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Ken Schwab: Demolition and rebuilds are trending in retail.
Ken Schwab: Demolition and rebuilds are trending in retail.

With vacancies down, retail developers pursue renovations

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Springfield is running out of shelf space.

According to Xceligent’s Market Trends report for the third quarter, the retail sector’s vacancy rate ticked up one-tenth of a point to 4.9 percent from the previous quarter. Despite the minimal increase, Xceligent reports the rate is down from 5.2 percent a year earlier.

As leases continue to be signed, area commercial real estate agents note a corresponding rise in demand from investor-owners.

“Investors are sitting on the sidelines chomping, wanting quality assets with quality leases as investments, and they are virtually nonexistent,” said Ross Murray, vice president of real estate firm R.B. Murray Co. “When they do come on the market, they sell quickly.”

Murray traces the dwindling vacancies to an improving economy, allowing construction companies to get back to work filling a backlog of demand that stretches back to the 2008 recession. And with increased activity comes a rise in asking rates for retail space, up to $11.74 per square foot in the third quarter from $9.97 during the first quarter of 2016, according to Xceligent.

With open land for new construction drying up, Wilhoit Properties agent Ken Schwab notes a trend toward investors purchasing parcels with existing structures only to demolish them in order to build space that meets the needs of retail tenants, as well as their own required rates of return. That particular boom is most noticeable along East Sunshine Street, he says.

“We’re seeing there’s enough demand for the corridor that they’re willing to tear down,” Schwab said, also pointing to the sale of a former Backyard Burgers structure, now demolished, at 1008 E. Battlefield Road. “In those highly desirable corridors, that will be more of a trend.”

Another trend is renovating the city’s older retail centers. Both Murray and Schwab point to the renovations planned by Jared Enterprises CEO Curtis Jared for the Brentwood Center as a prime example of how low vacancy is driving redevelopment.

“There are all kinds of investment, and people often go to where they can get the best return on their capital,” Schwab said. “(Jared) certainly believes that location is dynamic enough to be worthy of renovations.”

The Brentwood shuffle
Jared declined to discuss plans for the retail center east of Battlefield Mall, citing ongoing conversations with the city about project details. He noted plans call for demolishing and renovating parts of the Brentwood Center in order to eventually connect the entire building.

Acquired in 2015, Jared Enterprises plans a multimillion-dollar renovation for the Brentwood Center and the addition of a freestanding Starbucks, according to Springfield Business Journal archives.

“It was built in (1960) in multiple phases, so there are about 50 separate structures,” Jared said, noting various ceiling and floor heights, loading bay depths and multiple load-bearing block walls across the development. “That’s why it’s a complex renovation.”

Based on some of the renderings he’s seen of the proposed project, Piano Craft co-owner Greg Murdaugh, whose business has called the Brentwood Center home for 15 years, is looking forward to the changes.

“I think the main goal is to get the facade looking more modern and a right-in, right-out entrance off of Glenstone, which is going to be a big help,” said Murdaugh, noting shoppers currently are limited to three entry points at streets connecting to South Glenstone Avenue.

Declining to disclose the cost of Piano Craft’s lease, Murdaugh said new rates haven’t been discussed yet, but the company doesn’t plan to move out of Brentwood South.

“I’m sure once the work is done the rates will be higher – it wouldn’t surprise me,” Murdaugh said. “We see it as a positive. It’s a little bit of a hassle while it’s going on, but they’re accommodating our customers by making sure they can get in and out.”

Current lease rates at the Brentwood Center range from $20-$30 per square foot, triple net, according to Jared Enterprises’ website.

Jared said in the typical retail center renovation, rent for existing tenants increases over a specified time period – sometimes years – with the improved building hopefully providing increased traffic and sales.

“With existing centers, sometimes those tenants aren’t at a market rate depending on the condition of the property, and when you bring that up to market standard the rents will follow,” Jared said. “But you’re not going zero-to-60 overnight, like with the new tenants that are coming in.”

The tenant hunt
Jared said while Springfield’s demographics are the desired market for most national retail brands, the renovation trend has worked for revitalizing other centers in outlying communities. He points to the 30-year old Lebanon Marketplace, where Jared Enterprises completed renovations in November, and a newly constructed center in Monett completed in August as examples of what can happen when prime real estate is brought up to modern standards.

The 136,000-square-foot center in Lebanon, for instance, brought in Missouri’s first location for Scottsdale, Arizona-based pet products chain PetSense LLC, and Jared said lease rates run $12-$16 per square foot.

“It’s done better than we thought it would, and we’re actually looking at building additional retail out there,” Jared said of Lebanon Marketplace, adding there’s 6,400 square feet vacant in the center. “In our industry, if you’re 95 percent leased up, it’s considered 100 percent.”

In Monett, currently home to a Rue21, Dollar Tree and Shoe Sensation, Jared Enterprises’ range is similar.

As new retailers gain market penetration in surrounding communities, the dollars previously spent in Springfield for the same goods and services begin to trickle out. Jared said that puts pressure on municipal incentives for redevelopment or new construction.

“That’s becoming a more important aspect of development,” Jared said, referencing incentives such as blighted properties and community improvement districts. “Going ground up means different incentives to build, be reimbursed and stay competitive with the existing retail that’s there. You’ve got to make sure rental rates stay within a certain range and you can only push that so far.”

While Jared said Springfield’s lack of space means it’s being bypassed by potential retailers, Schwab said location is still king and the pending Glenstone Marketplace is proof tenants are willing to wait and pay higher rates for developers that pave their way.

“I think there’s an opportunity to be overlooked if you don’t have properly zoned property priced at a level that the user can afford to pay,” Schwab said.

“There are some retailers that say Springfield is on their horizon but so are 50 other communities across the U.S., and if they find the real estate in Cleveland, they’ll go there first.”

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