Thursday, July 3, 2008

Extreme Makeovers For Commercial Real Estate Buoy A Struggling Market

Though some sectors of commercial real estate remain stable and profitable, many retail and hospitality spaces are sitting vacant as poorly-performing tenants shut their doors. Beyond the lack of cash flow, commercial real estate investors with vacant spaces face a vicious cycle much like the Broken Windows effect in foreclosure-struck neighborhoods, wherein the vacant space may attract crime, loiterers and vandalism, which further decreases traffic and eventually compels existing tenants to move when the lease is up. However, some commercial real estate investors are overcoming this problem by turning to unconventional tenants to fill these spaces.

A recent AP article highlights some interesting examples of this trend. My favorite:

“In November, mall owner Pennsylvania Real Estate Investment Trust snagged New River Community College as a tenant for a former theater space in its New River Valley Mall in Christianburg, Va. The satellite location features seven classrooms, four computer labs, a science lab, two auditoriums, testing and conference rooms and office space."

A cinema complex seems difficult to convert successfully, but using theatres as auditoriums with plenty of study space just outside in the lobby and a concession stand is honestly quite brilliant. I like it much better than my idea to convert an abandoned Chuck E. Cheese into a funeral home (though I still insist that a ball-pit and an animatronic band would improve any wake).

Shopping malls and strip malls especially are facing high vacancy rates as larger chains begin to falter in leaner economic times. Levitz, Zales, Ann Taylor, PacSun and Foot Locker are closing hundreds of stores this year. Linens 'N Things and Sharper Image have already filed for bankruptcy protection. I guess radio-controlled backscratchers and self-cleaning plungers aren’t quite recession proof.

To generate income from vacant stores, larger malls are leasing empty storefronts as billboards while they search for new tenants. Malls large and small are also courting first-time and independent business owners by offering short-term leases with attractive rates, according to the AP article.

This may be bad news for many corporate retailers and their employees, but it isn’t necessarily bad news for commercial real estate investors in the long term and it is certainly good news for small business owners. Larger companies with more overhead will continue to suffer in a recession, but savvy entrepreneurs in control of their own expenses can still come out on top. Meanwhile, their landlords will still enjoy a regular income and a more diverse use of their property, which could guard against future fallout like that of Sharper Image.

Beyond all of that, this sea-change could even benefit the consumer, as erstwhile interchangeable chain shops become inoculated with local talent and independent ventures. In years to come, some malls may have a local flavor beyond the bland corporate spumoni that one customarily finds. The times may be sour for some retailers, but as in all upheavals, there could be sweet results for those who can adapt—most of all, investors and entrepreneurs.

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