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Two Trees Has Shrugged Off the Retail Apocalypse, Landing High-Profile Retail Tenants

Signs of retail’s continued demise are everywhere you look, from the recent death of Toys “R” Us to an almost weekly march of articles explaining why they and other stores can’t survive the current landscape.

But don’t try telling Jed Walentas, the CEO of Two Trees Management Company, that retail is dead. He’ll likely be too busy celebrating his recent retail triumph to notice.

Throughout its developments in high-end Brooklyn neighborhoods Williamsburg, Fort Greene and Dumbo, Two Trees has had great success in attracting both America’s hottest major retailers and proprietors of smartly curated one-off spaces to its properties.   

Retailers either open now or coming soon to Two Trees properties include monoliths like Apple and Whole Foods, both of which recently opened at the company’s 300 Ashland Place development in Fort Greene; smaller, more bespoke retailers are also appearing such as Sky Ting Yoga (open now), and a new, as-yet-unnamed restaurant from Lilia Chef Missy Robbins, which is scheduled to open this summer at the Domino Sugar Factory development at 325 Kent Avenue in South Williamsburg; and in Dumbo, the children’s activity space The Little Gym (coming soon).

At a time when so much retail seems on life support, how has Two Trees continued to draw such desirable retailers to its properties?

“We’ve always tried to put ourselves in the retailers’ situation, and understand that an arrangement is only good if it’s good for both parties,” Walentas said. “Having a lease with some huge number with somebody that can’t make it and they go out of business a couple years later, that’s not really what you’re trying to accomplish. You want to put retailers where you think they can be successful.

Two Trees’ retail philosophy has changed little since the company began developing Dumbo back in the 1970s, when you probably saw more rats on the streets than people. Walentas used the example of Jacques Torres Chocolate, which opened its first retail shop in Dumbo, at 66 Water Street, in 2000 as an example of his thinking.

“With Jacques Torres, my first conversation with him was a fight where he just wanted to do manufacturing,” Walentas said. “I forced him to do a little retail counter as part of the lease, and he was like, ‘No one’s ever going to come here.’ ”

But Walentas and Two Trees understood that developing a residential and destination neighborhood required an enticing retail environment, and considered that essential if Dumbo was ever to be more than just an industrial area.

“We really used retail as a place-making experience,” he said. “We had 3 million square feet of space. We recognized that if you walked around the neighborhood, you had no idea what was happening on the sixth floor or the 12th. Your retailers are your public face. So 20 years ago, we recognized that there was no traffic there, and we gave away a lot of free rent. We knew that the stores were in a position where they couldn’t spend any money on capital.”

Of course, different types of retail call for different approaches. Securing the deal for the Fort Greene Apple store, for example, was a lengthy endeavor, and Walentas admits he didn’t have much leverage doing the deal for the store, which opened this past December.

“That deal took seven years. It took a couple of years just to make contact with them and get them interested,” he said.

“When you get Apple interested in real estate, the reality is, they’re Apple,” Walentas said. “I wasn’t running that negotiation. That wasn’t the world’s most pleasant thing, but I wasn’t the one with the leverage in that situation. I knew I had the best real estate and I really wanted them to be there, but when Apple’s like, ‘this is how much rent we’re going to pay,’ that’s kind of how it goes. We have 350 apartments above it that I’ve got to rent every year in perpetuity. You’ve got to be an idiot to throw away a deal with Apple over a couple hundred thousand dollars. They add a lot of value to everything you’re doing and they know it.”

Christopher DeCrosta, the founder of the boutique tenant and landlord rep brokerage house Good Space, represented Apple in the deal, and makes the location sound like an easy decision for a prestigious tenant like Apple.

“Jed has shared plans with me for what he wanted to do here, and how special this site was, since 2005,” DeCrosta said. “You don’t need to be a genius to know how special it is. It’s in the middle of everything. He talked about how important the site was to Two Trees. When you have a landlord who shows that type of care and concern for a property, that matches well with having an uber-quality tenant in there.”

twotrees2 Two Trees Has Shrugged Off the Retail Apocalypse, Landing High Profile Retail Tenants
TWO TREES GROWS IN BROOKLYN: 325 Kent Avenue in Williamsburg will include Sky Ting Yoga (above); but Jed Walentas (below right) and his family have been building up Brooklyn for decades, including some of the most expensive condos in the city, like One Main Street (far left). Photos: Dan McMahon; Francesco Sapienza/for Commercial Observer; CoStar Group

For the more specialized (and smaller) retailers, Walentas said Two Trees makes an effort to identify properties that stand out as specifically appropriate for their environments.

“We look for things that have a uniqueness and a level of interest. We definitely discriminate against chain operators. We like to have individual partners or people that are doing interesting things,” he said.

One example of this, Sky Ting Yoga, which opened in February at the Domino property at 325 Kent Avenue in Williamsburg, sprung from a relationship many at Two Trees, including Walentas, had with two women who taught them yoga.

Krissy Jones and Chloe Kernaghan ran yoga studios in Chinatown and Tribeca, and were facing many requests from their students for a Williamsburg location, especially given the impending shutdown of the L train, which will make it difficult for many Brooklyn customers to reach Sky Ting’s Manhattan locations. The pair said that thanks to Two Trees, the decision was a no-brainer.

“We’ve always done our own build-outs and had to file our own permitting and deal with our leases and all that ourselves. Two Trees presented this offer to us where it they made it quite easy,” Jones said. “They were in charge of the buildout, and basically handed our studio to us as we wanted it designed. Also, because the building has so many residents, we already have a community of people living basically at our studio.”

Two Trees’ thoughtful approach to retail has played a significant role not only in their success, but in the success of Dumbo overall.

“The Walentas family has a long history, going back to when they were pioneers in Dumbo, of being very selective in curating their tenant mix,” said Timothy King, the managing partner at CPEX Real Estate. “They don’t just grab the first tenant that comes along. They have the staying power to get the tenant they want, that they think makes the right mix for whatever project they’re working on. Then, retailers want to know that they have a quality, qualified, financially stable landlord they can rely on to deliver the product that was promised, and who will be there in good times and bad to take care of the property.”

And given that Two Trees is seeking the sort of singular retailers who don’t have the resources of a chain, they go into the deal prepared to help.

