Retail churn worries spawn ideas, strategies

Gordmans, located at Lindale Market Place in Cedar Rapids, with new tenant Boot Barn shown in the distance. Gordmans will soon be closing, leaving another big retail space to be filled. PHOTO ADAM MOORE

By Dave DeWitte

As the COVID-19 pandemic closed tenants’ businesses in March, the immediate challenge for many retail landlords was basic survival – working out terms to keep lenders from foreclosing as tenants forced to shut their doors couldn’t meet lease payments.

While those issues haven’t gone away, the focus is already on the next crisis: Softening the impact of a predicted wave of retail closings and empty buildings.

Landlords and economic development groups are working to minimize the size of that wave, but they’re also preparing for potential fallout, including the need to re-tenant retail buildings, and in some cases, redesign or repurpose them for different uses.

The challenges are likely to be greatest for big-box stores with 50,000 or more square feet of space, said Adam Gibbs, vice president of GLD Commercial in Cedar Rapids.

“Even under a normal real estate cycle, they can take a year or so to lease,” he said. “The expectation [now] that it could take a few years isn’t unrealistic.”

Finding another retailer to lease the space as it stands would ordinarily be the first choice, but it’s not a likely scenario for the immediate future.

“Ten or 15 years ago, you had retailers in the 50,000-, 60,000-, 70,000-square-foot range,” said Craig Byers, a Realtor at Q4 Real Estate in Hiawatha, and a real estate investor. “Now, that retailer hardly even exists. Retailers have [store] prototypes barely half that size.”

A second option is “completely blowing it up,” or converting it to another kind of use, such as a family entertainment, fitness or customer contact center.

That might make it easier to find a tenant, Mr. Byers said, but only if leases with existing tenants make it possible. Most leases in sought-after retail centers have restrictions on types of uses, and other tenants may not be open to waiving those restrictions.

Q4 Real Estate recently re-tenanted a vacant retail space at Lindale Market Place on First Avenue SE in Cedar Rapids after Dressbarn moved out. The new tenant, Boot Barn, had barely opened when the owner of the adjacent Gordmans, Stage Stores, declared bankruptcy and announced plans to close it.

The Gordmans space might be re-tenanted faster if other retailers in the center welcome different uses, Mr. Byers said, but some may prefer to hold out for another big-brand retailer to come in, believing it will drive more shopper traffic.

A third option that may be more in tune with today’s retail space market is breaking up bigger boxes into smaller boxes. Smaller spaces can suit the needs of today’s omnichannel retailers, which stock less merchandise while using their storefronts as delivery and return points for products sold online.

Breaking up a large venue into smaller spaces may not face the same lease restrictions, Mr. Byers said, but it often comes with a high price. One Q4 client recently refitted a 60,000-square-foot big-box store that was more than a dozen years old to make it into two different retail spaces. The cost was about $3 million.

The challenge of bringing in a big retail chain to a vacant box has greatly increased of late. That’s because store closings related to COVID-19 and the consumer trend toward buying online have left chain stores in a better bargaining position.

The types of tenants typically taking over vacant retail boxes now are health care, family entertainment and office, Mr. Gibbs said. He sees health care providers as one tenant category that is likely to expand fastest during the recession, in part because of a desire to make health care more convenient.

Mr. Gibbs expects office demand to remain strong, despite many predictions that the work-from-home trend spawned by the pandemic will cause a drastic downturn in office space.

“The office and entertainment market will just be set back six months or a year,” Mr. Gibbs said.

He believes businesses will “hit pause” on their office development plans until it’s clear how the best practices for office layout and design are changed by the pandemic.

The Cedar Rapids Metro Economic Alliance even views logistics and distribution companies as potential tenants of larger retail buildings that become vacant.

“I think we need to look heavily at adaptive reuse of retail – how can those places be retrofitted for logistics, distribution opportunities, supply chain?” said Brian Crowe, director of business attraction with the Economic Alliance. Some closures appear inevitable, Mr. Crowe said during a recent virtual conference for developers and builders, “So when those spaces and employees become available, how are we getting that [information] real-time to an opportunity that could … take advantage of hiring those people in ways to avoid displacement, and utilizing our assets to invest in their abilities?”

For those who hope that only retail uses will backfill the empty retail boxes, some recent moves provide a reality check. A former Younkers department store space at Westdale is newly converted to a U-Haul self-storage and equipment rental business, while the former Toys ‘R’ Us space at 2425 Wiley Blvd. was also acquired by a self-storage business.

How bad is it?

Economic Development Specialist David Connolly has been working on the retail shrinkage issue for the city of Cedar Rapids. He estimates 6.5% of the employment in the retail, bar-restaurant and hospitality industries in the metro area is at risk because of the sales decline caused by COVID-19. That’s expected to stabilize by the end of the year, but the Cedar Rapids MSA is still projected to see a roughly 4% year-over-year decline in retail sales, he noted.

