The Future of Co-Tenancy In Shopping Centers

Topics: real estate, co-tenancy, future trends

Transcript:

Chris Ressa 0:00
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 to bring to you a unique episode. Today we’re going to debunk some myths, we are also going to talk about interesting merchandising. And we’re going to talk about how some stores ended up where they did. Okay, let’s dive in. We’re gonna just jump right in today, because I’m passionate about this topic, I’m passionate about this project. And we’re going to bring you to Hamden, Connecticut.

But before we do, let’s take a step back. For a long time, the retail world had a view of what drove traffic to properties, and foot traffic, and what good foot traffic was and is, I think that’s been flipped on its head. And I think it’s been flipped on its head in a good way. Here’s what I mean.

One of the challenges in some legacy leases is there might be a health prohibition, a health prohibition, I mean, health care medical office, health care office medical office prohibition, meaning that a lease or deed restriction might say that the property has to be retail nature. And here’s what retail means. And one thing that’s not retailers, medical office, healthcare office, in the shopping center, as we’ve seen, over the last decade, that’s been shifted.

And the old adage was, it’s a parking hog, it’s one person goes in and sits, keeps a parking spot. And I’ve heard the concepts that people don’t shop. But since health and wellness has been changed in America, you don’t just go to the doctor because you’re sick, you go for preventive care, you go for a lot of other reasons. And a lot of people who are doing that are in demographics that many retailers are trying to attract into their stores. So it’s actually a good co-tenant in some places.

The same is true of fitness. For a long time fitness was considered a parking, a parking hog, for lack of a better word. And that was in fitness studios all over shopping centers across America. And no one goes to the gym and works out and then goes to the store. Sure. Maybe they go to the store before they go to the gym. Maybe they go to the restaurant after, I don’t know about you, but after a workout I’m starving.

So these concepts of what is a good traffic generator, and what is not good traffic and just parking hogs, I think have been flipped over its head been accelerated by consumer behavior in a post pandemic world. And therefore I think shopping centers are going to be changing and I think retailers in 20 years from now are going to be desiring co-tenants that, long ago, they might not have wanted in a property, because they actually are bringing the right consumer and they’re driving traffic to the property.

We heard, coming out of the Great Recession 2015, restaurants and entertainment in properties were becoming like anchors, people, the spend in food at restaurants in America exceeded the spend at grocery stores for a time period. That changed in COVID, obviously, but I think that’s an evolution because, you know, there was a time where restaurants were considered, you know, maybe not so desirable to be next to a retailer, and that’s changed.

There’s many restaurants and shopping centers, and you might want to go shopping and then go eat something or go eat something then go shopping. I think more uses are coexisting than ever before. And I think that is only going to evolve. Tom McGee had once said, the word retail, people get stuck on and maybe it’s about, you know, people going to consume something, a service, a membership, a product, a consumer is going to consume something, pay for a service, pay for a good, pay for a membership, whatever it might be.

And if it’s in a similar target audience as the adjacent tenant, then it’s probably symbiotic. I don’t think the age old that when we’re going clothing shopping, we’re going clothing shopping, and that’s it, exists anymore. We are in a busy world today, super busy. I’m buying Barbie dolls for my kids, food for the family, and getting my oil changed, hopefully all in the same hour. And that is the fast paced world we live in therefore, I think the right tenant mix, the right merchandising mix is evolving.

And I think it’s going to be really great for communities, it’s going to be great for properties, because we’re gonna have this variety of tenants in a shopping center, that people come to, to consume something. Or in the mixed use scenario, maybe people come to do something else. And while they’re there, they might consume, go to an office project that is by adjacent to the shopping center, go to their apartment building that they live in that is attached to the shopping center.

This, and that’s the true mix used versus these new first class shopping center tenants that historically, were considered alternative uses. I’m eliminating alternative uses. They’re no longer alternative. They’re great uses for these properties. Now, it depends on the demos, it depends on the property depends on the location, all those factors play a role. But I want to talk about a shopping center that is really interesting, which is in Hamden, Connecticut, we own a shopping center called Putnam place.

It’s on the border of New Haven. It’s a super dense, very mixed demographic, from ethnicity perspective, super dense market. And we had a shopping, a Stop & Shop. And that Stop & Shop ended up closing, we had two stores in the market. They kept a store that was in a different trade area of Hampton, and they were closing this. So we were able to come in. We owned it, structured a deal. Bought out our lender. And then we went on a path to think about what could be here. And after digging…

We were laser focused at the time on a grocery store, grocery store. Even though there was a grocery store next to us, we’re like, we lost a grocery store that was volume here. We need another grocery store in the market. We had some tenants and the center had tenants, H&R Block, rainbow shops or some other tenants here, and we couldn’t get a grocery store to come and we had a couple of boxes.

What we ended up coming across was a long standing technical school in New England that had multiple branches. It looking to relocate one of the branches they liked, ended up liking our location. The bus stop was right where we were. It was it’s a trade school HVAC technicians and a whole bunch of trades like that, they teach people and help them get jobs when they graduate.