“The conversation [we have with potential retailers] is often, what do you need from us to be successful,” Walentas said. “We help them with the capital buildout of the stores and give them some free rent to get them off their feet a little bit.”

Walentas will even do a percentage deal with certain retailers, although he acknowledges that shrewd retailers steer clear of that.

“For almost anyone who will let us, we’re happy to do a percentage deal. [After all], it is our job to some degree to build up the traffic base,” he said.

“Some people are too smart for that. We went after Sweetgreen [at 50 Washington Street between Water and Front Streets] specifically because we thought there was a shortage of lunch places for our commercial workforce in Dumbo,” Walentas said. “I kept telling them, ‘You’re going to kill it here. I’ll do a free rent deal with you. I’ll do a percentage rent deal with you.’ I eventually got them to Dumbo, but they were too smart to do a percentage rent deal, and now the line is out the door every day at lunch. But that’s okay. We’re thrilled for them.”

Asked about the retail approach of Brooklyn competitors like Empire Stores or Industry City, Walentas is nothing but complimentary, although he notes differences in how Two Trees might have handled one of the properties.

“I think the world of [Industry City CEO] Andrew Kimball and the folks at Industry City,” Walentas said. “I think the place-making work they’ve done is extraordinary. I’ve become a little friendly with the Empire Stores guys, too. They’ve got a slightly different philosophy than we do. They did way more food there than we would have done. At first I was super skeptical, but I think it’s working great. They executed that totally differently than I would have, and I think it’s awesome. The great thing about cities is that you get a lot of smart people doing lots of different things, and it can all work. There’s not just one set of good ideas out there.”

So while forecasters cast doom and gloom on the retail environment, Walentas will continue taking his company’s good ideas, combined with their not-inconsiderable resources, and create the sort of satisfying retail mix that Brooklyn’s higher-end areas are becoming known for.

“Has retail changed forever? Yes. Are people going to do more and more shopping online to some degree? Yes. But is there still a place for great urban retail and real proprietors, and do people crave that experience? Yes. I think they do,” Walentas said. “There’s a reason cities exist and prosper. It’s because people really like personal interaction with other people. So yes, if you’re just buying paper towels, you don’t need to walk down the street. You can have Amazon deliver them. But there are certain things [for which] human interaction is never going to be replaced.”

Source: commercial

Dollar Stores Likely to Benefit Big From Toys ‘R’ Us Closures

Dollar stores could “benefit” from Toys “R” Us closures, according to a new research survey by Coresight Research, formerly Fung Global Retail & Technology.

With the New Jersey chain shutting down, Amazon, Walmart and Target are the big retail giants who will be duking it out for the $7 billion in annual toy sales that are up for grabs, as per the Coresight data. But, the survey concludes, “dollar stores…could also benefit from Toys ‘R’ Us closures.”

Looking at where shoppers have browsed and bought children’s toys and games in the past 12 months, excluding Toys “R” Us (which placed fourth in the rankings), Coresight found that Amazon led the pack (63.8 percent browsed and 53.7 percent bought) followed by Walmart (54.7 percent browsed and 45.5 percent bought) and then Target (50.4 percent browsed and 38.6 bought). Dollar stores came in fourth (25.3 browsed and 21.4 bought).

“On a percentage basis, they may see the biggest boost to their sales [of all toy sellers],” said Timothy King, the managing partner of CPEX Real Estate.

Toys “R” Us announced this month that it is closing its 800-plus U.S. Toys “R” Us and Babies “R” Us stores, six months after filing for bankruptcy protection. When surveying Toys “R” Us shoppers to find out where else they browsed for toys and games in the past year, Coresight, which provides future-focused analysis to organizations at the intersection of retail, technology and fashion, found Walmart and Amazon tied at 65.4 percent and Target was close behind at 63.6 percent. Dollar stores ranked fourth at 29.8 percent.

“For most consumers, low price and convenience are paramount features,” King said. “Dollar stores offer both low prices and ease of shopping. Smaller stores in more locations make them easy to get to and easy to shop at. A trip to Costco is time consuming and tiring—at least for me. Targets are large stores as well. A dollar store is like the 7-Eleven of retail—convenient locations and easy in and out.”

Retail consultant Kate Newlin said of dollar stores: They are “okay and cheap. They have a good enough selection and the prices are low. I believe some great portion of the stock is close-out and remainders, but for some kid you don’t know’s fifth birthday a bright and shiny something is the price of admission to the party.”

One retail broker, Eastern Consolidated‘s Robin Abrams said that while her mother loves to buy her great-grandchildren toys at the local dollar store, and dollar stores “will get a share of the business,” she can’t “imagine [it] will have a huge impact unless they greatly broaden their product offering to embrace some higher price points.”

Source: commercial

Is High Street Retail (Finally) on the Upswing?

It’s been a bumpy few years for high street retail, and at the risk of taking us off high alert too early, it looks like we’re finally entering a period of stabilized rents, increased deal activity, and a détente between e-commerce and bricks-and-mortar sites.

At the height of the market in 2015, everyone lost sight of the fact that retail stores needed to perform and that sales had to support rents. On prime Madison Avenue, for example, rents jumped seemingly overnight from $1,100 to $1,500 per square foot to an all-time high of $1,800 to $2,200 per square foot.

Putting aside the jolt e-commerce delivered to the rest of retail, this was never sustainable. Landlords increased rents to unrealistic levels and tenants grabbed spaces at any cost. There were painful repercussions for both, ultimately prompting stores to exit the market. Landlords who continued to demand top dollar found themselves saddled with vacant spaces.

Today retail rents have declined by 30 to 50 percent from the peak and leveled off, delivering a much-needed correction. Now those prime Madison Avenue rents have returned to their previous $1,100- to $1,500-per-square-foot level.

Not surprising, the rent adjustment is bringing about a renewed demand for retail spaces.

Tenants initially tiptoed back into the market with pop-ups—short-term scenarios to occupy a space, move some product, build a brand and make a statement. Brands like Amazon and Google did experiential pop-ups, while other brands did exciting collaborations like Supreme X Louis Vuitton. And then there were multiple pop-ups that provided great brand exposure for everything from Casper Bedding to Yankee Candle to Unilever’s multiple pop-ups for St. Ives skincare, Magnum Ice Cream Bars and Pure Leaf Tea. On top of that, it is now becoming the norm for many fashion apparel and shoe brands to do pop-ups in retail spaces for fashion week—i.e., Bogner and Sophia Webster. Lastly, some brands take pop-up space to conduct sample sales to clear out merchandise. Christian Siriano occupied a space on Madison Avenue for a week, and featured fabulous merchandise at much-reduced prices.

