Topics: Negotiating lease renewals, ancillary income, densifying properties

Chris is rejuvenated from some well-deserved time off and ready to drop some knowledge! Today’s solo episode is about adding value in a low vacancy environment, along with a story of how DLC did just that with a Starbucks in Newburgh, NY.

What You’ll Learn

1. What are three ways to add value to open-air retail properties in a low vacancy environment?
2. How does ancillary income differ in open-air retail vs. enclosed malls?
3. What are the three keys to successfully densifying properties?
4. How to establish site control at an open-air retail property
5. What is the process for gaining development approval from a municipality?

About Retail Retold

The Retail Retold Podcast highlights community retailer stories from across the country and gives a behind-the-scenes perspective from business leaders in both retail and real estate industries. The show’s episodes contain valuable insights that help solve the needs of entrepreneurs and real estate pros. Join host Chris Ressa weekly for amazing insights and thought-provoking stories.

Transcript:

This is Retail Retold, the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa, and I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC Management.

Welcome to Retail Retold everyone. I’m your host Chris Ressa and I’m excited for you to join me today.

Today we’re going to talk about a few things. It’s just me today, no interview, but I’m going to tell you how a store where it did and I think you’ll find it insightful. So, before we get there, what’s been going on? Well, first off, just got back from vacation. Went to St. Thomas. If you haven’t been, it was my first time to the U.S. Virgin Islands. Really interesting place. Super mountainous.

 I don’t love heights and the first day our house that we air bnb’d was on top of this mountain. Views are spectacular, but getting up the mountain there are some narrow roads, we’re in a cheap Wrangler. My hands were sweating on the steering wheel as we were driving up. Definitely got used to it by the end of the trip but in the beginning, it was a little scary I must admit.

Trip was great. Our house was overlooking Magens Bay, which was really cool. And that’s where we hung out most of the time was Magen’s Bay. We’re definitely a beach family. It was nice. If you can see in the back here, if you’re watching on video, we have snow here in the New York area on the ground. So it was nice to get some sun and fun for a week over the February break.

One thing I will say that was interesting. So when my family and I go to a sun and fun place, we typically like to eat at local fish joints. So, if you’re thinking about it, right, if you go to Florida, you go anywhere and they’ll have five different types of fish. You can get it grilled, blackened, fried, however you want. You choose the fish, you choose the style, and they bring you a grilled fish with some rice and some vegetables. And we love eating that.

Not a lot of that because of the trench in between St. Croix and St. Thomas. There’s some neurotoxin that makes some of the fish that come up out of the trench inedible. So most of the food is Caribbean fare food, which is delicious, just unexpected for us.

So that was one interesting piece, but the people were super nice. We went on a boat trip that was fantastic. The name of the company was SEAS, S -E -A -S, SEAS the day. That was really cool. So overall, fantastic. Kids loved it, wife loved it tt was an amazing trip. Excited for that, but definitely rejuvenated, recharged, and ready to take on the rest of the year.

Because of how I planned the trip, with it being over a February break and Presidents Day, it was a bit slower in the business world. So, I can’t say I didn’t do any work. I did some. I would say I probably unplugged more than most, and I wouldn’t say unplugged, wrong word. I would say decompressed more than most vacations.

So I am energized, I’m excited. The only issue if you’re looking at the top of my head. So day two I use sunblock, and I just rub the sunblock all over my face. It was the first time, I guess it was the sun tan which we used, that I had gotten sun tan lotion in my eyes, and it was terrible. It took hours with eye wash and water to get it out. So that was day two.

So the rest of the trip, above my nose, I was like “I’ll get burnt. I’m not using sun tan lotion.” That was insane. And if you look, you know I shaved my head, at the top of my head is peeling now because I didn’t. I should have probably used some on the top of my head, but the sweat from the heat was bringing the suntan lotion into my eyes and it was unbearable.

So the rest of the trip I got probably a bit too much color on my head and lesson learned, I need some suntan lotion that is tear-free, no doubt. So that’s the story there. Anyway, what’s been going on? So, I want to tell a story about Starbucks in Newburgh.

Store is not yet open, however, they are opening soon and I am excited for this one. In Newburgh New York, Mid Valley shopping center, Mid -Valley mall. It’s not a mall it’s a shopping center. Open -air, anchored by market 32.

But I am excited about this one because I think this is an interesting time period for open-air retail. And this deal kind of hits home on some of the opportunities. And I think when you’re owning open-air retail, if you’re owning any commercial real estate, the easiest way to add value that you control is to lease up vacant space. Well, in a world where there’s less vacancy in open-air retail, how do you continue to add value to properties?

 And for us, always, it’s going to be the vacancy and potentially upgrading tenancy, that’s always the top of mind and number one. But let’s put that aside. What are some other ways that you can increase NOI and add value to properties?

