Vestar Retools Retail Units as State-Of-The-Art Experimental Space

 As the retail sector continues to react to the rise of e-commerce platforms — as well as to changes in consumer spending habits and broader economic trends — developers and landlords are increasingly repurposing their retail spaces, according to privately-held shopping center owner and property manager Vestar.

The company, which was established in 1989 and focuses on buying, developing and managing retail destinations in the western United States, has refocused its strategy in recent years — emphasising acquisitions over new developments, and repurposing large portions of its shopping centers to incorporate more entertainment spaces alongside traditional retail.

Vestar’s president, David Larcher, sees similar moves being made across the retail real estate space and believes this is a trend that is likely to continue as consumers increasingly buy products online and eat out rather than cooking at home.

As brand-new developments have become less attractive or viable for investors, he also sees better opportunities in acquiring and redeveloping existing retail properties. “For the first 15 to 20 years of our operation, we were primarily focused on development; we made some acquisitions but for the most part we were a developer up until 2008,” he told Real Estate Finance & Investment. “Over the last 10 years we’ve been mainly interested in acquisitions: assets we can repurpose and redevelop.”

Prominent within the Vestar portfolio are Desert Ridge Marketplace — a Phoenix, Ariz. shopping destination providing 1.2 million square feet of leasable space, which the company developed from the ground up in the early 2000s — and The Gateway, a 1.4 million square foot site in Salt Lake City, Utah, which Vestar acquired in 2016.

The firm’s switch from development to an acquisition-focused approach is a direct response to market forces and the economic challenges of recent years, said Larcher. “Coming out of the overheated period of development in the mid-2000s and into the great financial and housing crisis of 2007-08, many companies found themselves overlevered, with tenants who could no longer afford the rents they were paying, or they started going out of business,” he explained. “Overlevered companies couldn’t develop anything new until values were adjusted.”

Vestar’s response was to “look for good real estate with the potential to be turned around into high performing and well-functioning properties,” said Larcher.

Repositioning itself as a value-added investor also presented opportunities to repurpose its retail premises to account for changes in consumer spending. “While turning these properties around, we reposition them for a tenant mix that reflects where retail is today — which means more entertaining and dining spaces,” he said.

The dramatic rise of online retailers — the so-called ‘Amazon effect’ — has had a significant impact on the retail landscape and is presenting major challenges for traditional stores. While Larcher acknowledges that this has informed Vestar’s strategy, he does not believe it is leading towards the death of retail.

“There’s certainly been an e-commerce boom, but 90% of retail is still happening out of bricks-and-mortar establishments,” he reasoned. “So e-commerce is one part of it, but it’s combined with the fact that people are spending more on eating out and less in the home. I guess you could say it’s a Millennial thing.”

Larcher continued: “Consumers are organic beings — they like to combine their shopping experience with entertainment and socialising. And we’ve been focusing on this trend for a while now.”

Historically, the typical retail center might have dedicated some 10-12% of total leasable area to food and beverage outlets, with the rest designated as shop units, estimated Larcher. But these days, space assigned under the broader definition of ‘entertainment’ — including restaurants and bars as well as movie theatres, arcades, gyms and museums — can account for up to 35% of leasable space, he said.

The decision to repurpose these spaces comes with its own considerations, noted Larcher. “It’s more capital-intensive, as restaurants and entertainment venues are generally more expensive to install,” he said. “And an entertainment center today needs to go beyond shopping and dining. Putting on events has become increasingly important, whether it’s live music, local dancers having Saturday shows or movie premieres,” he added.

Having built the aforementioned Desert Ridge from scratch in 2001, Vestar decided to take the Phoenix development through a $22 million renovation and reopened it in late 2017.

Alongside traditional retail tenants, Desert Ridge now also houses a movie theatre, an outdoor lifestyle area, and a 60,000-square-foot section devoted to health and well-being. Early tenants for this space include a Pilates studio, a massage therapy business and a health-food restaurant. The center also hosts around 300 free public events each year.

Vestar owns and operates around 30 million square feet of leasable space across its portfolio, with developments in Arizona, California, Colorado, Nevada, Texas, Utah and Washington State. Larcher said the company is “opportunity-focused, rather than feeling we need to be an a particular demographic area.”