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OWNERS FINDING NEW USES FOR OLD CENTERS

By Anne Watson

Ugly Duckling, a used car dealership chain, turned a vacated center in Phoenix into its corporate headquarters.

When anchors leave shopping centers, owners sometimes have a tough job replacing them with traditional tenants. But that’s no reason to despair, as some developers in the Phoenix area have discovered lately.

An overabundance of anchor store space, caused in part by a shake-up in the supermarket industry, has forced these landlords to get creative. Among the new tenants they are bringing in are a dinner theater, a corporate headquarters, a school and back-office support, and call centers.

Such issues especially affect older malls in central Phoenix, as well as neighborhood centers (usually with older grocery stores) that face abandonment by a population that shops at power centers and malls in the outer suburbs.

“We’ve had a large number of spaces come onto the market at a rapid rate,” said John Applebe, senior vice president of Grubb & Ellis Co.’s retail advisory group. “We have fewer grocery stores than we had five years ago,” he said, adding that other retailers have been leaving, too. By the end of 2001, Abco, Homebase, Office Depot and Southwest Supermarkets had shut down their stores in the Phoenix Valley, while three older centers in the area have lost their Kmart stores.

Most of that increase in vacant space came from anchor spaces in older neighborhood centers, especially in low-income neighborhoods. At the end of 2001, there were more than 130 anchor spaces available in the Valley, totaling more than 4.4 million square feet — nearly 64 percent of all vacant space.

But relieved as developers might be to find someone to rent their space, considerable challenges lie ahead for those that take on unconventional tenants, professionals warn. Before signing anything, tenants and landlords must mull over a number of issues, and the discussions should involve architects and contractors, too. Often roofs or heating, ventilation and air-conditioning systems need to be replaced. Security and parking needs can change, in turn forcing changes in the ingress and egress patterns. Municipal fire and parking codes can cause complications, since many older spaces were built before newer, stricter permit regulations were established.

A dinner theater
An old grocery store sat empty for two years after Abco, owned by grocery wholesaler Fleming Cos., closed its 46,000-square-foot space in Alta Mesa, a strip center owned by MG Development and located in Mesa, a suburb of Phoenix. Enter the Prather family, which runs dinner theaters in Florida and Pennsylvania and was seeking to enter Phoenix, a market filled with snowbirds partial to musicals and comedies. The Prathers subleased the space from Fleming for about $5.75 a square foot plus CAM charges, under a 12-year lease.

The project called for building a tiered, 500-seat theater and a reception area with a bar and a giftshop. Behind the public areas there were to be a full-service kitchen, workshops, sewing rooms, dressing rooms, storage space and administrative and box-office areas.

Work on the Broadway Palm Dinner Theatre-West was estimated to cost $25 to $30 a square foot, but complications delayed completion, adding to construction costs. Some surprises confronted contractors after they stripped down the space; they shut down the project for six weeks while they conferred with city inspectors. Additional layers of fire protection had to be installed under the roof, and the sprinkler system needed upgrading. The delays forced the theater to cancel its premiere of “Sounds of Christmas.”

Later the tenant discovered that the place needed a completely new HVAC system. The Abco store had been kept cool by its extensive freezers, so the space had only minimal air-conditioning systems. But in Phoenix, where temperatures remain above 100 degrees for the entire summer, a high-powered HVAC system is crucial.

Still, the old Abco store offered one advantage, at least: Like all grocery stores, it had extensive plumbing and wiring capacity, especially in its deli/bakery area, making construction of a full-service kitchen easier.

The theater finally opened in November. The lessons: Any business considering a shopping center conversion should consult with a contractor before making any plans or commitments, warned Dave Tilson, director of new business development at the Renaissance Cos., the contractor that handled the renovation.

One should also check with city officials, added Will Prather, the theater’s executive producer, who recommends “a fair amount of due diligence [at] the design and planning stage to see if the municipality is comfortable with the plans.”

A corporate headquarters
The old grocery-anchored center on East Indian School Road has been empty for years; many don’t even remember its name.

But dilapidated as it was, someone saw a diamond in the rough. Ugly Duckling, a used car dealership chain, bought the 30,000-square-foot center for its corporate headquarters and moved in last fall.

Despite the space’s age and its deterioration, Jeffrey Rausch, principal at Scottsdale, Ariz.-based Exclaim Design, which did the interior work for Ugly Duckling, saw potential in the store’s high ceilings, pillars and curved, glue-laminated wood beams. Exclaim Design incorporated the old grocery store’s features into the urban industrial look that Ugly Duckling was after.