 Well, I think one is on the renewals. And so there’s definitely a focus on you know, renewal spreads and you know, especially an inflationary environment, pushing on renewals. So that’s one. Maybe you’re able to push the renewals more than you had expected. But that is certainly one area to increase value at properties.

The second that we’re very focused on is ancillary income, and You know, the enclosed mall folks have done this for years in the common areas of malls, right, where they have done a few things. They have done kiosks, temp tenants, and they have done sponsorship deals. You see advertising deals in enclosed malls all the time. Not as prevalent in the open-air. And when I’m thinking of ancillary income, I’m thinking of some different things. So what are some things we’ve done?

One, solar is an opportunity for ancillary income. Two, one of the things we’ve done, we’ve done a lot of LED lighting at our projects. And that’s not necessarily income, It’s adding value though because total electric usage at properties is coming down. We’ve done many of our properties, we’ve added LED lighting.

We’ve done a billboard deal in Houston which is really interesting we’re adding a billboard to a property because it sits right on the interstate, and a company that rents out the billboard spaces is the tenant, so that that’s fascinating one. So ancillary income. So one is renewals, two is ancillary income and then three is an oldie but a goodie that people are, I think, in commercial estate frustrated with, and I’m trying not to get frustrated with and trying to push, which is densifying properties, which is development, right?

 And development is really challenging in today’s day and age. It’s obviously more challenging when you have to acquire new land. But if you acquired land previously and you’re, you know, maybe you have a bit of a different basis, development might be a way to add value. And the right development.

The second piece that people get frustrated with development, especially in integrated shopping centers, is all the no-build areas and site control that certain tenants may have, which requires waivers. We’ve talked about waivers on restrictive uses for years now, and that was a hot topic. But the other waiver that you might encounter that you need from tenants to do a development is the site control where they have no-build areas.

Well, If you can get those, you can unlock value. If you can get those waivers, you can unlock value in properties where you might not have thought you could develop. And then you have to go through the municipal efforts to get approved new building that wasn’t currently approved.

So I think those are the three really sticky points in trying to get a new development on the existing property done, which is one, can you get the economics to work? And then two, once you get the economics to work, can you get site control on your existing property from tenants to get that building built? And then third, can you get it approved?

So we have been doing a bunch of Starbucks deals, and the team had put this property in front of them and it just so happened they were interested in this property. But finding a location on this property was super challenging. We first started with a vacant end cap and building a drive-thru that we couldn’t get designed.

We couldn’t get a design, we couldn’t get the queuing to work. It just wasn’t going to work. And then time had gone by and we had tried to figure out where to put them on other parts of the property, and couldn’t figure out anything. And then finally there was this one spot on what I would say the non – main entrance of the property, but super visible, where we could get them a freestanding building. And we really hadn’t thought of it because the grade change was so severe that we thought it would be too expensive. Well, we ended up working on a deal with Starbucks where we could make the numbers work and be true to the site.

 So we got the building, between DLC and Starbucks, on the same page. Now we have site control issues. Our grocer had, we couldn’t take away this part as part of their no-build. So we went back and forth with the grocer for some time, some months, to try to figure out a deal to allow us to build a Starbucks. So after some time, there was a lot of back and forth, and definitely message me if you want to know how that went more in more detail.

But, we got them to agree to allow Starbucks. And it was interesting because that grocer, it wasn’t violating the use, the grocer didn’t have a restriction on coffee, but they did have the right to sell coffee. So getting that ability to do Starbucks was a coup.

So now we’ve got tenant consents, we’ve got an economic deal, and we’ve got a site plan drawn. So we go for approvals, and by and large, this is approved, but one of the things that’s a condition for us to build this Starbucks is there’s a water tower on site. And the municipality wants us to paint the water tower and that’s a condition for building the Starbucks. And so, now we have to go and figure out how to paint a water tower, which is a unique job to be done.

 It’s not just the local painter who paints your bedroom, they don’t do typically water towers. This is a very specialized job. So finding the right group to do that and then to execute on that, and then make the cost work, not easy. But the long and the short, the water tower is not painted, the Starbucks is not built, it’s all approved, we’re about to start the water tower project.

And I’m excited because by the end of this year, Starbucks will be at this property. So I mention this because this is the creativity and the effort in a low vacancy environment, it takes to add value to properties. So again, if you’re struggling to add value to properties or you’re thinking about it, you know, three ways that I think are really compelling or one, the renewal front. That’s always one that is top of mind for folks, but on renewals in today’s environment where there’s no place for tenants to relocate to landlords definitely have leverage on renewals. Two, ancillary income, maybe a little bit different than the ancillary income of yesteryear that the enclosed malls used to grow NOI at their properties.

And then three is can you densify a project? And that’s what we talked about today, a density play at Mid Valley Mall in Newburgh, New York.

With that, that’s all I got today. If you haven’t gone on a vacation, highly recommend it. It’s day one back, it’s early morning, but I’m fired up. All right, everyone, hope you have a great rest of your day. Thank you.