When tenants take a fall: The adaptive reuse of vacant real estate

They hold vastly differing positions in the commercial real estate industry - an economist, an investor/owner, a city planner and an attorney. But they came together to take a closer look at an issue that is increasingly important in the commercial real estate industry and in local communities and across the country.

Chris Brewer, vice president at AECOM Economics; Andrew Hochberg, CEO of Next Realty and Next Parking; Stephanie Phifer, director of planning for the City of Aurora and Paul Shadle, Partner at DLA Piper were presenters and panelists at "When Tenants Take a Fall: The Adaptive Reuse of Vacant or Underperforming Real Estate."

More than 100 people attended the annual conference hosted by The Real Estate Center at DePaul University and the Chaddick Institute.

Following a series of presentations by each participant, the group came together as a panel, moderated by Joe Schwieterman, a professor of public policy at DePaul University and the Chaddick Institute. To kickoff the discussion, panelists were asked to describe how the overall economic landscape has changed over the years.

Brewer described the suburban and downtown markets as "different worlds," based in part on the continued growth of urban neighborhoods. He said the suburban markets face challenges because "they need tenants to backstop their projects".

Hochberg of Skokie-based Next Realty agreed, and said the retail scene is very localized, potentially changing from location to location.

In terms of specific segments, Hochberg characterized development of restaurant space as favorable, with fast casual concepts seeing the greatest improvement. He said that the build out for these spaces is significant. He also suggested that the market for higher price point restaurants is a lot tougher.

Brewer added, "It's getting very pricey for lunch!" He suggested that grocery stores, and the prepared food sections they offer, represent a great alternative and likely will see an uptick. "People like healthy and safe," Brewer said. "So we are seeing a pivot."

Phifer said everyone wants restaurants, but no one goes. She added that there often are tremendous infrastructure, even code, hurdles involved in starting a restaurant. "We want the restaurants, though."

"You want to be the second owner of a restaurant space," said DLA Piper attorney Shadle.

He also noted that because dining is so experiential, adaptive reuse projects often have a leg up; older buildings, in a storied location or with a story to tell, often have that leg up.

Turning their attention to core, indoor malls, the panelists were asked for their prognosis, given the challenges the retail industry faces.

Hochberg predicts that the bottom third will go away, though in select cases some owners will try to ride it out. "I have trouble visualizing what the new uses will be," Hochberg added.

Brewer said the solid locations will remain strong, even in the face of changes that are likely. "I am more nervous about the edges, like power centers," he said. "It's harder to see redevelopment without population growth."

Shadle added that some institutional owners and users are contemplating how they can go beyond their typical skill sets and property types or connect with people who have the expertise to orchestrate the conversion of a property.

Even with population growth, the buying habits of consumers are changing significantly as they prefer, and often demand free shipping, or even look for in-store pickup.

Hochberg has a theory that delivery options including drive-through and drive-up will gain in popularity. This will play a significant role in reshaping the site selection for retail, with retailers taking less high-image, high-priced spaces. "You may begin to see retailers split their spaces between main street locations and places three blocks away," he said.

Brewer added, "Retail will have to change, but we are still building strip centers. I haven't seen the new models evolved yet, but as everyone says, we need to change."

Just as major property owners are looking for change and to build the better mousetrap, community stakeholders are equally concerned and invested.

"From a village and village board's perspective, we're looking for a crystal ball," Phifer said. "Everyone is nervous about making the wrong decision."

Given the stakes involved, professionals like Phifer do rely on outside consultants to help solve problems and create opportunities.

"You need to know what you need the consultant to do," Phifer said. "Do they educate or validate? Generally, consultants give credibility."