Market Factors that Must be Considered in Student Housing and Mixed-Use Developments

Market Factors that Must be Considered in Student Housing and Mixed-Use Developments

Student housing developers know students and what drives students and their parents to make housing decisions. “To create a genuine mixed-use place in a university setting, however, developers must fully understand the broader market,” says Dan Sheridan, partner with Hoffman Strategy Group. Without this understanding and knowledge, a mixed-use project can become a mixed-up project.

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Elyria Courtyard Marriott to Open in August

In 2016, Mayor Holly Brinda commissioned Jeff Green, head of Jeff Green Partners, and the Hoffman Strategy Group to assess and create a redevelopment plan and conceptual site design for Midway Mall that could serve as a tool for development and a selling point to anyone willing to invest in the mall’s potential.

In the plan, Jerry Hoffman said the market needs another hotel — possibly an 80-room or similar-sized upper- to midscale brand hotel by 2020.

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Asking the Right Questions for Retail Answers

Asking the Right Questions for Retail Answers

As SoCal Real Estate recently reported, industry veteran Dan Sheridan has become a partner with commercial real estate advisory firm Hoffman Strategy Group, based in the firm’s Newport Beach, California, office. Sheridan, previously president of the Retail Properties Division for The Irvine Company, has more than 20 years of retail real estate experience including serving as COO of Centennial Real Estate and EVP of asset management with General Growth Properties.

We caught up with Sheridan for a chat about his reasons for joining Hoffman Strategy Group, the challenges faced for Southern California’s retail sector, and what the future looks like for both.

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Life without Bon-Ton: Disaster or opportunity for Lehigh Valley malls?

Life without Bon-Ton: Disaster or opportunity for Lehigh Valley malls?

Jeff Green notes that department store spaces could be used for medical purposes or redeveloped into apartments or a limited-service hotel, lodging that would benefit mall restaurants. In yet another use, rumors have reportedly grown recently that the operators of Parx Casino in Bucks County are looking at a shuttered Bon-Ton store in Cumberland County for its planned mini-casino.

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AZ Business Leaders: Hoffman Strategy Group Adds Partners

AZ Business Leaders: Hoffman Strategy Group Adds Partners

Hoffman Strategy Group, a premier national commercial real estate advisory firm, announced today that retail and retail real estate industry veterans Dan Sheridan and Jeff Green have become Partners of the firm. Sheridan is based in Newport Beach, California with Green being located in Phoenix, Arizona. 

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Brookfield Strikes Deal to Acquire Rest of GGP

Gail Kalinsoki/Commercial Property Executive - Four months after Brookfield Property Partners came courting GGP Inc. and was initially spurned, Chicago-based mall owner GGP has accepted Brookfield’s offer to acquire the remaining portion it didn’t already own in a deal valued at about $15 billion.

“It was just a matter of time, they already own so much of it,” Jeff Green, a retail consultant and president & CEO of Jeff Green Partners in Phoenix, told Commercial Property Executive.

Brookfield, one of the world’s largest commercial real estate companies and the real estate arm of Toronto-based Brookfield Asset Management, is seeking to acquire the remaining 66 percent stake in GGP, the second-largest mall owner in the United States. The announcement of a definitive agreement comes after Brookfield made an unsolicited bid in November for GGP.

When GGP rejected that offer, Green told CPE it was “just the first volley” and predicted Brookfield would have to sweeten the deal. This week, Green said he wasn’t surprised about the proposed acquisition.

“I’m not sure if in fact it’s really a better deal as much as (GGP) waited for some time to pass to see if someone stepped up,” Green said. With no other suitors, “there certainly is more urgency to figure out a solution and Brookfield is probably the only solution as they already own so much of it,” he added.

A COMPELLING TRANSACTION

The deal, which still must be approved by GGP shareholders, calls for GGP shareholders to receive $23.5 a share in cash, or either one Brookfield unit or one share of a new U.S. REIT that will be formed for each GGP share owned. The offer is subject to proration based on aggregate cash payment of roughly $9.3 billion, up from $7.4 billion in the November offer that also suggested shares paid at $23.0 per share.

“This is a compelling transaction that enables GGP shareholders to receive premium value for their shares and gives them the ability to participate in the long-term upside of their investment,” Brian Kingston, Brookfield Property Partners CEO, said in a prepared statement. “We are pleased to have reached an agreement and are excited about combining Brookfield’s access to large-scale capital and deep operating expertise across multiple real estate sectors with GGP’s portfolio of irreplaceable retail assets.”

