Disclaimer: I am not an attorney and this article is not intended as a substitute for advice from the appropriate legal, zoning, financial, construction and/or tax professionals. This information is provided for educational purposes only and is made without warranties or representations
Shopping centers are arguably one of the riskiest forms of commercial real estate investment. A good shopping center with great anchor stores, a prime location, and consistent traffic can be an incredible investment with ongoing returns and continual growth. On the other hand, the fact that Dead Malls aren’t just an occasional tragedy and have reached cultural meme status means the risk is very high.
If you own a shopping center and you want to boost its value over time or grow it before selling it, or if you’re considering buying into a shopping center with a plan on how to improve it, it’s important to know the various avenues you have for that improvement.
How can you increase the value of a shopping center? Here are the most common options you have available.
A huge source of value for a commercial property is the rent generated by the tenants occupying it. In a shopping center, that includes your anchor stores, your nonanchor stores, your kiosks, and assorted adjacent businesses. Each of these tenants pays rent to occupy their space, often on long-term leases, and the terms of those leases need to be reevaluated and adjusted as necessary each time they come up for renewal.
The biggest risk and challenge here is that you can’t just blindly increase rents by a simple percentage and call it a day. In some cases, an increase is overdue, your tenants can handle it, and there will be a little sadness but no real objections on their part. In other cases, though, an increase in rent can be the difference between a viable business and an insolvent business.
If increasing rents has the side-effect of increasing vacancy rates for your storefronts, you face a serious challenge and a significant risk. Vacant storefronts aren’t just a lost source of revenue; they represent less foot traffic passing by other tenants, less overall interest in the shopping center, and less value across the board. If enough tenants are driven away, it can lead to a complete collapse of the shopping center.
How do you avoid this risk? Three ways.
Increasing rents increases the net operating income of a property, which technically increases its valuation, but there are other factors you can improve as well.
Deferred maintenance can be a powerful technique for managing expenses as they come in, and many maintenance tasks that can be deferred may not seem intrusive or value-busting in the moment. However, over time, three things happen.
First, the severity of the maintenance task adds up. Even something as simple as paring down the cleaning budget can lead to certain elements being overlooked and never addressed until suddenly the landscaping is in tatters, the awnings have been faded and torn for years, and that little water spot on the ceiling is now a leopard print of staining.
Second, the cost of that deferred maintenance rises. What could be fixed with an hour of labor and a $40 part now might cost six hours of labor of $1,000 in materials in a few years. Small repairs turn into larger repairs, larger repairs turn into full replacements, and what should have been a simple patch job and some paint becomes a unit refurbishment.
Third, the details can be lost over time. It’s easy to lose track of minor deferred maintenance tasks until eventually they reach a breaking point, and a tenant is threatening nonpayment of rent until it’s addressed or simply decides not to renew because something they thought was on your radar slipped through the cracks.
Deferring some maintenance and expenses can be useful for managing tax burdens and other costs, but there comes a point where the cost of letting it rest exceeds the benefits.
For those of you who own shopping centers, it can be difficult to see them and evaluate them from an objective, impartial viewpoint. Bringing in a third party who can go over the overall appearance and appeal of a property can be a great way to build a list of surface-level improvements that make your shopping center look more appealing, even if there are no real structural repairs or refurbishments being made.
Consider improvements such as:
While there are a near-infinite number of ways you can improve the surface-level appearance of a shopping center, the key is to look for options that are strategic. Perform an analysis to see what stands out in the minds of visitors, what affects their first impression, and what may dissuade them from stopping in. Likewise, look for improvements that can be significant on a large scale but don’t cost all that much. A fresh coat of paint is a prime example.
Pro tip: Look into your locality to see if there are any grants or incentives from local, state, or county governments for improvements. For example, in San Diego, the annual Storefront Improvement Program allows eligible CRE property owners to obtain reimbursement for materials used in improving storefront curb appeal.
There are two sides to any problem, and when it comes to the value of a shopping center, you can leverage both. The first is to improve income and the overall value of a property, but the second is to reduce the overall expenses you have to pay. More money in is good, but less money out is just as valuable.
Decreasing expenses can be done in many different ways, a lot of which are contextual to your situation and your property. Some ideas might include:
Cutting back on expenses can be a very valuable way to improve the overall valuation of your shopping center.
One of the biggest current trends in commercial real estate is switching from single-use designations to multi-use or adaptive-use designations, allowing for a shopping center to become a hybrid commercial property.
Consider some examples:
Not every unit needs to be filled solely with retail stores, after all. A mixed-use space can be a lot more attractive to a variety of people from different walks of life, and even something as simple as converting one unit into an open space that can be rented by the hour or by the month can be a benefit when you attract certain kinds of tenants.
Note: In some cases, the writing can be on the wall, and there may be little or no way to save a shopping center as-is. Many proposals have been floated for options like converting malls into housing, which, while it certainly changes the entire purpose of a commercial space, can still be a way to survive what would otherwise be a failing investment.
One of the keys to success with a shopping center is knowing what the locals want out of it. Polling the region, holding meetings to discuss possibilities, and generally taking feedback into account can be a great idea. Sometimes, the community at large will have great ideas you wouldn’t normally think of.
Of course, if you ask 100 people what they want out of a shopping center, you’re likely to get 120 different contradictory answers. Filtering out the less useful suggestions and using local feedback as a way to abandon ideas that have universal backlash may be the best you can hope for, depending on how much of the local populace is engaged and how.
If you’re a CRE investor looking to buy a shopping center with big ideas on how to improve the overall value of the property and bring more value to the community as well, I can definitely help you out. As California’s top commercial real estate broker, I have all the right hookups to find the ideal property for your next project or portfolio addition.
On the other hand, if you’re the owner of a shopping center and you’re at your wit’s end trying to find ways to keep it above water, you might find it’s time to sell. I’m here to help with that as well. CRE properties in this class are in short supply, so I know I can get you an excellent deal, top dollar for your shopping center. All you need to do is contact me to get started with the discussion and the process.
As always, if you ever have any questions about anything I discuss in my articles, please feel free to let me know, and I’ll do my best to help you out however I can!
Erik Egelko is a veteran of the commercial real estate business with a specialized focus on Investment Property Sales. In 2021 and 2022, Erik was the #1 ranked Broker in California for one of the largest CRE Firms as well as ranked in the Top 1% of brokers nationwide. He has extensive experience in a variety of asset types including: Retail Shopping Centers, Medical Office Buildings, Industrial Properties, and Multifamily Apartment Complexes. Over the course of his career, Erik has closed over $100,000,000 of commercial property sales throughout Southern California.