Cannibalism isn’t something usually associated with suit-and-tie executives. But for developers running billion-dollar retail portfolios, sometimes eating up their own business is necessary.
“We own several regional malls in Austin [Tex.], and have more in the plans,” said Stephen Sterrett, chief executive officer of Simon Property Group. “If we don’t build them, someone else will. You have to play offense and defense at the same time.”
The development strategy is indeed offensive, and one might wonder where the shoppers will come from, if not from Simon’s existing customer base. The $39 billion real estate investment trust already owns the lion’s share of retail property in Austin, including the regional malls Arboretum at Great Hills, Barton Creek Square and Lakeline Mall, and the community center Gateway Shopping Centers. The existing portfolio totals 5.4 million square feet and has four more projects under development in metropolitan Austin. But the company is confident that if it builds these properties, with varying price points and merchandise, shoppers will come.
“Austin has a great blend of the state capital, the state university, a significant base of technology companies that are growing, great geography with wonderful residential opportunities and a very good road system,” said Richard Sokolov, president and chief operating officer of Simon. “You put that all together and you have a wonderful market opportunity.”
Simon isn’t the only REIT aggressively capitalizing on its land banks in growing cities. The Macerich Co. has a similar tactic in Phoenix, and so does General Growth Properties Inc. in the Las Vegas market. For these companies, like Simon, playing offense and defense at the same time involves building every type of retail space imaginable.
Macerich’s 500-acre planned San Tan Village in suburban Phoenix, for example, will eventually encompass 3 million square feet of retail space. The first phase will include a 29-acre full-service power center with a Wal-Mart and Sam’s Club, while the second phase will include more than 300,000 square feet of big-box retailer. A 1.3-million-square-foot moderate regional shopping center including a Dillard’s and Robinsons-May will top off the Village, which is slated to open in the fall of 2007. It is currently under construction.
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None of these eat-or-be-eaten developers have yet to exhaust their sales potential in their attempts to grow market share. In its fashion malls in Phoenix, Macerich earns roughly $600 a square foot in annual sales, despite its wealth of other retail in the area. But still, market domination has its burdens.
“There’s always a cap on how much retail a market can handle, whether it’s developed by one owner or by multiple owners,” said John Bucksbaum, ceo of General Growth. Bucksbaum is wisely listening to his own cautionary tale. His company owns 3.7 million square feet in the highly competitive Las Vegas retail market. It will deliver The Palazzo, a 500,000-square-foot expansion of the Canal Shoppes, within the year.
And that’s hardly the end for General Growth in Vegas. As a result of its $12 billion acquisition in 2004 of the Rouse Co., which specialized in mixed-use communities and retail, the REIT controls all of the undeveloped land in Summerlin, a master-planned suburb northwest of Las Vegas and one of the fastest-growing areas, along with Phoenix and Austin, in the country. The bank has more than 7,000 acres remaining.
At what point the real estate is no longer productive, of course, is the issue at hand. The question of whether or not it’s worth investing hundreds of millions of dollars in a property that might take sales away from another hundred-million-dollar property down the block is tough to answer. How does a company compete against itself?
“We believe there is a lot of value in having a number of different price points and different sectors in each market,” said Sokolov. “But really, it starts with a great market. If you don’t have a great market, then no other strategy you have will be successful.”