GGP owns about 125 high-quality retail properties comprising approximately 121 million square feet of space in 40 states. With a total enterprise value of $41.1 billion as of Dec. 31, GGP’s assets include Water Tower Place, Chicago; Tysons Galleria, McLean, Va.; Ala Moana Center, Honolulu; Perimeter Mall, Atlanta; The Woodlands Malls in Woodlands, Texas; and Fashion Show and Grand Canal Shoppes, both in Las Vegas.

A GLOBAL LEADER

The combined company would have an ownership interest in approximately $90 billion in total assets and an annual net operating income of more than $4 billion, making it one of the world’s largest commercial real estate enterprises. If approved by GGP shareholders, the deal is expected to close early in the third quarter.

GGP’s Special Committee, formed in November after receiving Brookfield’s initial proposal, reviewed the new offer along with input from its independent advisors and unanimously recommended shareholders approve the transaction.

Daniel Hurwitz, lead director & chairman of the special committee, said the special committee, “determined that Brookfield’s improved proposal, which includes an increase in the cash portion of the consideration and the ability to receive shares in a newly listed REIT entity, provides GGP shareholders with a certainty of value, as well as upside potential through ownership in a globally diversified real estate company.”

Weil, Gotshal & Manges LLP, Goodwin Procter LLP and Torys LLP are serving as legal counsel to Brookfield and PwC is serving as the company’s tax advisor.

Goldman, Sachs & Co. is serving as financial advisor and Simpson Thacher & Bartlett LLP is legal counsel to GGP’s special committee. Citigroup Global Markets Inc. is GGP’s financial advisor and Sullivan & Cromwell LLP is its legal counsel.

The Brookfield-GGP deal comes at a time of increased consolidation among shopping center and mall owners. In December, Unibail-Rodamco SE, Europe’s largest listed commercial property group, said it was buying Australia’s Westfield Corp. for nearly $16 billion to create a global shopping center owner with a gross market value of $72.2 billion and 104 assets across 27 of the world’s top markets. Westfield has interests in 35 shopping centers in London and the U.S. That deal is expected to close in the second quarter.

The rapidly changing retail world is closing some doors, opening new ones

Jon Harris/The Morning Call - Some have described it as an apocalypse. Others prefer the term disruption. The more optimistic among us call it an evolution.

Terminology aside, the situation is pretty clear: The retail world is changing quickly, and its makeover won’t stop anytime soon.

Consider: E-commerce sales accounted for about 10 percent of all U.S. retail sales at the end of last year, up from around 6 percent in 2012, according to U.S. Commerce Department figures.

“It doesn’t sound like much, but it’s huge because of the effect it has on brick and mortar,” said retail expert Jeff Green, owner of Jeff Green Partners in Phoenix.

That percentage is forecast to grow quickly in the years ahead. Take it from research and advisory firm Forrester, which expects online sales to account for 17 percent of all U.S. retail sales by 2022.

It means the upheaval could just be getting started. In Outlook 2018, The Morning Call takes a closer look at the changing retail world. It’s a transformation that started gradually — the first purchase on the internet with a credit card was back in 1994 — but then suddenly, getting to the point where the once-dominant department store industry is shuttering hundreds of stores and turning to possibly its best remaining asset: its real estate.

Many sectors, however, have avoided the disruption. For example, home improvement stores still provide customers with in-person — and often much-needed — assistance, while off-price retailers such as Ross and T.J. Maxx remain one of the thorns in the sides of traditional department stores. In addition, even with Amazon’s purchase of Whole Foods Market last year, online grocery shopping remains relatively nascent, though experts expect that category to heat up in the next several years.

“Everyone is scared to death of Amazon, because they are a gorilla,” said Ron Friedman, a retail expert at accounting and advisory firm Marcum. As it is already, Amazon accounts for around one-third of all e-commerce spending.

As retail has evolved, so have the jobs.

Just look at the Allentown-Bethlehem-Easton metro area’s job figures from December, in the thick of the holiday shopping season. That month, the region’s retail trade sector had 40,800 jobs, down from 42,100 a year earlier, according to state Department of Labor & Industry. Meanwhile, the area’s booming transportation-and-warehousing sector had 29,400 jobs in December, up from 27,400 a year earlier.