Mr. Connolly is surprisingly upbeat about the future of retail, however. He said the industry has been shifting toward e-commerce, but the best overall retail play is an omnichannel strategy that combines online sales with brick-and-mortar retail stores, in order to satisfy consumers with a voracious appetite for research while deciding on a purchase.

“What we will see coming out of COVID-19 is some physical design of retail space, some shifting of how people shop – curbside pickup and ordering online,” he said. “A winning strategy in retail gives a consumer many different choices about how they get information about a product.”

Scott Olson, a commercial Realtor at Skogman Commercial, tracks the trends in retail, industrial and office occupancy, as well as lease rates, in the Cedar Rapids metro. He sees some big-box retailers downsizing their space requirements at their next lease renewal, but does not expect to see a flood of vacant boxes.

“We are seeing some ups and downs, but compared to the rest of the country, we’re very fortunate,” said Mr. Olson, a member of the Cedar Rapids City Council. “We’re a strong economic center. In SmartAsset, we were named as second best in the nation as ‘recession-proof,’” behind Frisco, Texas, he noted.

In his biannual Commercial Market Overview, Mr. Olson reported in December 2019 that retail space lease rates in the Cedar Rapids market had fallen over the preceding six months, from $13.80 to $13.45 per square foot as the amount of available retail space rose to 1,126,000 square feet from 1,113,000 square feet.

Downtown districts offer support

The Corridor’s downtown and Main Street districts also expect some loss of storefront retail, although less than the big-box scene. They are focusing on bolstering and backstopping local retailers so that they don’t close.

“We know that there will likely be impacts that are COVID-related to our downtown setting,” said Nancy Bird, executive director of the Iowa City Downtown District. “We are focusing on retention and supporting our businesses.”

The district is helping to change the downtown’s layout to allow for more outdoor seating at restaurants and developing a source of funding to sustain businesses that are still in jeopardy after federal and state relief programs end, among other initiatives.

The Uptown Marion Main Street District has developed an online guide helping retailers that can’t pay their rent reach amicable relief terms with their landlords; it’s also providing social media support to help inform shoppers about changed hours and precautions for COVID-19, according to Main Street Director Brooke Prouty. She also sees a good number of new retail arrivals that will help offset any losses, and new retail formats such as greenhouse-like “microbusiness” spaces at the West End diner.

“Retail’s definitely changing, and we’re excited to see what direction it goes in,” Ms. Prouty said.

A silver lining for independent downtowns is the buy-local emerging from the pandemic shutdown. In Iowa City, “they’ve amped up their online presence, and are doing a lot of retail deliveries,” Ms. Bird said. “This has really helped them develop their omnichannel retailing.”

At least seven promising new and soon-to-open retail stores will backfill some of the vacated spots, and help fuel the buy-local movement. They include the new Prairie Kitchen Store at 160 N. Linn St., Paul Clark’s Hare Parlor at 217 N. Gilbert St. and Basic Goods at 125 S. Dubuque St.

A bounce for neighborhood retail

The impact on smaller neighborhood retail spaces in the 1,000- to 5,000-square-foot range will be significantly less than the impact on big-box retail, according to Joe Ahmann, CEO of Ahmann Companies, which owns retail developments like The Fountains and Peck’s Landing in Cedar Rapids.

Mr. Gibbs, of GLD Commercial, shares the same view.

“QSRs [quick-service restaurants] and service businesses will be largely unaffected,” he said. “With the COVID thing, a lot of these businesses have hit pause. Six months or a year for now, their net effect will be that it doesn’t really change.”

The reason is, in part, because neighborhood retail stores offer services people need to get in person, Mr. Ahmann said, and therefore don’t compete with online retailers. Customers will still go to centers like The Fountains to have their nails done, their hair styled or their cell phone upgraded.

Even so, Mr. Ahmann uses what he calls “third-generation design” in his developments to minimize the cost of tenant improvements when there is a turnover. Except in cases like restaurants, he says, the spaces are designed so that costly fixtures like restrooms and lighting don’t have to be moved when a space is converted from one use to another.

Ahmann Companies expects to lose some tenants, but has done its best to avoid turnover by proactively approaching them with “creative” proposals to help them get through their cash crunch.

The deals vary according to the tenant’s needs, Mr. Ahmann said, but usually amount to some form of deferral of rent payments, perhaps in combination with a lease extension if they’re near the end of theirs.

“There’s just a certain number who aren’t going to be able to recover from it, who were under stress or struggling,” Mr. Ahmann said. “You feel very bad for those folks, because it can happen to anybody and it’s outside anything you could do about it.”

Across the United States, retail landlords have seen large chains try to use the COVID-19 crisis to renegotiate lower lease rates, frequently without success. Mr. Ahmann has already seen a tendency for some prospective tenants to make lowball leasing offers because they believe the situation gives them the upper hand. Even though he thinks a full economic recovery could be five or six years away, Mr. Ahmann declines such offers.

“I’m not engaging in it – we’ve got good product, good mix and a good reputation,” he said. “But with a high majority of our tenants, we’ve been able to work through some good compromises and give everybody the best chance to be successful in the future.”   CBJ