Transfusion cure

In the next few years, is there going to be an earthquake for ageing shopping centres? Many premises built in the 1990s need to undergo re-commercialization – perhaps their last hope against competition from modern shopping malls

The Wrocław Marino shopping centre completed in 1993 and rebuilt 5 years later has seen its best years. At least such is the impression given by this threadbare building, void of fashionable retail outlets and without the modern interiors designed for customer requirements. This is compounded by the rising competition in the city, where Galeria Dominikańska (30,000 sqm), managed by German developer ECE Projektmanagement, now squares up against the recently opened Pasaż Grunwaldzki owned by Echo Investment of Kielce (around 50,000 sqm of shopping and entertainment space), as well as Arkady Wrocławskie (around 32,000 sqm) owned by Leszek Czarnecki LC Corp. In addition, Galeria Legnicka (around 70,000 sqm) will be opening its doors for customers this autumn.

Living a second life

But the Marino residential estate centre has been given a second chance. Three companies: RE Investment, Gant and CB Richard Ellis claim the centre will glitter on the retail map of Wrocław within a year. And this will be the outcome of a 100-pct re-commercialization of the property. The term ‘re-commercialization’ means more than just changing one tenant for another – with upgrading work also being part of the plans.

Michał Masztakowski, senior property negotiator at CB Richard Ellis, which is responsible for preparing and executing the entire process, asserts that: “This will be the first fundamental recommercialization in Poland. We want to change literally everything. The companies presently operating in the centre have been given notices of tenancy contract termination – and that’s just for starters, as the construction work is to begin in August.”

RE Investment has jointly set up the Rafael Investment company itogether with stock exchange-listed Gant, to carry out this investment. The shopping centre situated on ul. Żmigrodzka and ul. Paprotna was bought from Marino for PLN 81.7 mln. A reserve sum of PLN 45 mln is still held to cover the repairs and adapt the building to the standards of a modern shopping centre. As well as new outlets, the elevation will also be changed, the car park renovation and escalators installed replacing traditional staircases. And the list of changes is longer than this, so might it not have been better to develop a new centre?

Habit takes pride of place

Maciej Mazur, board president of Lambert Smith Hampton Polska agency, which last year entirely transformed the Rzeszów-based Graffica (around 15,000 sqm of rentable space) lists the pros and cons of re-commercialization: “To lease new premises is simpler due to the absence of any restrictions. A centre’s communications system and tenant mix can be optimally laid out. But a new centres arouses question marks as to its popularity among customers, the quality of its architecture and management. Re-commercialization for its part allows tenants be talked to in a centre they already know, which enjoys a reputation, popularity and customers who are already used to it, while the owner can provide information on the number of visitors passing through its doors. In addition, tenants frequently use their own methods to check the competition’s turnover in the existing premises, due to which they can estimate the potential income generated by their outlet.”

The above-mentioned Graffica centre completed 5 years ago by a local businessman proved incapable of facing up to future serious competition, e.g. Millenium Hall (around 62,000 sqm of shopping and entertainment space) by Conres, which is to be opened imminently. LSH listened to suggestions made by tenants interested in opening their own showrooms in Rzeszów and convinced the owner to change Graffica into a modern-style centre able to compete for the custom of local citizens. The final results will be visible by the year’s end, when Millenium Halls opens for business.

More than 100 pct

Back now to Wrocław:

Michał Masztakowski asserts confidently that: “The location has several strong points – the first is the thousands of Wrocław citizens who visit Marino every day; the second is the absence of other competitive large-surface shopping centres in that sector of the city. This was the reasoning behind the decision to maintain the shopping character of the location. But, admittedly, the greatest challenge we face is competing with history – that is, changing the centre’s image, which had not been so magical previously. That, however, can be achieved with the well-known tenants who will be operating in the new Marino, as well as the investment in upgrading the technical and visual side of this centre.” He goes on to stress that the outcome will be a substantial improvement in both the value and attraction of this mall.

Maciej Mazur claims that: “Improving a centre’s value depends on the scope of the re-commercialization. In the case of premises in smaller cities, for example, where it is very difficult to recruit good tenants and which were often filled by local tenants, re-commercialization can lead to an increase of several dozen percent. The value of an investment can sometimes increase its value by as much as three figures.”

In many cases, the most important thing is not to increase, but rather to defend the stability of business in future years. In a situation where there is competition from new centres, it is not re-commercialization that is done, so much as the maximization of rents in order to defend positions already occupied.

The head of Lambert Smith Hampton Polska adds that: “The absence of any ‘refreshing’ activity on the part of the centre would result in customers simply moving to the competition. This can only lead to a slump in turnover among tenants, which can only result in a demand for a cut in rents, in the best case, and in the worst, the disappearance of tenants and difficulties filling unoccupied space”.

Fresh blood

To a lesser extent re-commercialization takes place in every shopping centre. Paweł Oskędra, leasing director for Poland of ECE Projektmanagement, reluctantly admits that this is the case. He explains that the process can be undertaken really efficiently: “Re-commercialization happens in our centres to a lesser extent than for the competition, since we always try to create an optimal tenant mix when developing a centre. But ‘fresh blood transfusions’ are also completely natural. Not every tenant copes with the competition in the same premises (not to mention rising customer requirements) and it sometimes happens that a tenant defaults on a contract. This becomes evident after some two years of the centre’s operations, by monitoring the market, analysing and collecting offers from chains interested opening in our mall. We can deal with this process very efficiently.”

He remarks that: “Re-commercialization can reach several percent of all tenants at the most in centres managed by my company (Galeria Dominikańska, Galeria Łódzka). This figure will increase somewhat in the immediate future, as it is always related to termination of tenancy contracts which have been signed for 10 years in ECE as the standard, but individual cases are known of 5-year contracts. This is why changes occur not only in our centres but also in others, since many malls were completed 5 to 7 years ago in Poland.”

He is reluctant to mention the significant changes which occurred in Łódź due to competition from Manufaktura (more than 100,000 sqm entertainment and shopping space) opened by Apsys in 2006. Admittedly, Galeria Łódzka with some 160 retail outlets could boast only one new brand, but the company is presently extending its mall to introduce fresh blood to the centre – Peek&Cloppenburg and H&M. The centre’s area will increase by some 5,000 sqm, while some tenants will surely say farewell to customers or change their position in the mall. The Alfa Centrum shopping centre in Gdańsk (15,000 sqm), managed by ECE, is also facing difficult times, since this year it will have to go head-to-head with Galeria Bałtycka (around 40,000 sqm), also developed by ECE.

Who’s next?

Re-commercialization is not only relevant for those old shopping centres built in the 1990s which blazed the trail for modern centres from experienced developers. Paweł Oskędra suggests that: “Many first and particularly second generation centres should decide to undertake such investment,” although he refuses to quote any examples. Some modern centres should also study the examples set by the Warsaw Klif centre by addressing its offer to more wealthy Varsovians to avoid losing customers following the opening of Arkadia. Around 20 to 25 pct of tenants were swapped during the last two years for those of a greater reputation, together with reatilers absent in the Cefic-managed centre.” Industrial specialists strongly believe they left the field victorious. Time will tell whether the Battle of Warsaw waged by Fort Wola for instance will end successfully.         

Ewa Andrzejewska