“Underserved markets” should, by name, spell opportunity for retailers, investors and shopping center developers. As Larisa Ortiz, managing director for consulting firm Streetsense, explained, “Underserved markets are [locations] where the retail and service opportunities are insufficient to meet the needs and spending that occurs in the communities.” Yet over time, the phrase “has been taken to mean insufficient demand.” That, according to Ortiz and other developers and retailers who have found success in these markets, is just wrong.

Especially in urban settings, retailers and shopping center developers have passed over some such markets for reasons like retail shrinkage, perceived crime and an assumed lack of purchasing power. Additionally, retailers’ traditional layouts often favor suburban over infill urban redevelopment.

But the data retailers and developers pull to gauge these underserved markets doesn’t capture the full extent of consumer demand and discretionary income. “Often, it takes a relationship to get people to listen,” said Lyneir Richardson, co-founder and CEO of Chicago TREND, which offers financing and consulting to retail developers in Chicago’s low-income communities and is experimenting with a model that encourages local ownership of shopping centers across a broader geography.

Today, opportunity is making itself more apparent in underserved communities as supply chains have become more efficient, retailer competition for space in coastal areas has tightened and demographic and forecasting tools have improved. Additionally, the popularity of omnichannel shopping — ordering online and picking up the goods in store a day or two later — is making it more important for retailers to have locations near customers. In the U.S., retailers see increasing white space in secondary and tertiary markets, said Adam Ifshin, founder and CEO of open-air shopping center owner DLC. “Retailers who understand where to dig and find the revenue in those markets and have the operational expertise in those markets are expanding in those markets. The smart retailers right now — they only know where the gas pedal is; they don’t know where the brake is.”

Don’t underestimate demand and spending power

Retail executives and shopping center owners have seen the payoff of investing in some of these communities. Reimagine RedBird — a $200 million redevelopment of a 1975 South Dallas mall that will feature retail, office, hotel, multifamily and health care — is set to open in mid-2022, a prime example that retailers and shopping center owners can do good and do well in underserved communities, given time, persistence and support.

When Peter Brodsky bought RedBird Mall in 2015, using his own private equity, the area was struggling. Though South Dallas made up roughly 54 percent of Dallas’ land mass, it provided only 17% of the city’s property tax base in 2017. According to Terrence Maiden — managing partner and CEO of Russell Glen, a partner and co-developer in RedBird — South Dallas lacked amenities from residential to health care to movie theaters to coffee shops. That need, coupled with its central location and pockets of strong middle-class communities, should have made RedBird a beacon for retail investment, said Maiden, who grew up in the community. But the area historically had been neglected by the business community, the schools were struggling, and misconceptions abounded. “People’s minds were so embedded that the area was tough and rough around the edges,” Maiden said. At first, “I couldn’t even get brokers to present the opportunity to their clients.”

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Yet Maiden and Brodsky believed that residents of South Dallas not only could afford but also deserved high-quality amenities. And because of the project’s private funding, they had the leeway to go after higher-end retailers on an extended timeline. In 2018, they lured their first new tenant, Starbucks. The freestanding Community Store, part of a Starbucks initiative to foster economic opportunity in underserved communities nationwide, became the No. 3 Starbucks performer in the Dallas-Fort Worth area. “The biggest takeaway is: Never underestimate the power of giving people a chance,” Maiden said.

Today, RedBird has also become a medical hub. UT Southwestern Medical Center signed a 15-year lease on 150,000 square feet of space in the mall, with Children’s Health, one of the largest pediatric health care providers in the county, taking up 70,000 square feet of the UT space as part of a collaboration. Additionally, the new Palladium RedBird’s 300 high-end apartments with an affordable housing component are nearly fully leased. Call center operator Chime Solutions rented 50,000 square feet in 2019 and has hired more than 1,000 workers. Last year, a 20,000-square-foot Foot Locker Power Store opened. And Courtyard by Marriot will be the first branded hotel in the area.

