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Shopping Centers Opening Up To Non-Retail Businesses

Source: Sacramento Business Journal

Brokers: Ken Turton

Shopping centers aren’t always about shopping these days.

Along with the ever-present grocery store, nail salon and sandwich shop, retail centers now may include a school, a church or a growing number of medical offices.

A couple factors are at play. In a national trend that also has been evident in the Sacramento region, some landlords have been much more willing to welcome tenants that previously they would have rejected. The reason? You guessed it — the economy. With retailers calling it quits or delaying expansion, retail-center landlords have had to get more creative — and more open-minded — in filling vacancies.

“Landlords are using the live-body approach,” said Tim Taylor, whose Potter-Taylor & Co. owns and manages shopping centers. Retail landlords are willing to consider any tenants that can fill their spaces.

The economy, though, isn’t the only reason the face of some retail properties is changing. Some businesses that historically located elsewhere have decided that they want a shopping center for the foot traffic and visibility, and for the convenience it offers customers.

Sun Grove Community Church, for example, is buying the Elk Grove building where Gold’s Gym operates. The gym franchise is in Chapter 11 bankruptcy reorganization. Over at Lyon Village in Sacramento, Wells Fargo is taking the key spot on the corner of Fair Oaks Boulevard and Munroe Street where a Blockbuster video store closed.

Out of this region, former big-box retail spaces have been converted into a go-cart track, a shooting range, a car dealership, glow-in-the-dark miniature golf and even a Spam museum.

A healthy change

Of course, banks, dentists, chiropractors, optometrists and gyms are no stranger to shopping centers. What’s different now, local real estate professionals say, is how many more of these type of operators now prefer or can afford a retail setting over an office park.

“The dentists and chiropractors — they’ve always been interested in going into shopping centers,” said Jason Gallelli, a broker with Voit Retail Services. “You’re seeing a bigger influx now because rents have gone down. It’s a more achievable deal for them.”

Physician Peter Wroblicky couldn’t be happier with the shopping center at Fair Oaks Boulevard and Watt Avenue where he opened his WellnessMart MD franchise in December 2009. He picked the spot not because it was a retail center, but because it’s at a busy intersection with great visibility. His health clinic, which offers lab tests, travel immunizations and exams, has attracted — as expected — customers driving by, but Wroblicky has found he’s also picking up business from people patronizing the center’s shoe store, fly fishing shop, beauty salon and restaurants. The retail setting, he said, has been “fantastic.”

Locating in an office complex would have been cheaper per square foot, but not if you factor in the extra advertising he would have needed, he said.

Now Wroblicky is looking at shopping centers in Roseville for a possible expansion within six months.

Also feeding into this trend is some new type of businesses needing space. Hookah lounges and medical marijuana dispensaries, for example, want into retail locations, but often only the second- or third-tier retail sites will accept them.

“Those guys call us all the time,” said Rick Martinez, a CB Richard Ellis retail broker. “Landlords are looking at this if they can. Those are lower-end users you wouldn’t look at before.”

Not all shopping centers have been so eager for these nontraditional kind of tenants. Thriving retail centers with low vacancies are still sticking to their bread-and-butter kind of shops.

“We have continued to focus on our core leasing, which is all retail,” said Deron Conway, leasing director at Inter-Cal Real Estate Corp. Inter-Cal’s centers include Fountains at Roseville and Loehmann’s Plaza in Sacramento, which stay full or nearly full. Inter-Cal, he said, will keep the integrity of its centers by sticking with retail tenants.

The El Dorado Hills Town Center serves a higher-income community that hasn’t suffered from the economy to the extent of the rest of the Sacramento region. Therefore, excessive vacancies haven’t been an issue, said Doug Wiele, who oversees leasing for the center.

But people still need to get their teeth cleaned and cash checks. So when Hollywood Video went dark, Chase bank moved into the space at the beginning of this year. Wiele noted, however, that this spot is in the center’s periphery — not along the development’s main street.

Not sexy, but solid

Parts of town enter into the equation too. Midtown Sacramento, for example, doesn’t have strip centers, per se, and it’s always had office tenants operating out of pseudo-retail space. Now, landlords are trying to reposition the midtown space for retail because they can pull in more rent from shops than from office tenants, said Ken Turton, a broker who owns Turton Commercial Real Estate.

Retail landlords considering whether to lease to a nonretail business have to weigh the need and the fit — and that’s if the zoning even allows it.

“It’s about creating overall synergy and activity within a property,” Gallelli said.

If they need to fill to space in a hurry in order to keep up payments to their lender, sure. Dental offices, banks and some of these other nonretail businesses may not be sexy tenants. But “they’re solid,” said Garrick Brown, research director with brokerage Terranomics. “They pay their bills.”

Even if for just the psychological effect on consumers, “it’s far better to have a tenant in there regardless, than having an empty storefront,” said Jesse Tron, spokesman for the International Council of Shopping Centers, a trade group.

Landlords also may consider nonretailers if they need to fill an irregular space. Or maybe the landlord has a space with a lot of contained parking, like when Taylor’s company used to own and manage Madison Mall in Fair Oaks. Years ago Potter-Taylor leased a space that had its own rear parking lot to a gymnastics studio at one time and to a bingo parlor another time.

And perhaps the nonretail tenant would create some good synergy with the shops in the center. A residential property management company may locate in Potter-Taylor’s Raley’s-anchored center in Galt.

“Our price is right,” Taylor said.

Also, he added, because Galt doesn’t have traditional office space with good visibility.

Parking, real estate professionals say, is a key consideration when a landlord is deciding whether to lease to a nonretail business, no matter the economy. A big gym or a church, for example, can fill up parking spaces for hours, and those people may not patronize neighboring businesses before or afterward.

Banks, on the other hand, bring in a lot of customers and have a low impact on the rest of the center, said Jim Teare, a Terranomics retail broker. Most customers are in and out quickly, and banks close by 6 p.m.

When retail occupancy and rents rise, landlords will return to focusing on actual retailers for their centers, say real estate professionals. That’s unless a nontraditional kind of tenant has done especially well in attracting traffic to a center.

As it is, this was “more of a trend over the course of the recession,” Tron said. At least nationally, he said, “It’s waning somewhat at this point.”

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