Now we’ve gone from very short-term pop-ups to seeing tenants sign one- to three-year leases with options for long-term extensions, a scenario that is limiting risk for both landlords and tenants. If sales are strong and the stores perform well, the tenants plan to stay long term.

Brands are reengaging, perhaps taking fewer stores or spaces with a smaller footprint, but making a real commitment, spending money, and opening retail locations with substantial product.

Retailers that aren’t yet ready to commit to five- or 10- or 15-year leases are nervous about the changing retail climate and future of the industry. Their anxiety is heightened by the constant drumbeat that e-commerce will continue to take market share away from bricks-and-mortar stores.

But I believe that retailers should relax because retail is all about driving sales and there is now less concern whether those sales originate online or in a store. If customers visit a store and it helps them make a decision to go home and buy merchandise online, then that store is serving a purpose.

A classic example is a luxury online brand we represented that wanted to test the New York City market. The tenant opened in a pop-up space in Soho, which was so successful we found the store a permanent space in Soho where sales have been phenomenal.

This retailer understood after opening the pop-up how important it was to have a physical presence. The managers learned that there were expensive products customers weren’t comfortable buying online. Instead, customers wanted to go to the store and see and touch these high-ticket items before making such a significant purchase.

For bricks-and-mortar shops, the lesson is that the internet isn’t something they should fear but embrace and integrate into their brand identity. For e-commerce sites, the lesson is that to increase sales, online retailers should open a physical store, which today is more doable than ever in this climate of reasonable rents.

Robin Abrams is a principal and vice chairman of retail at Eastern Consolidated.

Source: commercial

Manhattan Is Tops for Coworking Space, LA Ranks Second: Report

Coworking represents a small yet growing segment of the office market, a new study demonstrates, with Manhattan dominating.

Manhattan has 245 coworking spaces equaling 7.7 million square feet, according to a new study by Yardi Matrix,  a commercial real estate research and data platform. Los Angeles came in second with 3.7 million square feet in 158 locations. Nine other metros studied have at least 1 million square feet of coworking office product, with Miami being home to the most coworking space as a percentage of total stock, at 2.7 percent of the metro’s 50.5 million square feet of space. Manhattan took second at 1.7 percent of total product dedicated to shared space. (Los Angeles ranked third along with West Palm Beach, with 1.6 percent of space dedicated to coworking.)

Yardi quantified coworking locations in 20 of the U.S.’ largest markets encompassing buildings of 50,000 square feet in major cities and large regions. The research found companies offering memberships at 1,166 coworking sites with 26.9 million square feet of space, which represented 1.2 percent of office space in the 20 markets studied. Furthermore, 11 of the 20 locations studied have more than 1 million square feet of coworking space for lease. There is no comparative data available, as Yardi said this is the first study to “quantify the amount of square footage of coworking space in relation to total office space within markets.”

Perhaps, unsurprisingly, coworking has proliferated more in cities—which have a critical mass of workers—with leases encompassing 1.4 percent of urban office versus 0.9 percent of suburban office space, according to Yardi.

Although there are numerous companies offering coworking space for lease, the field is dominated by Regus (9.4 million square feet)—which pioneered the “workspace as a service” concept in the 1990s, first in Europe and later in the Americas—and WeWork (6.5 million square feet). The two industry giants account for nearly 60 percent of all coworking space in the 20 markets studied.

“Demand is high in markets with concentrations of knowledge workers—especially IT but also new media or industries such as biotechnology and telecommunications—that are friendly to startups [and] in metros where space is at a premium,” the report says, and lower in cities such as Dallas and Houston that have modest barriers to construction and high vacancy rates. Markets with lower vacancy rates, where office space is at a premium, have a higher concentration of coworking space. Fewer blocks of space exist in large coastal markets studied, such as Manhattan, San Francisco and Los Angeles, which, subsequently, have led to a larger percentage of coworking space.

That’s certainly been the case in Los Angeles, where an increasing number of new media providers including Amazon and Netflix have set up shop around town.

According to stats from Cushman & Wakefield’s fourth-quarter 2017 Greater Los Angeles Office market report, coworking companies WeWork and Spaces currently span multiple submarkets and have signed leases totaling more than 220,000 square feet in Hollywood, the Financial District and Culver City.

Source: commercial

Barneys Shuttering Upper West Side Store After More Than a Decade

Barneys New York is closing its Upper West Side store store on Feb. 18, a company spokeswoman confirmed to Commercial Observer.

“Barneys New York has enjoyed serving the community on the Upper West Side for over a decade. We sincerely appreciate the loyalty of our customers, and we look forward to continuing to serve them at our Madison, Downtown and Brooklyn locations,” the spokeswoman emailed.

West Side Rag first reported the news on Feb. 2 based on information provided by a manager.

The roughly 10,000-square-foot clothing store, which is on the ground and lower levels at 2151 Broadway between West 75th and West 76th Streets, opened in 2004, according to retail broker Faith Hope Consolo of Douglas Elliman Real Estate, who represented the landlord in the original lease negotiations with Barneys. The space underwent a renovation in July 2013, which included rebranding it from a Co-op store—selling lower-price fashion—to a Barneys New York. (The company has converted Co-ops stores to Barneys New York shops.) The lease is slated to expire at the end of 2023, according to CoStar Group.

Once it shutters, there will be two remaining Barneys stores in Manhattan: one at 660 Madison Avenue between East 60th and East 61st Streets and one at 101 Seventh Avenue between West 16th and West 17th Streets.

“This is a big loss for the Upper West Side,” Consolo said. The deal was unique at the time as most retailers were focused on Columbus Avenue, but Barneys took a Broadway space.

Broker John Brod, a partner at ABS Partners Real Estate, said the news is of no surprise.

