The Changing Landscape of Commercial Real Estate: Repurposing Spaces in Retail, Shopping Centers, Healthcare and Golf Courses

4 Min Read By: Cathy Reece

Commercial real estate markets have experienced significant challenges over the last decade in all regions and sectors of the country, from retail to office to medical to senior living to golf courses. Some facilities and developments have thrived and continue to thrive, while others are subject to relentless external changes and influences in our economy. Every real estate sector in the country has experienced changes in their markets due to increases in internet and online sales, shifts in spending habits and interests, changes in demographics, declines in revenues, increases in over-built areas, increases in virtual offices, and declines in population centers, among other factors. Given these market challenges, the repurposing of commercial properties will likely focus on who the ultimate owner is to solve them, what the obstacles are in reshaping the property, and what some of the solutions to the challenges include. No doubt, innovation, creative thinking, and capital investment will be needed for the repurposing of spaces in these sectors.

As for retail, news articles are full of stories reporting that over 8,000 stores were closed in 2017, and 2018 is on track to see the same or a higher number of store closures. Some retailers have gone out of business completely; others have downsized significantly, decreasing the number of stores and concentrating on their more profitable areas. On the other hand, Amazon and other similar types of businesses with increasing online sales have expanded their distribution centers and are experimenting with ventures with other businesses in brick-and-mortar areas to fill in their business models. Consumers have changed their spending trends, which has caused retailers to chase them via online sales, thus choosing a different kind of shopping cart.

Landlords have been significantly impacted by store closings and have had to change their tenant mix and repurpose their shopping centers. The owner, the landlord, the lender, and the ultimate buyer of the property have all had to adjust and evolve to repurpose and redevelop their projects. Capital investment of course is needed. In some limited situations, shopping malls have been razed or “de-malled.” In others, significant renovations and redevelopment have taken place. There are multiple examples of landlords and owners changing the mix of shops and restaurants and activity centers to include theaters, gyms, walk-in medical centers, entertainment spaces, museums, aquariums, bowling alleys, arcades, and other experimental and service-oriented tenants in what has traditionally been retail sales space. Other changes include nonretail uses, such as charter schools, community colleges, call centers, libraries, multifamily housing, medical space, and a mix of uses to increase traffic and neighborhood involvement. Some proposals require zoning and other entitlement changes. It is plain to see that creativity, flexibility, and capital are needed to repurpose the changing landscape in retail space.

As for healthcare and senior living space, the aging population will continue to drive this sector for years to come. Trends toward more outpatient care have grown in order to provide lower costs and have impacted the traditional healthcare space. Medical office space has continued to increase, and hospitals have seen growth in metropolitan areas, although declining revenues have impacted community and rural hospitals. Driving the pressure were problems such as payment delays, bad mergers, overexpansion, reimbursement changes, rapid changes in the healthcare environment, and tort litigation, among others. Some of the senior living facilities also experienced challenges with deferred maintenance, capex constraints, slow revenue increases, and competition in increased outpatient care. In addition, the industry is complex due to nonprofit ownership, state regulatory structures, single tenant usage, and public financing. Solutions exist, including consolidation of uses and administrative costs, expansion into independent living, and repurposing of facilities to include other, additional medical usages, and where appropriate closing facilities or buildings and repurposing the property for nonmedical uses. Struggles continue, but like the other real estate areas, creativity, capital, and community involvement can give this sector a much-needed shot in the arm.

As for golf courses and recreational properties, the challenges to the industry appear to be caused by factors such as overbuilt facilities, extensive costs for maintenance of facilities, declining demographics, and flat markets, among others. However, membership alternatives and a variety of users seem to be the keys to driving improvements in golf and recreational properties. Expansion of categories of membership, expansion of family facilities, reconfiguration of the course, or even consolidation of other clubs and courses into a new program all seem to be in the mix to repurpose this sector.

In sum, innovation, creative thinking, and capital investment are necessary to surviving and repurposing the changing landscape in all of these sectors of commercial real estate. Owners must challenge their traditional thinking on uses and users and try different concepts. In today’s market, there are a growing number of creative ideas, innovation, and applications of capital that appear to be part of the solutions that must be made to make the properties and industries profitable and productive again.

ABOUT THE AUTHOR

Cathy Reece

Cathy L. Reece chairs  Fennemore Craig, P.C.’s Financial Restructuring, Bankruptcy and Creditors’ Rights Group in Phoenix, Arizona. She has extensive experience in real estate and commercial finance…

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