The reason boils down to consumers increasingly trading brick-and-mortar for click-and-order. As online orders have surged, Amazon and Walmart have become two of the Lehigh Valley’s largest employers, each employing more than 2,000 workers across their area fulfillment centers. Its strategic location, close to major population centers, is one reason the Lehigh Valley is at the intersection of the retail changes, one where an in-store retail worker here could handle virtual orders at a fulfillment center instead and make more money — roughly $15 an hour in some cases.

 

With the boom in the sector, however, the pool of available warehouse workers has grown increasingly tight. The competitive job market has motivated many Lehigh Valley warehouses, where basic English is typically a requirement, to loosen some of those standards and tap into a plentiful supply of non-native speakers, though much work remains on that front.

All these changes have led to ongoing transformations in retail real estate.

While downtown retailers are making changes to compete, they also benefit — in fully developed downtowns, anyway — from a healthy array of dining and entertainment options, which help drive foot traffic. Meanwhile, shopping center owners are adapting by making changes and, often, turning to grocery stores as anchors. Many shopping malls also are trying to adapt, diversifying their tenant mix, lessening their exposure to struggling department store chains and, in some cases, turning inside out to resemble a shopping center with more exterior entrances.

Friedman expects the mall of the future to look like Westfield Century City, a 1.3-million-square-foot mall in Los Angeles that received a two-year, $1 billion makeover. The refreshed facility features a plethora of restaurants, an outdoor event space and a health clinic. Following the redevelopment, about 90 percent of its stores are new, including an Amazon Books location.

While malls such as Westfield Century City are well-prepared for the future, there will be plenty of low-performing shopping centers that don’t make the cut, likely going the way of the shuttered Schuylkill Mall near Frackville. Roughly one-quarter of the nation’s malls could close by 2022, by one estimate.

The tough part for these centers: They’re trying to remake themselves in an over-stored environment, one in which brick-and-mortar must downsize to survive.

Consider this: There are about 2,360 square feet of shopping center space in the United States for every 100 Americans, according to CoStar Group. By comparison, that figure is about 550 square feet in the United Kingdom.

Even with additional contraction, the National Retail Federation is expecting a strong year in 2018. The world’s largest retail trade association expects retail industry sales to grow between 3.8 and 4.4 percent this year, compared with 2017. That forecast is boosted by anticipated online and other non-store sales growth of between 10 and 12 percent.

On the association’s Feb. 8 annual forecast call, NRF officials said they expect strong consumer confidence — and tax cuts — to help continue the momentum for the retail industry, coming off a strong holiday season. The association also pointed to a Wharton School analysis, which showed the retail trade industry will save more than $170 billion as a result of the Tax Cuts and Jobs Act. The savings should allow retailers to redirect capital to employees and other aspects of their business, they said.

“The retail industry, while continuing to transform, is alive and well,” NRF President and CEO Matthew Shay said on the call.

While these are uncertain times for retailers, Friedman also described them as “really exciting times.” Some retailers will seize new opportunities, while others will not.

 

Even though the day and age of the gig economy has begun, both Friedman and Green said there is still room for brick-and-mortar, though the industry needs to resize and know its customers better than it ever has. Some well-known brands are opening their own stores. For example, Montgomery County workplace furniture and textile maker Knoll Inc. in January opened a home design shop in Los Angeles, its second direct-to-consumer retail location following the success of its New York City shop.

In addition, some physical locations can be repurposed to serve e-commerce. In fact, Walmart is converting up to a dozen of the 63 Sam’s Clubs it closed into e-commerce fulfillment centers, a move that will boost the retailer’s delivery of online orders.

The digital world, however, is giving new life to defunct retailers, such as Circuit City. A New York businessman who bought the Circuit City brand has vowed to launch an e-commerce website, potentially followed by kiosks and showrooms.

So, moving forward, Shay said the NRF expects to see more of the same in the industry, with retailers finding ways to stay competitive by reallocating resources from nonproductive investments to more promising ones.

Sure, some doors will close, he acknowledged, but others will open.

As Ann Taylor and J. Crew leave, Lehigh Valley Mall rolls with the punches in tough retail climate

As Ann Taylor and J. Crew leave, Lehigh Valley Mall rolls with the punches in tough retail climate

One area of potential concern, Jeff Green noted, is the mall’s reliance on department stores, a retail segment in decline that many analysts believe is in need of a reinvention. In addition, department stores are large footprint anchors in malls — spaces that aren’t easy to replace if and when they close.