“Customers can go on line at Bonobos, UNTUCKit, Allbirds, Amazon, Suitsupply and manufacturers’ own online e-commerce store to purchase the same merchandise so the need for Barneys to have a brick-and-mortar presence has past,” Brod emailed. “Specifically, Barneys is a multi-brand retailer and as such the need for a second store in a secondary market becomes redundant in today’s retail and shopping environment. The issues are further challenged by the general state of retail in this area—note that Sephora has opted to downsize from their 2162 Broadway location—they passed on their right to renew. Moreover, Anthropology who was negotiating to replace Sephora here after many months of negotiation, decided not to proceed. Additionally Eastern Mountain Sports vacated this area [at 2152 Broadway] as well. The fact is there is a very limited demand for large flagships in both primary and secondary markets. Clearly the Upper West Side is a secondary market.”

The market and neighborhood combined to hurt Barneys.

“Barneys closing is a reflection of the current market,” said SCG Retail Partner David Firestein. “With that said, they were never right for the neighborhood, in the mid 70s. A better fit would have been closer to Lincoln Center, near Century 21.”

And the popularity of online food shopping has impacted the area, including Barneys.

“That stretch of Broadway has always been local, and much of its traffic from shoppers that live or work outside the market area was based on the food anchors—Citerella, Fairway and Zabars—all on the west side of Broadway in a seven-block stretch,” said Robin Abrams, a vice president at Eastern Consolidated. “Once it became possible to get fresh produce and a wide array of prepared foods at the various Whole Foods [stores], Fairway’s other locations and a variety of other competitors, the pedestrian traffic on Broadway diminished. Now the retailers on Broadway must be strong to cater to local traffic, and even stronger if they are to pull from a broader customer base.”

Source: commercial

Newark Connected & Cost Efficient: Why Your Company Should Move to Newark

Recently, Amazon named Newark as one of the top finalists in the company’s HQ2 location search. To those familiar with the Brick City, this came as no surprise; Newark has long enjoyed a host of infrastructural and geographical advantages — it’s just 20 minutes from New York City– that have made it a growing business hub.

Amazon isn’t the only business looking to make moves in Newark. Other established, multinational companies have also turned to the city as a viable option for their corporate headquarters, including Audible Inc., an Amazon-owned company which employs 1,000 workers to produce and sell audio entertainment. Mars Wrigley Confectionary, the chocolate company behind M&M’s, recently announced that one of its U.S. headquarters will open in Newark by July of 2020, bringing with it about 500 new jobs to the city.

In December, Broadridge Financial Solutions, a fintech company that provides technical services to financial institutions moved 1,000 employees in December from Jersey City to 2 Gateway, a building in the heart of Newark. Standard Chartered Bank, a London-based institution, which provides financial products and services to corporations, is another company at 2 Gateway that recently signed a lease extension for 72,319-square-foot office space. The 2 Gateway building has also signed leases with other businesses across multiple industries in 2017, including one with award-winning architectural and design planning firm Minno & Wasko back in December. The list goes on.

The leasing velocity in the Newark submarket has more than doubled year-over-year and that’s because companies are now looking to Newark as a locale that isn’t just practical, but attractive for its executives and employees alike. The city’s downtown is just one stop away from New York City with commercial rent cost at a third of the price of what a company would pay if they were to operate in Manhattan. It’s also less expensive than Jersey City and Hoboken, and effectively just as close to NYC. With a leasing velocity of nearly 700,000-square-feet in 2017, Newark is quickly becoming an attractive destination for businesses throughout the region and beyond.

But unlike other busy urban centers coveted by new businesses, Newark has the space available for interested companies. In fact, 2 Gateway has an unheard of 200,000-square-feet available in their Class A building, perfect for any company looking for a large amount of space, and just one stop away from Midtown, Manhattan.

Not only is Newark emerging as an ideal location at the right price, but it is also uniquely positioned to handle all of the technological needs for companies, large and small, at an affordable cost. The city happens to sit directly above the fiber optic cable network that runs along the eastern seaboard, which allows companies to tap into the fastest internet speeds in the country at an extraordinarily competitive price point. The city took advantage of this network to create Newark Fiber, a program offering the highest-speed fiber for Newark buildings at the lowest cost in the region for comparable connections. 2 Gateway was the first building to tap into Newark Fiber, enabling C&K Properties to offer the connections a la carte to its tenants. This trendsetting nature isn’t foreign to 2 Gateway; in 2014, it became first building in New Jersey to become Wired Certified Platinum by WiredScore, indicating the highest rating for a building’s internet connectivity and technological infrastructure.

When it comes to location, cost and connectivity, Newark is in prime position to strengthen its standing as a regional business powerhouse, with or without Amazon.

Source: commercial

Eight Retail Trends to Watch in 2018

The year 2017 was one of the newsiest and noisiest retail years on record. It will be remembered as the year retail evolved and changed forever. We will remember it as the year that experiential retail moved to the forefront and brick-and-mortar brands finally embraced omnichannel strategies in a meaningful way. While media reports of a “retail-pocalypse” grabbed the headlines, online stores—Everlane, M.Gemi and Rent the Runway to name a few—were busy opening more physical locations than ever before.

It was the year retailers shifted strategies and realized that consumer engagement must come from multiple touch points. Megamergers and strategic mergers changed the landscape with Walmart’s $310 million acquisition of Bonobos and Amazon’s purchase of Whole Foods Market for $13.7 billion—the latter representing a watershed moment for the retail industry. It is barely 2018 and already there are rumors of new brick-and-mortar targets for Amazon. In general, the “Amazon effect” finally forced the industry to adapt to the needs of the modern consumer and brick-and-mortar to embrace omnichannel.

So, what will take hold in 2018? Here are eight major themes and trends that will continue to transform the retail landscape:

International brands will continue to touch down in the U.S.: We expect exciting international brands to continue growing their presence stateside. In New York City last year we witnessed several new overseas retailers like Sneakersnstuff (Sweden), Innisfree and Line Friends (both from Korea) stake a claim in the market. The U.S. remains a highly prestigious key market and international brands will continue to flock to our largest urban markets to grow and attract new consumers. Asian brands, especially those from South Korea and Japan, are poised for another year of strong retail expansion and brand building. K-Beauty (referring to skin care products from Korea) continues to flourish overseas, buoying a still-strong beauty and cosmetics retail segment in the U.S. I also expect to see more fashion from Down Under as brands from both Australia and New Zealand have recently touched down in Manhattan. Aussie retailer Ksubi opened shop in Soho in 2017, while fellow Australian outfitter Scalan Theodore found a home on Prince Street. Expect more to follow. And of course, European brands will continue to be popular in the U.S.

