Success in commercial real estate, especially with shopping centers, often depends on selecting the right strategy to maximize a property’s value. For me and the RockStep Capital team, these strategies boil down to two main approaches: the cash flow play and redevelopment. While both aim to enhance value, their methods and outcomes are fundamentally different. Choosing between them requires a clear understanding of the property’s condition, market demand, and financial potential.
Here’s how I approach these strategies—and why the right choice can make all the difference.
A cash flow play focuses on optimizing the property’s existing structure to generate stable or growing net operating income (NOI). The property in its existing architecture, in its existing form, produces a net operating income—a stable or growing net operating income—in such a way that you can service the debt and, with the excess cash, pay the preferred return on the property. This strategy relies on the property as-is, requiring operational improvements rather than significant changes.
For example, Manhattan Town Center (MTC) is a RockStep Capital property in Downtown Manhattan, Kansas. It is a robust example of a classic cash flow play. The architecture is just fine. It’s producing steady and growing NOI, and it’s very hard to modify it. Instead, we focused on maintaining tenant stability, streamlining management, and cutting unnecessary costs.
Redevelopment is a more transformative approach. For this strategy, the RockStep team doesn’t focus on the revenue of the existing property in its current form. We modify or demolish the use, and we’re going to do something new. The idea is to create value through change, whether that means reconfiguring tenant spaces, demolishing outdated sections, or even repurposing the property entirely. Unlike a cash flow play, redevelopment can take years to execute.
Take our shopping center in Hot Springs, Colorado, as an example. We’ve got two existing tenants—Dillard’s and JCPenney—and we demolished the remainder of the enclosed mall to build approximately 75,000 to 110,000 square feet of new shopping center space. This approach allowed us to attract stronger tenants and meet the needs of the local market, transforming an underperforming property into a thriving retail hub.
While both strategies aim to enhance value, they are significantly different in execution, risk, and long-term impact. Here’s a breakdown of how they compare:
The emphasis here is on cutting costs and optimizing existing operations. We look at all the expenses line item by line item—telephone, utilities, landscaping—and reduce costs wherever possible.
For example, switching to energy-efficient LED lighting or consolidating management roles can significantly lower expenses. At Manhattan Town Center, we reduced a four-person management team to two. We reduced security and looked at every line item. We asked ourselves, “Do we need three telephone lines? Do we need any telephone lines?” These operational efficiencies ensure the property remains profitable without requiring major changes.
In redevelopment, the focus is on structural transformation. It’s about modifying the property by reusing existing architecture, adding new facades, or demolishing outdated sections. The goal is to attract new tenants or uses that generate higher income.
This approach works best when occupancy (the amount of tenants present) is high—typically above 80-85%. If you believe you can maintain or increase occupancy and rents without significant capital expenditures, then it’s a cash flow play. Properties like Manhattan Town Center are perfect for this strategy because their existing setups are already effective.
Redevelopment becomes necessary when occupancy falls, and existing tenants aren’t enough to sustain NOI. If the property has low or declining occupancy and you cannot stem it, it becomes a redevelopment play. Understanding local demand and tenant interest is critical.
Are there retail tenants that want to be there? Does the market have energy? Does it have essential drivers so that if a redevelopment play comes into effect, there’s a probability that there will be multiple redevelopment drivers?
With stable NOI, your debt service coverage ratios are above 1.25, which banks love. This means the property generates enough income to comfortably cover loan payments, making it a low-risk investment.
At RockStep Capital, we typically buy properties at high cap rates and leverage them conservatively. When you buy at high cap rates and keep leverage low, your debt service coverage can exceed 2.0. Frankly, that’s as good as it gets for a banker.
Financing redevelopment is more complex. With redevelopment, you are building for future cash flow. You don’t have it today, so lenders see that as riskier. Banks often require personal guarantees and release funds only in phases, contingent on signed leases or construction progress. You need to structure agreements with anchor tenants before you demolish anything.
Tenant mix is critical in cash flow plays. It’s about finding stable tenants and filling vacancies. Grouping complementary tenants—like family-oriented retailers or off-price brands—boosts customer dwell time and spending. This strategy emphasizes stability over radical change.
Redevelopment thrives on identifying new tenant trends. Off-price retailers like TJ Maxx, Ross, and Burlington are expanding into secondary markets, but they need second-generation spaces to make it work. This trend ensures redevelopment projects can meet the demands of a growing retail sector.
Both strategies have challenges. Cash flow plays may struggle to achieve growth if the market stagnates, while redevelopment requires substantial capital and carries more risk.
Construction costs are higher in redevelopment, and interest rates add pressure. Before you demolish anything, you need to structure agreements with anchor tenants. Without strong demand drivers, redevelopment projects can falter. The combination of high costs and brutal complexity means every step must be carefully planned.
The long-term impacts of cash flow plays and redevelopment strategies extend beyond immediate financial returns. Each approach uniquely shapes the property’s valuation, tenant relationships, and role in the community.
Redevelopment strategies often deliver higher valuations due to the modernized nature of the property and the lease structures that come with it. Additionally, redevelopment strategies are more modern and result in longer-term leases, which generally means higher valuations.
These leases, typically five to ten years or more, provide stability and predictability for both the landlord and tenants. In contrast, cash flow plays rely on shorter-term leases. In a cash flow play, you’re rolling your leases every two, three, or five years, which can lead to fluctuations in NOI and limit the property’s valuation potential over time.
One of the strengths of redevelopment is its ability to adapt properties to meet evolving market demands. You should always be judging: Is there something better out there to give you a higher return? Redevelopment projects allow us to align properties with current trends, like the growing demand for off-price retailers or experiential spaces. This adaptability ensures that the property remains competitive and attractive to tenants in the long run.
Redevelopment projects often have a transformative effect on their communities. For instance, at the RockStep Capital property in Janesville, Wisconsin, we repurposed mall space to meet the city’s need for a hockey arena. We presented our property as a solution for that need to local leadership and were given approval and incentives to proceed with the project. Projects of this kind don’t just enhance property value; they also foster goodwill, drive local economic growth, and strengthen ties with the community.
While cash flow plays emphasize steady income, redevelopment offers the potential for more sustainable, long-term revenue streams. When we build a redevelopment strategy, our initial leases are often five to ten years, plus. This stability contrasts with the shorter-term leases of cash flow plays, where tenant turnover can make income more volatile.
Both strategies provide lasting benefits, but the choice depends on the property’s potential, market dynamics, and community needs.
Deciding between a cash flow play and redevelopment is never straightforward. Firstly, our team has to look at the current occupancy. If the property has occupancy above 80 or 85% and you believe you can maintain or increase occupancy and rents without significant capital expenditures, that’s generally a cash flow play. But when occupancy declines, and stability can’t be maintained, it becomes a redevelopment play.
Ultimately, the best strategy aligns with a property’s potential and market opportunities. A stable NOI is critical, but there is always the question of whether something better could provide a higher return. By tailoring strategies to each property, we continue to unlock value and deliver results for investors while ensuring properties remain valuable community assets.