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As Ann Taylor and J. Crew leave, Lehigh Valley Mall rolls with the punches in tough retail climate

Jon Harris/The Morning Call - A little more than a week ago, signs from the shuttered J. Crew store sat on the sidewalk behind a 1-800-Got-Junk? truck, waiting to be loaded and hauled away from Lehigh Valley Mall’s outdoor lifestyle center in Whitehall Township.

Just days later, a barricade in front of the vacant store was already rising, with a construction crew and lifts working behind a waist-level orange fence to get the spot ready for its next tenant.

Out with the old, in with the new.

This is not an unfamiliar scene at the area’s premier mall. While Lehigh Valley Mall’s performance remains strong, it has steadily been hit — as most malls have — with store closures in a rapidly evolving landscape in which many retailers are shrinking their brick-and-mortar footprint or going out of business.

But unlike many other shopping centers, the mall — backed by a strong ownership group that includes the country’s largest mall operator — has been able to fill its vacancies quickly, boasting an occupancy rate that easily exceeds the national rate of 93.1 percent recorded by the International Council of Shopping Centers.

“We, like everybody else, are not immune to everything that’s going on, but I think what we’re able to do is we’re able to recover,” said John Ferreira, Lehigh Valley Mall manager. “You have people come and go. You always have people come and go here, but we’re able to find replacements and the replacements that we find are retailers, they’re restaurants, and now they’re more experiential types of activities or stores that will attract today’s customer.

“And we’ve been pretty successful at doing it,” he said.

Fighting the headwinds

The situation won’t get any easier moving forward, however, as e-commerce continues to gobble up sales, causing a dramatically overstored U.S. retail climate to correct itself. The correction could be significant: One report last year from Credit Suisse said roughly one-quarter of the nation’s malls could close by 2022.

The centers most at risk, according to Green Street Advisors, are the low-performing malls, of which the Lehigh Valley has several that are trying to adapt by adding more exterior entrances, freshening up their 1980s-like appearance and bringing in tenants such as local restaurants, gyms or even a trampoline park.

Those malls, such as South Mall in Salisbury Township, Palmer Park Mall in Palmer Township and Phillipsburg Mall in New Jersey, face a tough road. While South Malland Palmer Park are now under the control of their own respective hands-on ownership groups, both count the bankrupt Bon-Ton as an anchor and South Mall’s other anchor, Stein Mart, has assembled a team to “identify potential strategic alternatives.” Meanwhile, the Phillipsburg Mall is in the midst of losing its Bon-Ton, putting it another anchor down and forcing its owner to weigh alternatives for the property.

The 1.18 million-square-foot Lehigh Valley Mall is far from a low-performing mall, though some of its numbers were slightly lower in 2017 than in years past. One retail expert believes those figures could decline further following the 2019 holiday shopping season as the retail disruption continues, but the mall is fighting those headwinds by looking at ways to diversify and weighing an expansion that would give it greater visibility from busy MacArthur Road and cement its position as the area’s top shopping hub.

As of Dec. 31, sales per square foot at the mall were $561, down from $570 a year earlier, according to a U.S. Securities and Exchange Commission filing from Pennsylvania Real Estate Investment Trust, which co-owns Lehigh Valley Mall with Simon Property Group. In addition, Lehigh Valley Associates — the formal name of the mall partnership between Simon and PREIT — reported revenue of $34.9 million last year, down from $36.9 million in 2016, according to PREIT’s annual report.

While the mall doesn’t discuss specific numbers, Ferreira said turnover in a mall can generally lead to downtime and push some figures lower. One number that isn’t declining at Lehigh Valley Mall, according to Simon’s annual report, is its occupancy rate. Its figure of 98.8 percent within the mall concourse is up from a year earlier, when it was 97.7 percent.

Getting to that point is a testament to the mall’s ability to backfill tenants quickly even as it has lost mainstays such as Delia’s, Wet Seal and Bebe.

To fill the gaps, the mall has brought in tenants such as women’s retailer Love Culture, family-owned business Windsor and Torrid, the last of which will open within weeks in the former Bebe space and offer apparel, accessories and swimwear to women sized 10 to 30.

Many of the mall’s retailers, Ferreira said, are now more experiential. For example, Pocono Oil and Spice Co., which took over the space vacated by Teavana, allows customers to sample dozens of selections, from garlic cilantro and spicy mango dark balsamic vinegars to blood orange and Parmesan, garlic and rosemary olive oils.

The mall is even experimenting with the virtual world.

