LAS VEGAS — Developers are breaking ground — but it’s the ground on which they’ve already built.
It’s a matter of necessity with a weak U.S. economy, rising costs, little room left in the country to start up completely new projects, flattening rents and the shutting of retail doors, which leaves landlords with vacancies to fill.
The “intensification” or “densification” or “organic growth” of existing shopping centers, as executives call it, is the top priority in a nation that’s overstored, overmalled and in an economic malaise.
And that means finding, then rolling out, new retail formats for selling fashion, and redeveloping tired and underutilized space with food and restaurant offerings that go beyond the traditional food court menu. It also means adding entertainment features, such as theaters and parks, as well as hotels and office and residential space.
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“Intensifying the use of property is certainly the major innovation,” said John Bucksbaum, chairman and chief executive officer of General Growth Properties, the nation’s second-biggest developer, during an interview at last month’s International Council of Shopping Centers annual convention here.
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At the Cottonwood Mall, in Holladay, Utah, near Salt Lake City, for example, “we’ve put a lot of emphasis on offices and residential growth,” Bucksbaum said. “That’s a mall being de-malled.” The conventional enclosed mall will reopen in 2010 with a mixed-use format for fashion shops, cafes, restaurants, a specialty grocery, a cinema, condos, town houses, cottages, single-family homes, offices, streets for strolling, riverside trails and a public plaza.
GGP also has an aggressive program to bring farmers’ markets to its properties. “Maybe it’s time for food to come back to shopping centers,” said Alexander Berman, senior vice president at GGP, during one of the convention’s panel discussions.
“You need to give people more choices,” said Scott Schroeder, vice president of marketing and communications for Developers Diversified Realty. “Nobody wants to make eight stops to get what they need.” He noted that the performance of certain specialty retailers and smaller “junior” anchors was an ongoing concern for the industry. “The more we can create a hub that combines value and fashion, the more appeal we have and the more customers we will retain.”
“Isn’t it time to reevaluate one-stop shopping?” asked Ian Thomas of the Vancouver-based Thomas Consultants, who moderated a panel on international growth.
The one-stop notion is an old format with renewed relevance as mall traffic wanes and gas prices spiral.
In Phoenix, Macerich is studying the addition of two residential towers at the Biltmore Fashion Park, a highly productive open-air center, and in Scottsdale, Ariz., it’s looking at putting residential or office space on the site of a former Days Inn in Scottsdale Fashion Square, another upscale center. Macerich is moving forward with a number of projects in the West, including the Oaks Mall in Thousand Oaks, Calif., which will open in phases beginning this fall. The firm also is taking the roof off Santa Monica Place and overhauling the 30-year-old center to integrate it more with the coastal community.
“We are taking a fresh look at projects and asking, is there a demand for other mixed uses?” said John Genovese, executive vice president for development at Macerich. “We take a very patient approach. We want to do the right thing for [our] assets.”
“Providing a sense of the outdoors is very important,” said Robert Taubman, chairman, president and ceo of Taubman Centers, in describing an industry trend. In one of the few new projects going up, Taubman is developing the mixed-use City Creek Center in downtown Salt Lake City with a retractable glass roof over much of its 700,000 square feet of retail. The project is massive, with 1.4 million square feet of offices planned, along with a Marriott Hotel and a 50,000-square-foot Harmons grocery store, among other features. The project is being done in conjunction with the Church of Jesus Christ of Ladder Day Saints, at a cost sources put at around $2 billion, including $60 million for the roof.
Los Angeles developer Rick Caruso said, “Our main goal is to make the shopping experience feel different and feel special,” noting that, at his Americana at Brand center, there are uniformed elevator operators and fountains with water displays choreographed to music. “Even the rest rooms are opulent. When the novelty wears off, we’ll introduce new stores, we’ll do something spectacular.”
Caruso’s planned Shops at Santa Anita, slated for 2010, will take the outdoor-village concept one step further, with opulent residences and horse-drawn carriages at the center.
The other big trend is going global. That expansion is happening faster than ever, with Russia, India, the Far East and Eastern Europe prime targets. “The shift to the global focus has rejuvenated the shopping center industry,” stated Rene Tremblay, president and ceo of Ivanhoe Cambridge and the outgoing chairman of ICSC, in a keynote speech. “Shopping center development has continued to thrive around the world, though less in North America. In North America, not many new spaces are being built. I never would have imagined the day when we would be doing business in 12 countries.”
But there is a big dilemma in going overseas. Can the developers lure the retailers abroad? Macy’s and Lord & Taylor revealed that they’re interested in exploring overseas opportunities, and Saks Fifth Avenue already has two stores operating in the Middle East, announced a third there recently, has one in Mexico and is planning another in Shanghai.
However, “any department store has difficulties translating across boundaries,” said J.C. Penney chairman and ceo Myron Ullman 3rd, who was on stage at the convention for a Q&A. “It’s easy to announce international expansion. It’s much more difficult to make it work for shareholders.”
