down to about 2,000 from roughly 3,000 over the past several years, is likely to fall further over the next decade.

What is more, while commodity retail is here to stay, the growth of properties to house them has slowed dramatically, except in some fast-growing markets, such as Houston. That makes it all the more important for developers and brokers to drill down on what communities need and are able to support when leasing up centers.

“The market dynamics of your city will dictate what happens to your center,” Egelanian said. “But remind yourself all the time of where you’re going and whether it makes sense for the long term. And have a merchandising plan."