Kimco Realty's mixed-use Lincoln Square development in Philadelphia has 322 apartment units in addition to retail.
Source: Kimco Realty
Retail property owners with an excess of vacant or soon-to-be-vacant space on their hands are embarking on lucrative secondary careers as residential developers and hoteliers, or as partners in such projects.
In retail's ongoing great repositioning, landlords have already had success converting big boxes into movie theaters, fitness centers and other revenue-generating "experiential" spaces. But it is a property's potential to be transitioned for residential use that presents the most potential upside today, according to Benjamin Schall, president and CEO of Seritage Growth Properties, the public real estate investment trust spun off from Sears Holdings Corp. and tasked with converting moribund department store real estate to other uses.
"We think our most significant opportunity is bringing housing ... on these sites with retail," Schall said last week at the International Council of Shopping Centers' annual RECon conference in Las Vegas. He later identified limited-service hotels as another significant opportunity.
Retail landlords' push into the residential arena represents a fundamental shift in the commercial landscape, where multi-use is now the gold standard for many urban markets. Anjee Solanki, national director for retail services at Colliers International, described the new emphasis on multi-use projects as the most significant change in retail real estate over the last five years.
"Retail is no longer the lead actor," Solanki said in an interview. "It's a supporting actor in a mixed-use environment."
Richard Latella, executive managing director and retail practice group lead for the Americas at Cushman & Wakefield, described residential development as a potentially very profitable, and not overly risky, route for a mall owner to take in the current retail climate, where property values are on shaky ground. Many malls still serve as de facto town centers, and there is demand to be within walking distance of the amenities they provide, he said.
"A lot of the mall owners now are looking at those opportunities," Latella said in an interview. "We're seeing multifamily coming in. But not only ... market-rate housing. We're seeing senior housing on the periphery of a mall."
Latella cited The Collection at UTC, an upscale mixed-use redevelopment at Unibail-Rodamco-Westfield's Westfield UTC property in San Diego that will include coworking space, as among the most ambitious and profitable Sears box redevelopments to date. Unibail-Rodamco-Westfield will complete this year a 23-story, 300-unit luxury Westfield UTC Residential on the site, dubbed Palisade UTC, and it is rumored that the landlord is garnering rents at a 15% to 20% premium in an already pricey market, he said.
Kimco Realty Corp. CEO Conor Flynn, appearing on a panel at RECon with Seritage's Schall, said residential uses are now firmly part of the company's playbook. People want to live where the amenities are, he said.
"I think it's something that all of us are looking at when we look at our real estate, and [weigh] how we unlock the value in it," Flynn said of residential and hotel uses. "If the highest and best use is a hotel, we're going to pursue that."
Kimco, a public shopping center REIT, has 4,000 residential units "entitled, constructed or in the process of being leased," as of May, and an additional 2,000 units in the entitlement process, David Bujnicki, a Kimco spokesperson, said in an email. The company is also in the process of ground leasing "several" hotels with a combined total of 350 rooms.
"[T]he vast majority of these mixed-use components are part of our current development and redevelopment pipelines and therefore are not yet stabilized," Bujnicki said. "This [stabilization] will begin to happen this year as the projects are completed and leased and provide a nice growth platform for us in 2019 and beyond."