LAS VEGAS—Don’t confuse a challenged property with a distressed one. So said panelist Erik Christopher, broker of David, Hicks & Lampert Brokerage LLC, during a session titled “Acquiring and Then Revitalizing a Challenged Center,” on Monday at ICSC’s RECon event here in Las Vegas.
“The key in looking at revitalization is opportunity,” Christopher said. “You have to look at property, understand the market it’s in and understand what the center may have been or could be.”
Moderated by Sean Burke, principal of S.T. Burke Retail Partners, panelists were asked whether “challenged” was a fair description to describe these types of retail centers. Panelists said that while accurate—since many of these types of centers have their challenges—value-add opportunities provide a more positive view.
The more difficult of the challenges are getting the city to buy in, and also keeping tenants happy, panelists said. “How do you tear down a center and rebuild it with tenants in it? You have to maintain access to it while it is a war zone,” said Bryan McFarland, principal of Alberta Development Partners LLC.
When asked what makes these centers attractive investments, Edward Coury, SVP and director of leasing at Starwood Retail Partners, points out that trophy asset cap rates are 4%, a B asset is maybe a 7% or 8% and a challenged can be more than that. Over time, if the challenged center is revitalized, “you can really capitalize on the return of investment,” he said. In addition, Coury said, “there are more opportunities out there to buy those types of assets. You have to be daring and aggressive, but the rewards are there.”
As a general rule, the equity looks forward while the debt looks backward, said Timothy J. Joyce, managing director of HFF LP. “You have to understand the story behind the asset and work with the new buyer to understand what their plan is. You need to walk the lender through the process, and at the end, you are really selling the dream.”
Most markets are fairly static in terms of population growth, so you are talking about market share and capturing dollars, explained Coury. “If a center has lost to a competitor, you have to look at what they did and how you can get it back.”
Starwood Retail Partners tends to drift towards quality, said Coury. “Don’t always default to the easy deal, because you may regret it.”
The conversation shifted to how the Internet impacts people’s life and shopping habits, and according to Coury, the Internet is growing and is a growing part of a retailer business, “but it isn’t the part of your business.” It is a complementary use, he said.
“Making the experience worth the trip when you get there is what it is all about. If you’re a static mall owner, it becomes boring and your customer gets that.”