Market correction: We finally saw much-needed flexibility from property owners who moved to establish new rent thresholds that both landlords and tenants could accept. New opportunities were created in 2017 for emerging, entrepreneurial retailers who entered the market at a lower cost of entry, and I expect price adjustments and more creative deals to continue well into 2018.

The “theme-park-ification” of retail will continue: Global brands like National Geographic, Disney, Mattel, Lionsgate and DreamWorks will continue to take advantage of vacant retail space, leverage their intellectual property and attract visitors with new engaging technologies and social media-friendly landscapes. “Retail-tainment” won’t be limited to big-box spaces in 2018; companies are harnessing the power of Instagram to create small-scale museums and “Instagamable” theme parks in boutique spaces.

Seasonal sales are so 2017: Retailers won’t be relying as much on one-time sales events as they did in the past. As evidenced by this last holiday selling season, the seasonal and event-shopping mentality is flattening out. In 2018, we will see more event-driven and experiential retailing year round as events like Black Friday become less important.

Food, fitness and fun: Clusters of health and wellness-oriented retail (athleisure, juice shops and fast casual with menus showcasing traceable ingredients) will continue to draw shoppers to street retail corridors, lifestyle centers, malls and live-work-play developments in 2018. In fact, fitness centers are one of the key categories and have become attractive, sustainable anchor tenants for repositioned malls.

The still-great American mall: In 2018, developers and mall owners will be working overtime to unveil updated mall footprints. Expect to see fewer department stores and big-box anchors, and more food purveyors, fitness studios, medical uses and converted residential and office units. Malls will be reimagining their food options into attractive quick dining options, making way for more food halls that are an experience in and of themselves. Mall food courts will be getting a facelift for the new year and changing their name in the process. Food halls are here to stay. Keep an eye out for more celebrity chef-driven concepts, as they look to leverage their name brand and star power to start new ventures.

Retail gets snackable: It is no secret that we Americans like to snack. This year will see an increase in small artisanal-style purveyors of snacks and treats like handmade ice cream, gourmet doughnuts and housemade pickles, just to name a few. In 2018, the more detail and care taken in creating food, the more popular these smaller locations will become.

There is little doubt that it is an exciting time to be in the retail real estate industry, and it’s clear that we have already witnessed one of the biggest retail transformations of our time. I am excited to see retail’s next act continue as 2018 unfolds.

Retail real estate pioneer and investor Robert K. Futterman is chairman and chief executive officer of RKF, a leading retail real estate brokerage firm in the U.S.

Source: commercial

The Pluses and Minuses of Every City on Amazon’s HQ2 Shortlist

And then there were 20.

Following months of competition, this morning Amazon revealed the shortlist of locations for its second headquarters. The company will now work with officials in each city to “evaluate the feasibility of a future partnership” and will announce a final decision later this year.

The online retail giant expects to create 50,000 jobs and invest over $5 billion in the chosen city, calling it “a full equal” to its original Seattle HQ. As such, each of the locations have been wooing Amazon by promising tax incentives and submitting dramatic love letters about each area’s benefits.

But which of the 20 cities is best positioned to host Amazon’s HQ2?

We’ve assessed the pluses and minuses of what each city is offering Amazon. So listen up, Jeff Bezos—here’s what you’re working with…

To continue reading on Observer, click here.

Source: commercial

Mall Developers Bet on the Basics—and a Trampoline or Two

The death of the American mall has been a topic discussed ad nauseam. Whether through overdevelopment, the rise of Amazon or the financial woes of traditional anchor tenants like Macy’s and Sears, brick-and-mortar retail—and the mall meccas that house them—have had their obituaries posted for the last year, or more.

Yet, in seeming defiance of the mournful headlines, private investors, with the funds and ability to reinvent struggling properties, are buying into the regional mall model that has defined the U.S. retail landscape since its creation in the mid-1950s by Victor Gruen.

Way back when, Gruen, the Austrian-born architect created the nation’s first grand shopping center, the 800,000-square-foot Southdale Center in Edina, Minn., in 1956 and still operates as the oldest, fully enclosed shopping mall in the United States. He was inspired by the town center of Vienna where he was born. He envisioned a communal gathering spot with a lively mix of commerce, art and entertainment. A socialist who hated cars, Gruen designed the development with long promenades and parking lots built far away to encourage walking. Gruen also envisioned a property with medical centers, schools and residences, not just an array of retail.

He wasn’t alone. Matthew Bucksbaum and his brothers, Maurice and Martin, the founders of what would become General Growth Properties, bought a struggling shopping center in Cedar Rapids, Iowa, around the same time and went on to expand to many small cities throughout the Midwest.

The model was widely embraced, and the rest is history. Today, there are an estimated 1,200 malls nationwide, primarily in suburban areas, inspired by Gruen’s conception—one he grew to despise. They didn’t bring about the vibrant urban centers Gruen envisioned; they led more to the rise of American car culture, suburban sprawl and the decline of walkable downtowns.

Is it any wonder then that the American mall—a concept dreamed up and later cursed by its own creator—would continue to stir debate and contradictory ideas about how to run, refashion or completely reinvent them?

Round1 Bowling
The Moreno Valley Mall is turning itself around by bringing in a bowling alley, gym and trampoline park. Photo: Dan Arnold Photos

Too Much of a Good Thing

“You know, the big question is, How many malls does the country need?”

This is the question asked by Thomas Dobrowski, the executive managing director at Newmark Knight Frank in New York, who handles regional mall investment sales nationally.

“Does it need 500? Does it need 800? There’s no question that the U.S. is over-retailed, and it’s really the regional malls that have been overbuilt. There are just too many, especially with people shopping more and more online and with people looking for more experiential experiences.”

Pete Bethea, an executive managing director at NKF, concurred.

Some of these centers that are in secondary and tertiary markets were just overbuilt with retail. So, instead of there being three viable centers, there might be one,” said Bethea, who is based in NKF’s San Diego office and focuses mainly on open-air suburban mall property sales. “What happens with those other two centers [depends on what] the market lends itself to, right? What is the next evolution of use of that space or that land?”

As mall real estate investment trusts (REITs) have been shedding their B- or C-level malls or noncore assets over the last five years, private equity investors have stepped up to purchase them.