Virtual reality gaming facility VR Cafe opened at the mall last year, filling the space left by Wet Seal, Ferreira said. VR Cafe, which opened its first location at Palmer Park Mall in September 2016, also has a cafe bar alongside its booths where customers immerse themselves in 360-degree virtual worlds.

The mall also this year filled one of its largest vacancies in recent memory, when Bob’s Discount Furniture opened in a more than 30,000-square-foot space in the mall-owned outparcel along Grape Street that previously housed HHGregg.

“To have a space of 35,000 square feet, and we backfill it within six months with a really good tenant, I think that really means a lot,” Ferreira said.

But more challenges could be on the horizon — in fact, just a stone’s throw from Bob’s.

Babies R Us, in the same building as Bob’s and Guitar Center, could be the next space to fill. Going-out-of-business signs were posted in the store’s entrance on Friday, eight days after the retailer’s parent company, Toys R Us Inc., announced it would liquidate its remaining U.S. stores.

Meanwhile, Claire’s, known for its tween jewelry and ear piercing, filed for bankruptcy Monday. It has stores at Lehigh Valley Mall, South Mall, Palmer Park Mall and the Promenade Shops at Saucon Valley.

Some of Lehigh Valley Mall’s turnover is simply a result of its size and depth of merchandise, scale that leads Ferreira to call the shopping center “this area’s King of Prussia,” referring to Simon’s massive mall about 50 miles south in Montgomery County. With more than 150 stores, it’s not that unusual for Lehigh Valley Mall to house a national retailer that decides to downsize or close shop for good.

Continued reinvestment

Despite the turnover, retail expert Jeff Green, owner of Jeff Green Partners in Phoenix, said the mall’s $561 in sales per square foot is still strong, placing it as an A mall by that figure. Green estimated a further decline could occur after Christmas 2019 or early 2020, by which time Lehigh Valley Mall — and many other malls — could be transitioning from an A mall to a B mall, the latter of which has sales per square foot of $375-$550.

One area of potential concern, Green noted, is the mall’s reliance on department stores, a retail segment in decline that many analysts believe is in need of a reinvention. In addition, department stores are large footprint anchors in malls — spaces that aren’t easy to replace if and when they close.

For example, at Lehigh Valley Mall, Boscov’s space, leased through 2022, is nearly 165,000 square feet, while the Macy’s location, also leased through 2022, is 212,000 square feet, according to a PREIT public filing. Meanwhile, J.C. Penney owns its 207,292-square-foot store.

From Ferreira’s point of view, however, each of the three department stores offers a different type of merchandise and each caters to a specific kind of customer. In addition, he noted, it bodes well that neither Macy’s nor J.C. Penney has shuttered even as both chains have announced closures in recent years.

Green said Lehigh Valley Mall will still be the area’s dominant shopping center in the future even as retail headwinds continue to intensify. From a national perspective, Lehigh Valley Mall is considered a premier mall in a secondary market, a scenario Green said is preferable to being a secondary mall in a major market.

“Whether it be A or B+, it’ll still be the best mall in the [Lehigh Valley] market,” Green said.

In the future, Ferreira expects the mall will still be one retailers want to invest in. Starbucks and Express just finished remodeling their stores at the mall, while Swarovski is in the midst of construction.

Simon, as an operator, also has not hesitated to invest in good malls. For example, Simon opened a 155,000-square-foot expansion at King of Prussia Mall in August 2016 and, a little more than 10 years ago, opened a $40 million, 110,000-square-foot lifestyle center at Lehigh Valley Mall.

Even with the loss of J. Crew and the closure of Ann Taylor on Saturday, Ferreira said the lifestyle center is a strong performer, as those trying to park there can probably believe as they participate in a nonstop version of vehicular musical chairs.

The lifestyle center likely won’t be the last investment in Lehigh Valley Mall.

Since at least March 2016, the mall has been mulling an expansion on the 4.5-acre parcel at 1457 MacArthur Road, which hosts an office building, a Friendly’s and a former Wendy’s, the last of which recently moved to a newly constructed building at 2545 Mickley Ave.

Rumors have been rampant over the years, with past and current tenants saying the parcel had been discussed as a potential spot to construct the second phase of the lifestyle center. Some believe a Cheesecake Factory is on its way.

For his part, Ferreira isn’t tipping his hand. When it is redeveloped, however, he believes it will be a “really nice entry point” to Lehigh Valley Mall that shoppers will appreciate.

The questions at this point seem to revolve around when and what — not if the project will happen.

Said Ferreira: “It’s coming — sooner than later.”