Breaking With Tradition: Retail Adjusts to Reality

LOS ANGELES-One of the ways that property owners have adjusted to the downturn is to find new types of tenants for empty spaces. This is especially true in the retail sector, where department store and big box closings have left landlords with lots of space to fill and relatively few big national tenants looking for such space. GlobeSt.com West Coast editor Natalie Dolce talked with Ellen Berkowitz, a real estate partner at law firm Manatt, Phelps & Phillips in Los Angeles, about solutions and approaches to the empty space.

Dolce: A lot of large retail spaces recently vacated during the economic downturn, so how are these property owners now using that empty space, or what can they do differently to make productive use of the vacant space?

Berkowitz: Get creative. Look for non-traditional tenants, such as "pop-up retail," family themed entertainment centers, children's play areas and farmer's markets–these are all great uses for vacant retail space. "Pop-upretail," for example, includes holiday stores that may be leased from Halloween to Christmas, or it may include any kind of temporary retail concept that a retailer wants to try out on a short-term basis. Both holiday stores and temporary retail concepts can turn into long-term ventures if the retailers and landlords find the venture to be economically productive. Property owners can also sub-divide a larger space to accommodate smaller tenants for both long and short-term leases.

Dolce: What types of tenants are you seeing take up a lot of these vacated retail spaces, such as the leftover spaces of chains like Mervyns for example?

Berkowitz: When Mervyn’s, Circuit City, and Linens ‘n Things, among others, all declared bankruptcy and left a flood of empty retail space about two years ago, landlords wondered if they would ever find a sufficient number of viable tenants to take over all the space. But other retailers and creative concepts have come in to fill the void. Vacant retail spaces, such as former Mervyn’s stores, have become prime candidates for the pop-up retail stores, especially during the Halloween to Christmas holiday season. Other popular uses include entities that couldn't afford such prime spaces a few years ago, such as ethic and independent grocery stores, farmer’s markets, and children's museums and play areas. Vacant spaces are also being used for other retailers, such as Kohl’s and Walmart, which continue to thrive in today’s market.

Dolce: What are some options for undeveloped land?

Berkowitz: Creative land owners are using their vacant undeveloped land for a variety of uses including open-air farmer’s markets, urban gardens, and parking and vehicle storage areas. Bicycle transit stations are immensely popular in cities with good public transit facilities or in areas committed to promoting decreased reliance on motor vehicles. And depending on the locale, undeveloped land provides prime real estate for renewable energy projects, including solar and wind farms and geothermal power stations.

Dolce: What is your forecast of the retail market both nationally and on a local level for 2011?

Berkowitz: The retail world has been changing for some time, and will continue to change in the year ahead. While some retail outlets will flourish, others will fall victim to our changed shopping habits–most significantly, increased Internet shopping. To stay competitive, retailers have to offer something unique about the shopping experience that can’t be found on- line: niche or ethic marketplaces, life-style or entertainment centers, innovative restaurants and food concepts, and other “experiential” retail ideas. While the retail market is still in recovery, the economic forecast looks increasingly positive, particularly for those who understand that innovation and creativity are the keys to building the new consumer base.