“Contrary to all the news out there, there have been a lot of transactions happening in the enclosed mall space,” Dobrowski said. “Some of the malls we’re selling are almost exclusively to private equity or high-net-worth buyers who don’t have the same scrutiny that an institutional or typical mall REIT would have when it comes to repositioning or redeveloping these malls by bringing in alternative uses.”

Dobrowski said that a lot of the malls he sells are purchased to continue as malls with about one-third bought to be redeveloped.

He pointed to the Moreno Valley Mall in San Bernardino County outside of Los Angeles, which was previously owned by GGP before the company filed for bankruptcy in 2009 in one of the largest commercial real estate collapses in U.S. history, as a prime example of a mall turnaround.

NKF sold the property on behalf of CW Capital, which had bought it back from GGP, for $63 million in November 2017 to International Growth Properties, a small private equity firm in Beverly Hills.

IGP brought in a gym, Crunch Fitness—in a move most mall operators previously shunned, according to The Wall Street Journal—Round1 Bowling and Amusement, Action Time Bungee Jumping (a trampoline park) in addition to movie theaters and anchor tenants like Macy’s already on the premises.

“They really transitioned this mall from a kind of cookie-cutter enclosed mall with your traditional anchor tenants into a shining star of a lot of the malls that we sold this year,” Dobrowski said.

He and Bethea expect the trend to continue given market conditions.

“Pricing now is at a level where it makes sense to purchase a property and then go reinvest and reposition it,” Bethea said. “We’re in the early innings of that starting to happen. There are double-digit cap rates. Certainly, in the world of suburbia, we are starting to approach the 8 or 9 [percent cap rate] in submarkets.”

Dobrowski said the trend will likely accelerate in the next 12 to 24 months, depending on the state of major retailers.

“Last year was a big year in terms of stores closing and bankruptcies, and 2018 will probably be another big year,” he said. “But to redevelop a mall takes a long time. It’s a two- to five-year process, so we’re really just in the early phase of malls being purchased to eventually be redeveloped.” (For more from Dobrowski, see the Sit-Down on page 32.)

Adapt or Perish

IGP’s strategy of incorporating something like a trampoline park is exactly what the mall redevelopers are looking for to attract consumers to their properties, from families to millennials. Some are going even further. The long-stalled American Dream Mall in Northern New Jersey is back in business with construction resumed and developer Triple Five Group targeting a fall 2018 opening. The 6-million-square-foot property at the Meadowlands sports complex will feature the country’s first indoor ski slope, an aquarium, an indoor water park with a 1.5-acre pool capable of generating seven-foot waves and the largest indoor theme park in the Western Hemisphere with four roller coasters.

Triple Five, the Canadian company that already owns the two largest malls in the Western Hemisphere, the Mall of America in Minnesota and the West Edmonton Mall in Canada, is obviously betting big on the megaproject despite the pessimism surrounding traditional brick-and-mortar enterprises of which the shopping mall is emblematic. According to The New York Times, the developer has spent $700 million thus far on the project.

Ami Ziff, the director of national retail at Time Equities, is in the process of adding amenities to reinvigorate a few of its regional mall properties, including the Newgate Mall in Ogden, Utah, for $69.5 million in August 2016 from GGP, as CO previously reported and two malls in Tennessee purchased from Chattanooga, Tenn.-based CBL & Associates Properties for $53.5 million last May.

In addition to adding a Fly High Trampoline Park, which will occupy 41,000 square feet at the Newgate Mall, Time Equities is looking to add amenities that can meet the human’s need to socialize and appeal to social media and Instagram-addicted consumers.

There are plans for flash mobs as a special event, as well as immersive experiences, including a bubble and ball exhibit like the one the company has at its residential condominium at 50 West Street in Manhattan.

At Newgate, Time Equities will be renovating the food court area with the addition of a fireplace and common-area seating meant to evoke a ski lodge with seasonal and community programming—think caroling and hot chocolate around the fire during the winter holidays, s’mores and ghost stories come Halloween.

“There is such a difference in the kind of work that goes into owning a mall versus a strip center,” Ziff said. “You might have a lot of the same tenants, but the fact that you have this common space, there’s a significant burden on the landlord as well as the tenants to produce experiences. There needs to be a whole marketing agenda and program that we roll out at different malls based on different needs, timing and markets.”

Ski slope in Dubai
The long-stalled American Dream Mall will include an indoor ski slope like the one in Dubai . Photo: Getty Images

Alternative Uses

In addition to off-the-hook amenities, mall developers have turned to creating truly mixed-use properties, including creative office space, residential, grocery and, at some, alternative uses like medical facilities, thereby creating in effect the one-stop community center Gruen once envisioned.

“The same Baby Boom population that fueled regional malls and other retail property types in the 1950s, ’60s and ’70s continues to do so,” said Mark Hunter, the managing director of retail asset services for the Americas at CBRE based in Chicago. “We’re now seeing Baby Boomers [are] now requiring additional medical services and [how they’re being integrated]. A perfect example of that is the 100 Oaks Mall in Nashville, Tenn.”

In 2007 100 Oaks Plaza, which bought the property the previous year for $49.2 million, redeveloped one of its department stores into a medical center for The Vanderbilt University Medical Center, which leases over half of the 850,000-square-foot building. “I think you’re going to continue to see this trend where there’s a mix of medical, office, entertainment and residential as different markets adapt to the changing environment,” Hunter said.

Data centers could also fill in space left by struggling retailers, given the rise in cloud storage needs, pointing to how Rackspace, a web-hosting company based in San Antonio, moved its corporate headquarters into the local now-shuttered Windsor Park Mall in 2012.

Then there is a model that turns the whole American mall discussion on its head. Billed as a “solution to the retail conundrum,” Case Equity Partners introduced a patent-pending concept called the Shopping Fulfillment Center last month. The SFC, a hybrid of brick and click, combines a vast fulfillment center in the back of a retail center component. In the proposed model, retailers would share logistics costs and require much less in terms of traditional square footage. It would allow customers to peruse or test out their products, but instead of, say, having to stock several varieties of a high-touch item like a sweater, one would suffice with a vast array of options housed in a communal warehouse in back. (For more on the concept, see Chopp’s column on page 35.)

