Commercial Retail Shopping Centers How to improve NOI?

According to ICSC Redevelopment is the new development in retail real estate, as landlords renovate and rehabilitate existing assets rather than building new ones, said speakers at ICSC’s NOI+ Asset Management Conference this week in Washington.

Rockville, Md.–based Federal Realty Investment Trust says a site must be a proven retail location if redevelopment is to be successful; simply renovating an asset will be no help if that is not the right formula for that market, said Donald Wood, president and CEO of Federal Realty. “Every corner is unique,” he said. “Every customer base is unique.”

For privately held, Miami-based Terranova Corp., the goal of a redevelopment is a high return rate, because that is what investors are looking for. This means a payback of 500 to 600 basis points, said Stephen Bittel, chairman of Terranova. “We want to crank the income meaningfully, so we can cash out and move on to another development,” he said.

PREIT, meanwhile, is looking for longer-term returns on its assets, which are complicated because of their size. One question that Joseph Coradino, the firm’s CEO, asks when taking on a redevelopment is: “ ‘What is the next tenant?’ If it’s a Nordstrom, you can change a whole asset with a Nordstrom.” Sales surged at PREIT’s Plymouth Meeting (Pa.) Mall when the firm added a Whole Foods supermarket. Annual sales per square foot increased from the mid-$250 range to the mid-$330 range after that addition, Coradino said. When a property does not garner the attention of a superstar tenant like Whole Foods, another type of user, such as government offices or a school, can improve the net asset value, Coradino said. The end goal is often to sell down the road in these cases, he said. “It gives us the ability to take those assets and give the story to another buyer.”

But recent activity in the department store sector — including the purchase of Saks Inc. by Hudson’s Bay Co., and the acquisition of Neiman Marcus by a group led by Ares Management and the Canada Pension Plan Investment Board — could indicate a surge in tenant demand that might drive some new development, Coradino said. As Bittel put it: “If you give a developer money, they will always develop.”