The risks and opportunities in the retail space are changing quickly, driven primarily by the rise of e-commerce. As the way we shop evolves, so too do the requirements for retail buildings and locations. For example, today stores are increasingly designed as display-suites for people to “window-shop”, whereas actual sales take place online. The retail real estate market is shaped by what tenants are demanding, what assets are available, what regulations are enforced and what financing options are available. So how do you ensure your next retail project is a success in this changing market? For those investing in or financing retail developments, what are the key things to consider when embarking on their next retail project.
1. Remember the Future
Technology is quickly changing how we use retail assets, and creating a risk of building obsolescence in its path. For example, just think about how next-or-same-day delivery of online purchases has created a need for urban, centrally-located distribution centers with storage systems that allow for superfast sorting of products. This has replaced the demand for the influx of major suburban distribution centers that were built near freeways and train-lines only a few years ago. These must now adjust to avoid becoming obsolete. Similarly, driverless cars are expected to hit our roads within the next decade, and will fundamentally change how our cities – including retail developments – are designed.
2. Be Realistic about Brownfield Risk
With a growing shortage of well-positioned land to build, many retail developers are increasingly focusing their efforts on infill projects. Although the risk of environmental contamination is higher for these sites, brownfield development can be a feasible and rewarding option in today’s competitive market. Contaminated sites are no longer something to be scared of, or walk away from. Not surprisingly, we’re seeing that retail investors and developers are increasingly willing to tackle environmental issues to make a deal or project feasible. Issues like vapor intrusion concerns that were once considered to be deal-killers are increasingly seen as a challenge worth solving.
As long as you (or your consultant!) understand all applicable regulations, and know about the best way to assign risk, evaluate cost-effective solutions, and get financing, infill sites can be a great option for retail development. In fact, so long as the problem is fully understood, some developers and investors argue that environmental contamination can actually create opportunity: this is because contamination can help weed out competition and lower acquisition costs, enabling savvy buyers to swoop in and get a good deal. Obtaining a Remedial Cost Estimate (RCE) to put a dollar amount on the issue is key. Also, there are clever ways to leverage the cleanup process to improve ROI. For example, you can save on costs by incorporating the remediation process into the design stage (i.e. installing ventilation or parking garages where contaminated soil needs to be excavated anyway). Taking advantage of available financing options is also key to making an infill project a success. At the federal and local level, there is a range of available economic incentives and financing tools that can be applied to offset the cost of assessing and fixing the environmental issue.
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