Omnichannel and Co-Existence

Arthur Coppolla, the chairman and CEO of Macerich, one of the country’s leading owners of high-end mall REITs, is bullish about the future of brick-and-mortar retail.

“If you read the social media and the news media, you would come to the conclusion that Amazon and e-commerce are killing all legacy retailers, but I see digital as being the best of friends with brick-and-mortar retail,” Coppolla said during a keynote talk at “Rethink: Emerging Macro Trends in Real Estate” in Los Angeles this past December. (Coppolla declined to be interviewed for this article.)

Coppolla said the common misperception among investors is that Amazon is synonymous with e-commerce “and that there’s nothing else, which is not true.”

Digitally made, vertically integrated brands—brands that have a niche and identified a broad market to disrupt and are not Amazon—are where it’s at in terms of the next great brands.

“Digitally native is a very chic place to be born,” he said. “Digital brands are growing at a far greater rate than e-commerce itself. If you look at the next [few] years between now and 2020, the digitally native brands are going to be generating as much business as Amazon direct.”

If you want a glimpse into the future of traditional retail, he said, just look to its past.

“The future of retail is its past,” Coppolla said. “If you look at legacy retailers, department stores were everything. They distinguished themselves in how they curated brands for their customers. But they cut sales people on their floors and lost touch with their customers. We have to be curators of brands like how department stores used to be.”

Successful malls need to take over where legacy retailers faltered and curate brands. E-commerce, he said, is the driver of brand creation today, and as such, he is actively seeking digitally native brands to his properties and the feeling among these brands is mutual.

“These digitally native brands, they all believe that brick and mortar is where they want to go because, when they open their store, that’s when they feel that they have arrived. It’s the last mile for them in terms of having a relationship with their customer,” Coppolla said.

Not only can e-commerce and brick and mortar co-exist, but according to Hunter at CBRE, the perception that online selling eclipsed traditional retail is much overblown.

“When you really delve into where most retail sales are happening today, as of last year, 9 percent of all retail sales were online, meaning 91 percent of all other retail sales were done in a physical space,” he said. “Our research shows that peaking in the next, call it, eight to 10 years in the high teens. Still, the bulk of retail sales will be done in physical space.”

The more important point, he said, is that, to thrive, retailers must be adept at omnichannel distribution.

“Whether you’re on your smartphone, or you’re in the store, it’s going to be a much more seamless transaction. You’re going to continue to see that happen, and the retailers that can adapt to the omnichannel distribution, they’re going to be very successful,” he said. “Those behind the times, that don’t adapt to that, will struggle more.”


Source: commercial

Brookfield’s Takeover Bid Is the Latest Chapter in Mall Giant GGP’s Turbulent History

When Brookfield Property Partners lodged a $14.8 billion takeover bid for GGP last month, it raised the possibility of one of the biggest real estate mergers and acquisitions seen in recent years—one that would create a massive company with nearly $100 billion in assets globally and annual net operating income of roughly $5 billion, Brookfield said in announcing the bid.

It also marked the latest chapter in the tumultuous history of the Chicago-based real estate investment trust formerly known as General Growth Properties. The past decade, in particular, saw GGP emerge from the wreckage of one of the biggest real estate bankruptcies in history in 2009—when it was unable to refinance more than $27 billion of debt in the wake of the financial crisis—to re-establish itself as one of the nation’s major players in the Class A mall space, with assets ranging from prestigious shopping centers in Honolulu and Southern California to high-street storefronts on Fifth Avenue.

GGP’s renaissance has come under the guidance of Sandeep Mathrani, who left his role as head of Vornado Realty Trust’s retail division to become the REIT’s chief executive officer in 2010, when the company was just getting back on its feet after the bankruptcy. With the help of investment from the likes of Brookfield and hedge fund investor Bill Ackman’s Pershing Square Capital Management, GGP shed dozens of properties, rid itself of burdensome holdings by spinning off Rouse Properties and the Howard Hughes Corporation into standalone companies and exiled to the past the legacy of the Bucksbaum family—which founded General Growth Properties in the 1950s but also oversaw its descent into financial ruin. Today, GGP has regained its status as one of the largest publicly traded owners and operators of retail properties in the U.S., with a portfolio of more than 120 properties spanning roughly 123 million square feet.

Yet, the Brookfield takeover proposal comes at a significant juncture for both the company and the market in which it specializes. The challenges facing the brick-and-mortar retail sector today have been well documented, with the Amazon-fueled rise of e-commerce having contributed to store closures at a rate unseen since the Great Recession.

Though GGP’s profile as an owner of high-quality, Class A malls has insulated it somewhat from headwinds that have most heavily impacted Class B and Class C malls and shopping centers throughout the country, the company has not been altogether immune from the great retail apocalypse of 2017. The struggles of department stores like Sears, Macy’s and J.C. Penney, which historically were counted on as mall anchor tenants capable of driving customer traffic, have prompted GGP to spend more than $2 billion to redevelop roughly 9 million square feet of space across its portfolio—mostly “anchor boxes” formerly occupied by such department stores that it has sought to reposition into restaurants, cinemas and other uses more relevant to the current retail market climate.

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Sandeep Mathrani. Photo: GGP

Like fellow Class A mall REITs Simon Property Group, Macerich and Taubman Centers, GGP has seen its stock price undertake a slow and steady slide over the last 12 months as investors have increasingly subscribed to the doom-and-gloom narrative surrounding the retail sector. Market conditions have meant that GGP (also like its peers) has found itself consistently trading at a discount to its actual net asset value (NAV); by Nov. 6, the day before news broke of the Brookfield takeover talks, GGP’s share price had fallen to $19.01, down from its 52-week high of $26.63 and well below the company’s consensus NAV of more than $28 per share (analysts who spoke to Commercial Observer for this story pegged GGP’s NAV at anywhere from $26 per share to $35 per share).

Brookfield’s initial bid for GGP, meanwhile, came in at $23 per share, or $14.8 billion in total, and took the form of a 50-50 cash-equity offer comprising $7.4 billion in cash and another $7.4 billion in Brookfield Property Partners (BPY) stock. BPY, a subsidiary of Toronto-based investment giant Brookfield Asset Management, has held a sizable stake in GGP since helping bring the company out of bankruptcy in 2010, and the deal would see it acquire the 66 percent of GGP that it does not already own. (In the third quarter of this year, Brookfield exercised stock warrants to increase its ownership interest in the REIT from 29 percent to 34 percent by purchasing 68 million GGP shares for $462 million.)