Government support

Maiden said government support determines whether a project in an underserved community fails or thrives. He and Brodsky received an economic incentive grant from the city to help with infrastructure. RedBird also is part of a tax increment financing district, and it received a $4.2 million loan from a GrowSouth fund set up by the mayor. “We needed the public sector to prime the pump,” Maiden said.

He advised developers and investors looking to invest in underserved markets to “go big.” That way, “you can see the true community impact that you’re making.”

Root meaning of “underserved”

“Underserved” doesn’t mean minority, urban communities, Ortiz pointed out. It means the retail offerings are insufficient to meet the needs of the market. As populations, traditional retail corridors and even road patterns shift, some areas become underserved, according to Ifshin, and now are ripe for retail investment.

Frederick, Maryland — a secondary market outside Washington, D.C., that is growing in population — would not be considered underserved in the classic sense. Frederick Towne Mall once was the retail center of the city, but the 2011 loss of the last of its original anchors created a ripple effect nearby. SuperFresh closed, as did Giant grocery. People headed further north to Wegmans. “The conventional grocery squeeze had occurred,” Ifshin said. “The corridor got left for dead.”

Based on the available retail options nearby, especially grocery, Ifshin said, this strip of Frederick had become underserved. In August 2019, DLC bought a 227,000-square-foot, Kmart-anchored center there called Frederick County Square that had remained open. In January 2020, Kmart vacated its 94,500 square feet. DLC’s first move was to bring a grocer, Lidl, into part of the Kmart space. Then COVID happened. While many centers around the country had struggling tenants or even vacancies, DLC leased out the rest of the former Kmart to tenants like Goodwill, Ollie’s and Harbor Freight Tools. It also created new net operating income with a pad for a Starbucks and Aspen Dental.

The speed of the leasing, even during COVID, proved to Ifshin strong interest among off-price retailers like Aldi, Burlington and Five Below in underserved markets. Due in part to cheaper rents and outward population migration from locales like California, these retailers are taking “the opportunity to invade white space that they might have flown over before,” Ifshin said.

And with apartment rents falling in urban markets and an economic rebound from economic stimulus checks and tax credits, there’s more spending money available in some traditionally underserved markets, he said. Andy Shallal — owner of D.C.-area restaurant, bar, bookstore and coffee shop chain Busboys and Poets — said his Anacostia store performed best among his locations during COVID-19. That’s in a market that had only one grocery store for nearly 80,000 people in 2019.

Community connection

Of course, shopping centers and retail need the support and buy-in of the local community. Owners and operators often cite crime and security risks as deterrents for moving into urban underserved markets. One reason for damage at stores after George Floyd’s death, Richardson believes, is that underserved communities didn’t feel connected to the owners of the centers or stores. “Nobody knew the owner of the center or the person who leased and managed it,” he said.

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Shopping centers and retailers can be more successful in underserved markets if those communities feel they have a stake in success, he believes. That’s why Chicago TREND is experimenting with bringing in community members as microinvestors. In April, Richardson closed on a 47,070-square-foot neighborhood shopping center in Baltimore anchored by Rite Aid and Save a Lot. More than $330,000 of the $6.2 million purchase price came from more than 130 mostly local community members via a crowdfunding site.

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Though a large number of investors can bring logistical headaches, Richardson bets that local ownership means more people will patronize, protect and appreciate new shopping center investments. “If communities feel more connection, the retail asset might be more productive and the retailers might be more productive and profitable,” he said. Richardson is working on two similar buys in Baltimore and is talking to potential sellers in North Carolina, Cleveland and Cincinnati. “I’m hoping that it capitalizes other investments,” he said.

While it can still be hard to make a case to investors in these markets, “there’s movement, capital and attention around underserved neighborhoods,” he said. But he reminds shopping center owners and retailers that the return on investment “is evolutionary, not revolutionary.” He said: “You’ve got to be urgent but patient: urgent about doing this now while there’s capital, there’s attention around underserved neighborhoods,” and patient to “implement a strategy that has long-term success built into it.”

Ortiz has hope that this this trend of seeing value in underserved markets will continue. “Water flows downhill. Retailers like to follow one another.”