How One Small Shopping Center Operator Is Thinking About the Future of Retail

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The Millionacres team recently chatted with Todd Laurie, executive vice president of Fund Services and partner at Baceline Investments, on The Motley Fool’s live show. The reason we wanted Todd on is to talk about the future of retail and shopping centers. We’ve seen a dramatic shift in retail during the COVID-19 pandemic, which is affecting real estate investing as a whole, whether you’re investing in REITs or commercial real estate.

Todd leads the Capital Development and Investor Relations Department and sits on the company’s board of directors, making him responsible for setting the strategic direction of the company, overseeing day-to-day operations of investor relations and capital development. Baceline is headquartered in Denver and operates nearly 80 neighborhood community shopping centers at around 25 markets. Baceline is a private company that invests in small strip centers that are in the middle of neighborhoods and deal in everyday goods and services, including restaurants, salons, and other services.

When the pandemic hit and closures began, Baceline saw an approximately 30%-40% decline in businesses for its tenants. But Baceline also found that many of its tenants bounced back after reopenings began and the company is up to over 80% rent collections. The company had 841 tenants at the start of the pandemic and now has 843. But some businesses have failed. Much of these accelerated trends that were already in motion such as the rise of e-commerce but small shopping centers remain an important part of the community.

“There is no proxy for that small shopping center, that small space for making a sandwich and getting that to somebody, for somebody coming in and cutting their hair. Until we have a computer mouse that will cut our hair or 3D printers that spin out hamburgers, you still need these neighborhood shopping centers,” said Laurie.

The Impact on Small Businesses

One thing we’ve been following is the impact of COVD-19 on small businesses.

Small businesses in locations with a lot of consumers nearby have an advantage. Consider restaurants: Food that comes from a long distance isn’t going to be good. “If you’re more than three miles away from a rooftop, then by the time the food gets to you, it’s not great. So you really want to be within three miles,” said Laurie.

Franchise businesses receive a lot of support from their parent company with things such as apps, but small businesses might not necessarily have those tools. However, one thing that Laurie did note was that when it came to dealing with the crisis, it was the smaller businesses that were more flexible on rent. Some of the nationals immediately sent letters saying they weren’t going to pay, as we saw with major mall tenants earlier this year.

The types of businesses best suited for small shopping centers are shifting. The pandemic has been very tough on the restaurant industry as a whole, but smaller restaurants that are mostly carryout are bouncing back. One area that may be a big potential growth driver for malls as well as for these smaller shopping centers is medical use. Laurie reported that they’re seeing a large uptick in medical use inquiries. This includes dentists, chiropractors, medical testing, dialysis, and more. Baceline currently has 13 percent of its portfolio in medical services, but that is increasing partly because as people work from home, they’re more likely to seek services in their own neighborhood. Again, the rooftop theory is at play: If you have a lot of people within three miles of your business, you may end up in better shape.

“Instead of paying for extensive medical office space, you can come into a shopping center, be more conveniently located to your tenants. You don’t have to go through a building, through an elevator to get to your dentist,” said Laurie. “You just drive up in front, park, and walk in their front door, and you can get a really nice space and a nice buildup at a lesser rate per square foot than what you would get in an office space.”

Planning for tenant success

The pandemic has changed how retail landlords in particular think about new tenants. A successful center is about far more than just who can pay rent in the short term. Like other operators, both public and private, Baceline is taking a look at tenant business plans and if that tenant fits in with a need in the area and also has solid financials for the future. This can require some flexibility.

“We are going to take a look at your financial wherewithal,” added Laurie. “We’re going to get personal guarantees in place and we’re going to put a lease length that makes sense. If it doesn’t make sense to have a ten-year lease in place with you, we’re not going to tie you to that. Maybe it makes sense to do three years and see how things go with your business if you’ve got good backing and this is really something you want to do.”

Baceline is also getting opportunistic about buying properties. It’s closing on three properties in the next two weeks and has a full pipeline. Many smaller property owners have been stressed by a few months of interrupted revenue. Part of this is a larger demographic trend as smaller operators start to look toward retirement, but Baceline sees an opportunity to buy properties that add value and increase the strength of the tenant base.

“We’re not sure where the economy is going to go, but I am cautiously optimistic,” said Laurie. “Where there is distress, there is also an opportunity for those people that are very prudent, and for people that are very shrewd, they can find some neat things to do with their money that’s out there. I’m looking forward to that, but I think it will be a slow start to the new year.”