“Brookfield’s access to large-scale capital and deep operating expertise across multiple sectors, combined with GGP’s high-quality retail asset base, will allow us to maximize the value of these irreplaceable assets,” Brookfield Property Partners CEO Brian Kingston said in a statement announcing the bid.

Brookfield noted that its takeover offer constituted a 21 percent premium on GGP’s “unaffected closing share price” of $19.01 on Nov. 6, as news of the proposal immediately pushed GGP stock to north of $22 per share the next day and above $24 per share on Nov. 13, when Brookfield officially announced its offer. In the wake of the bid, GGP said it had formed a “special committee” of independent directors—excluding Mathrani and directors affiliated with Brookfield, such as Kingston, BPY Chairman Ric Clark and Brookfield Asset Management CEO Bruce Flatt—to review and consider Brookfield’s proposal and “pursue the course of action that it believes is in the best interests of the company.”

Representatives for both GGP and Brookfield declined to comment for this story.

With the offer coming in well below most analysts’ valuation of GGP, many are split on whether the deal provides good value for GGP shareholders at a challenging time for the retail sector at large, or if it undervalues one of the top publicly traded commercial landlords in the country and could prove a mere starting point in negotiations between the two sides.

“I’m sure everyone would like to get a deal done; the question is, What is the price Brookfield is willing to pay?” said Alexander Goldfarb, a managing director and senior REIT analyst at Sandler O’Neill + Partners, who noted that the initial Brookfield bid “undervalues” GGP below Brookfield’s own internal net asset valuation of the company of around $30 per share.

Goldfarb and other analysts also called into question whether GGP investors would be willing to accept BPY stock as part of any deal. In a note released last month, BTIG equity research analysts James Sullivan and Ami Probandt described BPY’s stock, which has been trading between $21 to $24 per share for most of this year, as “relatively illiquid with very low average trading volume.”

“Our assumption is they’ll have to improve their offer; no one ever throws in their best offer first,” Goldfarb said. “I think Brookfield sees the real story, which is the company being undervalued by the Street.”

Anita Ogbara, a director and credit analyst at Standard & Poor’s, described the Brookfield bid as “opportunistic” at a time when there is “a lot of pressure on valuations” in the mall REIT sector. “We don’t know what the ultimate outcome is going to be, but there’s a clear sign that [Brookfield is] trying to take advantage of the discount versus the true value of [GGP’s] assets.”

While Brookfield’s first crack at a GGP takeover may have been “an underwhelming offer” for many stakeholders, Haendel St. Juste, a managing director and senior equity research analyst at Mizuho Securities USA, said that challenging conditions in the retail space could end up having outsized sway over whether a deal gets done or not. He noted that, speaking to participants at the National Association of Real Estate Investment Trusts’ annual REITworld convention last month, there is a sense that an offer of around $25 per share “would maybe carry the day.”

“People are disappointed [in the $23-per-share offer], but then again I think there’s been a resignation among folks—that maybe it’s not great on its face, but given the current dynamic, maybe it’s as good as you could hope for or expect,” St. Juste said.

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Brookfield Place in Battery Park City, Manhattan. Photo: Getty Images

Should a deal go through and Brookfield acquire GGP, it is unclear what will become of the company’s leadership and whether the likes of Mathrani will remain in some position or capacity. What appears more certain, according to analysts as well as sources with knowledge of Brookfield’s operations, is that the combined company would look to leverage Brookfield’s exposure in nonretail sectors, such as office and residential, to potentially reposition underperforming properties in the GGP portfolio.

“We are excited about the opportunity to leverage our expertise to grow, transform or reposition GGP’s shopping centers, creating long-term value in a way that would not otherwise be possible,” Kingston said in his statement announcing the bid.

While GGP has already made steps toward pursuing such repositionings—having recently announced a partnership with residential REIT AvalonBay Communities to build apartments at one of GGP’s malls in Seattle—Brookfield would likely seek to further that approach, as it did with select Rouse Properties assets in New Jersey and Vermont in the wake of its $2.8 billion acquisition of the mall landlord last year.

Mizuho’s St. Juste said the integration of a more diverse array of uses at malls and shopping centers is warranted in an environment where “there’s too much retail in the United States” and landlords are seeking new ways to drive traffic.

Sources also said that while Brookfield would almost certainly look to hold long-term onto GGP’s premier retail assets—such as the Ala Moana Center in Honolulu, Glendale Galleria in Glendale, Calif., and Tysons Galleria in Washington, D.C., suburbs—it would probably seek to offload other lower-quality properties either through outright sales or joint-venture partnerships.

It would also remain to be seen what happens to GGP’s high-street retail portfolio, a market in which former Vornado executive Mathrani upped the REIT’s exposure via the acquisition of pricey storefronts along luxury retail strips like Manhattan’s upper Fifth Avenue corridor.

Sandler O’Neill’s Goldfarb noted that GGP’s foray into the luxury street retail space was one of the few areas where Mathrani “got pushback” from investors and observers, given that the REIT entered that market “right at the peak” of New York City property values—via deals like its nearly $1.8 billion acquisition of the Crown Building at 730 Fifth Avenue, which GGP acquired alongside retail magnate Jeff Sutton of Wharton Properties.

“[Mathrani] had done [street retail] at Vornado and he saw an opportunity at GGP,” Goldfarb said. “It was just that the prices he was paying were top of the market.” While GGP has found success with its street retail assets—most notably signing luxury fashion brand Bulgari to a pricey lease to maintain its presence at the Crown Building—depressed Manhattan street retail rents could contribute to a change in approach.

Whatever direction is in store for a new Brookfield-helmed GGP, it is almost certain that a successful takeover would shake up the market as far as publicly traded retail landlords are concerned—and very well signal a time of heightened consolidation as the industry takes on virtually unprecedented headwinds.

“It’s created an M&A tailwind and brought some investors back in the space,” St. Juste said, citing how the likes of Simon, Macerich and Taubman have also seen their share prices run up in the wake of the Brookfield bid. “Next year is going to be tough from an operational perspective; without this M&A buzz, the stocks would be down. They’re not trading on fundamentals right now.”


Source: commercial