And anyone who’s involved in construction knows that’s like a need we have in America are these types of schools. We actually had someone on our construction team who was a graduate of Porter and Chester in a different location. So a long standing brand. And there was a lot of discussion internally because it’s not a huge center.

Ressa 9:52
But it’s big, it’s got you know, two boxes outside of that and, you know, some small shops, there was a multi-tenant building pad. And you know, there was some discussion, what happens to the balance of the center? This is the 2016-17 world. And we are we are, you know, thinking about it, and we’re going, you know, will this attract the other tenants we need in the shopping center, because they see technical school.

And they’re like, ah, that’s not a grocery store that has everyday traffic. And we, we kind of thought internally. So we went through the tenants credit. One day, I will do an episode about the structure of that deal, because it was super creative. We had to get really creative to structure deal with that tenant. So that’s for different episode.

But we ended up getting comfortable that, wait a second. Every day people will be here. A lot of people, hundreds people coming to the property. They will have breaks with classes, and they will, these are people who we’re bringing to the property maybe from other markets, other retailers might be able to expand their trade area.

Ressa 11:29
And we get consistent traffic and lo and behold we pulled the trigger and we put in Porter Chester and it’s a first class school. It’s awesome. It looks amazing. Then as we started, like, could we get that commodity every day products to come to the project, something like the grocery store? We had a variety store to Family Dollar. So we did have that. Could we use some more, there are other niches, and we ended up having like I said we had a multi-tenant building.

We ended up making a deal with CVS. We tore down that building. We did a ground lease with CVS on that corner. And one of the things, we had a lot of parking lot, 150,000 square foot center. Really a lot of frontage, not deep, you know, built for the frontage of a 2022 world. Those who know frontage, the width of stores is very important in store planning. But in some of the old legacy leases, the tenants of yesteryear with that wide parking lot, we can do anything.

We were able to carve out an area where in the future we now have a future building we could build for potentially restaurant QSR, and in our redevelopment with the city we got that approved. So it led to a new opportunity there. So we bring in CVS, at the time, we’re also, there’s a lack of soft goods in the market.

And you know, DLC has historically done a lot of great projects in markets like this and where we know a lot of the tenants, and we brought in city transit, they go adjacent they’re adjacent to, they take a portion of the Stop & Shop box, Porter and Chester takes the rest. We bring in CVS, and then we had two more boxes that are in the 25,000 square foot range. We’re like, people get a specialty grocer but there’s one across the street. We ended up landing a trampoline park.

So let’s take a step back, right, the center is a technical school, trampoline park, Rainbow, City Trends, H&R block, CVS, Family Dollar and there’s a restaurant and at the time, a beauty salon, a beauty supply store. So now if you think about this, we’re hitting a lot of different categories. We have entertainment for families, family entertainment. We have the everyday traffic driver of school, everyday driver of CVS and basic needs, of variety store and Family Dollar, with H&R Block, a good service that people need in the community.

We have a restaurant with a beauty supply store. We have an eclectic mix that all actually works to help each other. We ended up doing a few steals in Connecticut with a brand called Downtown Locker Room. Downtown Locker Room, for those who don’t know, is an awesome cool sneaker store they sell some amazing sneaker stores or sneakers, you might hear them called DTLR. So they go next to City Trends. Now we got cool sneakers, hottest precious sneakers in the center.

And then we had a a space in the rear used to be a cosmetology school. That space, we signed a lease with DoorDash to take a space. And the center was full with this eclectic mix. And it’s working in tenant sales growing. And I think when we first started this project, we would have never dreamed up that merchandising mix. But you have to be nimble with in the market you’re in, and how consumer behavior is changing, and what the market obviously brings you. But it works.

And when you look at it on a site plan, you might go, I don’t know, this isn’t my normal co-tenancy, if you’re a retailer or a tenant that someone who needs a user of real estate that has customers, people who come to consume something. But if the demographic that we’re in is your demographic, we’re the best quarter in the market, the dominant quarter, with the most foot traffic of any property.

So the if you’re looking to see that demographic, we have the most people consuming, spending money in one way shape or form at our property than any property in that market. And that’s good for everyone. And so, with that, the consumer is changing, the uses and properties are changing. And what the right co-tenancy in a market might be, obviously this is a very extreme one.

It’s gonna look a lot different in 10 years from now, and I’m excited to see it. With that. It’s a project I’m really proud of because it’s so unique. It’s very different. With that, I’ll leave everyone, but stay tuned when I tell everyone about the structure of that deal with Porter and Chester and how unique it is because it’s really creative. So that’ll come soon. Stay tuned.

Thank you for listening to Retail Retold. If you want to share a story about a retail real estate deal that you were a part of on our show, please reach out to us at retailretold@dlcmgmt.com This show highlights the stories behind the deals from all perspectives. So it doesn’t matter if you are a retailer, broker, entrepreneur, architect or an attorney Also don’t forget to subscribe to Retail Retold so you don’t miss out on next Thursday’s episode.