We’ve likely all read articles in recent years since the retail real estate industry has turned around about the bifurcation of the market between Class “A” centers and Class “B” and “C” centers. Most state that while the economy has improved, national retailers are still choosing to either pay the freight for Class “A” properties or wait until they get the opportunity for one. They go on about how many Class “C” centers are now functionally obsolescent and will continue to stagnate until they are either re-tenanted with uncommon tenants or redeveloped completely, likely to uses other than retail. What many don’t discuss is the resurgence of the Class “B” center in today’s new economy.
What do I mean when I talk about Class “B” centers? While this is typically a term reserved for classifying office properties and there is no official way of defining exactly what one is, the Building Owners and Managers Association (BOMA) defines a Class “B” office building as “Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A at the same price.” I would define a Class “B” center as typically older construction, potentially some functional obsolescence, and likely located in a retail corridor but not at “main & main”.
These centers, while not getting the attention of all the top national retailers, are still getting the benefit of an improved economy and lack of Class “A” space at reasonable rates. Many of these centers are seeing substantial increases in both occupancy and rental rates for the first time since before the recession. Many users such as franchised retail & restaurant concepts, regional chains, and mom & pop tenants are finding Class “B” centers to be a reasonable compromise. They are able to enter a retail market that is generally thriving and benefit from the traffic, visibility, and access in the market without paying the Class “A” rates for the hard corner or new construction development down the block.
The increased occupancy and revenue at these centers doesn’t always come for free, however. Many of these centers are requiring some form of capital from ownership whether it be for tenant improvements (many of these tenants are local and often undercapitalized) or to remodel the shopping center to attract new tenants. For the shopping center owner who is able to fund these projects however, there has been a tremendous deal flow and increase in occupancy.
The Mid-America Real Estate – Minnesota Project Leasing team has had the pleasure of working on a number of these Class “B” centers and helping owners increase occupancy and maximize revenue and value of their assets. Two projects that our team has worked on recently are the Crystal Gallery Mall in Crystal, Minnesota, and Lino Lakes Marketplace in Lino Lakes, Minnesota. Both projects are Class “B” centers, shadow anchored by Target, but they are very different in nature.
Our team has been able to participate in the remodel of Crystal Gallery Mall, removing a functionally obsolescent common area hallway in front of the storefronts, create a new pad building on the corner, and take the mall from 35% occupancy to above 90% occupancy in the course of two years. Meanwhile, in Lino Lakes, our team has been able to assist the new ownership in aggressively leasing up a series of out lot buildings to a Super Target and Kohl’s that have sat mostly vacant since they were constructed. The center was purchased with 50% occupancy and with new leases recently signed this year and leases being currently negotiated we are well on our way to bringing this center to full occupancy.
With the economy continuing to grow back to pre-recession numbers and good vacant retail space becoming scarcer, I suspect we will continue to see the spotlight shine and occupancy rise on these Class “B” centers.
Mark Robinson, CCIM | Retail Sales & Leasing Specialist
Mid-America Real Estate – Minnesota, LLC
5353 Wayzata Boulevard, Suite 650 | Minneapolis, MN 55416
Direct: 952.563.6664 | Fax: 952.563.6633 | Mobile: 612.220.0348
MRobinson@midamericagrp.com | www.midamericagrp.com