One of the largest and most forward-thinking developers of retail and mixed-use centers in the nation, Retail Properties of America, Inc. announced a new strategic initiative called RPAI 2.0 to react to megatrends affecting the industry. Real estate editor Al Urbanski recently asked the company’s CEO and director, Steven Grimes, about the prevailing winds in retail.
Since 2013, RPAI has cut the number of centers in its portfolio by half. Does retail reinvention come down to a case of fewer but better centers?
I would say yes, largely because we wanted to localize our business around 10 markets, from Seattle to Texas, and on the East Coast from New York down to Atlanta, and in our home base of Chicago. We want to be on the ground in these markets managing the business and have adjacencies in our markets in order to be the best we can be. The primary effort is a focus on densification. We want to create longer dwell times with experiences starting with your first cup of coffee in the morning and continuing with your morning class at the gym, working lunches, all the way until dinner and a night of entertainment.
At the same time, top 20 retailers in your centers have gone from 38% to 29%. Have your tenant curation philosophies changed?
You want to take great care in choosing the retailers you are eliminating and the ones you are expanding. In 2013, our top 20 retailers made up 38 percent of our portfolio. Today, our concentration is at 29 percent and no single tenant is greater than 3 percent of our annual base rent. We are parting ways with commodity-based retailers that are less internet savvy. Meanwhile, we want to expand with retailers that have really grabbed hold of omni-channel and are working to optimize both physical and digital channels. And yes, we’re not top 20 dominant. In 2013, we were at about 35% in-line and 65% anchor tenancy. Today we are sitting at approximately 50% in-line space. This gives us the ability to be agile and offer a better merchandising mix.
What are the fundamental pillars of RPAI 2.0?
Densification and experience. We’ve been acquiring great real estate — predominantly mixed-use and grocery-anchored centers in the best MSAs — and our densification and growth opportunities reside in our present portfolio. Sixty-five percent of our properties are in five of the top MSAs. We see our expansion opportunities exceeding four million square feet. The modern consumer demands experience and densification brings the consumer.
What is the key imperative for retailers today?
Branding, from the internet to the mobile device to store frontage. When we purchased our Downtown Crown asset in Gaithersburg, Maryland, it was 77 percent occupied and the original developer had LOIs for big box, commodity retailers. We decided to be patient and develop a merchandising plan that was focused on smaller, boutique shop space, but we also wanted to appeal to the consumer with nationally known brands good with social interaction with their customers. Sephora is one of those. They’ve done a great job of taking what they do in-store and putting it online, tracking what their consumers do and marrying physical and digital experiences together. We recently celebrated Sephora’s grand opening and will welcome Lululemon next door in the coming weeks.
Tell us about some of the pet projects you have in development that incorporate these characteristics.
At our One Loudoun asset in Ashburn, Virginia, we created a unique outdoor space that includes two retail containers that are intended to serve as temporary incubator spaces. Retailers can come in and test out their concept to showcase their products at One Loudoun. If they are successful, we work with the tenant to move them into a full-time space. We continue to focus on experience-based retailers that are focused on the evolution and improvement of their brand. We see this test environment as critical because a retail cycle that used to be five-to-seven years has now been reduced to about three years. Retail brands that don’t refresh themselves every three years could be at risk.
Would an online retailer share of 25% fundamentally threaten brick and mortar retail?
Online is still a very small percentage of total retail sales. And we find that online purchases is closely related to physical store adjacencies. The more that retailers embrace online sales and deliver products from their stores, the better off they’ll be.
Steven Grimes is director and CEO of Retail Properties of America, Inc., based in Chicago.