“They wanted an urban warehouse feel, and that’s what they got,” Rausch said. “A contemporary design instead of a box.”

A small mezzanine area that had been used for back-office operations was redone as an employee lounge. Ductwork and conduits were left exposed, and a stained concrete floor was poured. The high ceilings also allowed for the construction of a basketball half-court for the employees. Three roll-up doors were built leading out onto the loading dock, which was converted into a patio.

The building also needed to have the roof and its HVAC, electrical and plumbing systems replaced. The exterior was stripped and reskinned. The center already had an extensive parking lot, which Ugly Duckling relandscaped and to which it added carports.

The moral: When it comes to empty anchor space, the right tenant can turn even the ugliest duckling into a swan.

A school
Maryvale Mall in central Phoenix had been empty for more than three years when its owner, John F. Long Properties, and the Cartwright School District came up with an idea to solve both their problems.

Cartwright School District transformed Maryvale Mall into two schools, complete with a gymnasium.

At the time, prospects were bleak for the 500,000-square-foot center; its anchor tenants had departed for newer malls in the far western suburbs, while the smaller merchants fled to smaller, cheaper strip centers.

Meanwhile, the school district was having problems of its own. Rampant development was burdening it with more children while at the same time raising land values. Though the state has called for development of more than 400 schools, there is limited funding available for charter schools, which often teeter on the brink of financial collapse. The result was that the Cartwright School District couldn’t afford to buy or build custom space for additional classrooms. Instead it was forced to seek out retail space, bowling alleys, skating rinks, warehouses and movie theaters.

Often retail landlords are loath to rent to schools because of the “hang out” factor. “Generally, schools of any type [are] a detriment,” said consultant Robert Kammrath of Robert Kammrath & Associates. “The students tend to hang out, so it’s the last choice for a landlord.”

But in this case, the owner had no existing tenants to worry about. Long sold the district 320,000 square feet plus about 25 acres of land and parking lot space. At the time, the fair market value was $17 million, which Long discounted by $8 million as a donation.

The district gutted the mall’s interior, converting the space into two schools: a middle school, which opened in fall 2000, and an elementary school that opened the following fall.

Because of budget and space restrictions, the district’s architectural firm, BPLW Architects & Engineers, made creative use of the old mall’s features. Wide interior walkways were turned into streetscapes. Light wells provide natural light for the interior, while a skating rink was converted into a sports center. A former bowling alley is now a warehouse for the district, and a movie theater will eventually be converted into an auditorium.

Owners might be wary of schools, but Jim Miller, Long’s director of real estate, says they shouldn’t be dismissed. “It’s a chance for an owner to turn a nonproductive asset into a community asset,” he said.

Miller’s advice for negotiations: “Keep the overall objective in mind, and be flexible.” The mall owner and school district learned to work out issues after the deal was struck, including traffic flow for school buses and utility easements.

After the sale and conversion of slightly more than half the Maryvale Mall, the landlord converted the remainder into administrative/office space, which is now on the market for $5 a square foot.

A call center
Call centers love shopping centers, with their potential for large, open office spaces located near fast-food restaurants and major freeways, and with plenty of parking, to boot. The Phoenix Valley is filled with scores of call centers and back-office support operations attracted to the area by cheap real estate and labor.

Locally based Westcor Partners figured it had just the ticket for them — three stories of vacant department store space — when it converted Camelback Colonnade, northern Phoenix, from an enclosed mall to a hybrid power center/neighborhood center. MCI Telecommunications agreed and rented the top floor for a telemarketing office. Staples and Marshalls take up most of the first two stories.

Still, the conversion required some investment. Westcor built a three-story parking structure next to the old anchor for MCI employees’ use, linking it to the third floor with a bridge.

Being a property manager for a 24-hour call center requires flexibility when negotiating lease terms with the tenant. John Campbell, director of asset management for Westcor’s urban village division, said tenants like MCI resist paying marketing and CAM charges. But because a 24-hour operation does demand more utilities, higher heating and cooling fees could be charged. And since employees are coming and going at all hours, a landlord should also consider how a call center will change a center’s security arrangements, Campbell recommended.

Westcor didn’t disclose the leasing rate for the 66,254-square-foot space, but similar operations in the area pay $10 a square foot. That compares with $24 a square foot for class-A commercial space in the surrounding business district.

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