In tough times come real (estate) opportunities

NEW YORK —No one loves a recession, but the current environment holds significant real estate opportunities, particularly for large, credit worthy retailers. Leverage is turning from landlords to retailers just at a time when mass-market chains have begun development of new formats and merchandising concepts that maximize the range of opportunities they can explore.

A confluence of circumstances has made this an ideal time for some judicious expansion, or at least the odd test.

Kathy Iversen, national leader of the retailer practice for Alvarez & Marsal's business consulting practice, said that the strongest retailers are in a particularly powerful position to jump on opportunities current market conditions offer because of the increasingly sophisticated way they handle and analyze data. Recognition of how demographic and lifestyle trends affect purchasing has prompted major retailers to apply information gleaned in sophisticated segmentation analysis, and that that has transformed store merchandising and how retailers look at real estate.

“What we are telling clients today is that sometimes in a crisis, it’s better to build a war chest and hunker down, but we can help you build that war chest in the presence of major market shifts that have opportunities built that provide new ways to compete,” Iversen said. “Those clients of ours that are not in crisis themselves, we’re working with them on the inventory process and otherwise to lower the cost base, but we’re saying, you develop that war chest to be ready for the next round of market segmentation.”

Retailers have been adapting to seize fresh retail opportunities as they have pursued choice real estate. Over the past two decades, many of the best retail real estate opportunities have emerged on the perimeters or even the centers of dense urban areas.

Target’s recent addition in downtown Brooklyn in an urban mall location follows on a similar move in Rego Park, Queens, that occupied an even smaller space. Target reconfigured merchandising to a multi-floor building and made adaptations to the neighborhood, particularly in food in Rego Park, to offer more home meal replacement options for on-the-go moms. Brooklyn features an expanded and upgraded cafe space for students from adjacent Brooklyn College.

A&P is another retailer adapting merchandising to space. In a supermarket in a mixed development on the Hudson River, squeezed between the Big Apple and the densely populated suburban community of Weehawken, N.J., the store combines elements of its gourmet Fresh store concepts, one applied to suburban units, and its upscale urban Food Emporium concept for consumers who want the best of the city but have sought out a calmer suburban environment.

While merchandising metamorphoses, a number of retailers are going beyond new merchandising and developing whole new formats. In part, this has been prompted by the emergence of Tesco’s Fresh & Easy format, but the success of Aldi-owned Trader Joe’s has played a part, as well. International trends toward the development of multi-format portfolios, including at Wal-Mart, also are an influence in the United States today, too. Safeway, Whole Foods and Wal-Mart, all of which have been using alterative merchandising schemes to modify stores to new kinds of environments, have recently announced fresh formats, with retailing waiting for word on even more concepts emerging from Wal-Mart.

Amy Lauren Young, an analyst affiliated with Street Brains who covers REITs, said Wall Street has yet to understand how the economy and the credit crunch are impacting retail real estate. She noted that Wall Street is valuing shares of retail-heavy REITs at a premium to retailers, even though, under current conditions, leverage is shifting away from landlords. It’s not only that big-box retailers such as Linens ’N Things have had problems, or that broadliners such as JCPenney have cut back growth plans. Many of the specialty chains that lifestyle centers have looked to as traffic generators such as Talbot’s and Chico’s have curtailed expansion. So, she said, landlords have to look to local retailers, including startups, to fill space, take bigger deposits and worry about the capacity of unknowns to draw customers that will help out other tenants.

As a result, landlords will be on the lookout for credit-worthy retailers who have operated formats that draw. Thus, alternative concepts could find a welcome home in environments such as lifestyle centers where they might not have been welcome once. Even failing this, mixed use developments will be actively looking for concepts that help them set up the pedestrian friendly, town living atmosphere they want to establish. A range of new opportunities should ensue.