RETAIL CONCEPTS TO WATCH
According to Taubman executives, Victoria’s Secret, Apple and Abercrombie & Fitch are the three most desired U.S. specialty chains in overseas markets. Internationally, Inditex and its Zara chain and Hennes & Mauritz are the best poised for further expansion.
At home, developers said they’re closely watching the expansion of Japanese fashion retailer Uniqlo, which opened its first U.S. store in November 2006. Safeway’s new concept, called The Market, a 20,000-square-foot box for produce and prepared food and a service deli, is also on the radar, as is Gilly Hicks, the intimate apparel chain launched by Abercrombie & Fitch last winter.
Other retail nameplates of keen interest are Metro Park; Forever 21, which is looking to open larger footprint stores (for more details, see page 16); J. Crew and its two-year-old Madewell division, as well as the even newer VSX, a shop selling activewear and yogawear that was launched by Victoria’s Secret in a single site in Easton, Ohio, last year.
Another newcomer from the West Coast, called Love Culture, is gathering steam. The chain has seven stores operating, five under construction, 15 set for next year and another 20 seen for 2010. It’s privately owned and sells women’s moderate-to-better-priced fashion.
Two chains that have been around for awhile, but continue to impress developers are Puma and Apple.
At ICSC’s “hot retail” session, in the food category, Five Guys Burgers and Fries, Pinkberry, Pollo Campero and Stir Crazy took the honors, and women’s fashion retailer Apricot Lane, board sports chain Billabong, Tesco’s grocery concept Fresh & Easy, L.L. Bean and toy car retailer Ridemakerz were also honored as the best.
“We’ve seen a lot of innovation in new retail, even with the apparel retailers, which is not easy to do,” said ICSC president and ceo Michael Kercheval. “It’s great to see, but more importantly, it’s imperative in order to keep shopping centers new and interesting.”
At other sessions, developers at the conference cited Costco, Wal-Mart and Target as highly desirable tenants in a down economy, largely because of their pricing and their grocery offerings, which have fared well, and the new view that they can be neighbors to upscale stores in the same centers. Westfield Group, for example, will house Target as well as Neiman Marcus as anchors this year in its Topanga center near Los Angeles’ San Fernando Valley. DDR has a Costco anchor in its Christown Spectrum Mall in Phoenix, and in the fall, Macerich will open its first in a former Macy’s at Lakewood Center, one of the largest enclosed malls in the Los Angeles area. Other mall-based Costcos are in Simon Property Group’s Potomac Mills in Prince William, Va.; General Growth Properties’ Cumberland Mall in Atlanta, and the Cafaro Co.’s Spotsylvania Towne Centre in Fredericksburg, Va.
“The lines are all blurred. The days of saying we won’t or can’t do a mix don’t fly now,” said Anthony Buono, CB Richard Ellis’ executive managing director of retail services. “Your Target customer is the same as your Nordstrom customer is the same as your Saks customer.”
ON THE ECONOMY, RETAIL PERFORMANCE AND CONSUMERS
While concerned about the state of the economy, developers are positive regarding the long term.
“The whole point is you’ve got to look at things down the road,” said Taubman of Taubman Centers, which saw a 3 percent comparable-store gain last quarter. “The country is not technically in a recession. I believe we are in a period of slower growth. It’s important the Fed do the things it’s done to loosen monetary policy. Things will improve. The economy will continue to have slow growth, but should not worsen.
“You can’t ignore the huge engines that are out there,” he added, citing emerging economies including China and India, and sovereign funds with huge pools of capital from oil interests that must be invested.
“A quarterly event is really irrelevant. Our thinking is really 10 to 15 years out,” said Arthur Coppola, president and ceo of Macerich. However, he added, Macerich “will not build before a market is ready for the project. “In the old days, it was location, location, location. Now it’s location, location, location and timing, timing, timing. We will not build before the market is right.”
Coppola believes retailers need to “constantly look for ways to keep their brands fresh and to look for brand extensions that drive repeat visits and grow their customer base. But at the end of the day, Americans love to shop, and we’re in a position to capitalize on these new brand extensions, delivering prime real estate that can be a platform for retailers.”
According to Ullman of Penney’s: “Consumers are either buying the lowest possible price — door-busters — or something innovative or new.”
“There is no question the Gen-X women’s business is not good,” said William Taubman, chief operating officer of Taubman Centers. “There is a changing fashion profile toward more contemporary silhouettes and some retail concepts have just not adjusted. Women don’t want to feel old or tired.”
On the development front, “money is tight. Fewer projects are being announced. People are making sure they’re leasing what they’ve got,” said Taubman.
GGP’s Bucksbaum said comparable-store sales at his centers were down 1 to 2 percent during the first quarter of this year, and occupancy rates were down 20 basis points. He foresees sales relatively flat for the year overall and occupancy down 50 to 100 basis points by yearend relative to the fourth quarter.
“What’s happening is that developers are moving at 80 miles an hour, retailers are doing 60 miles an hour and lenders are going 25 or 30 miles an hour,” said David Solomon, president and ceo of NAI Global’s ReStore unit. “For most, it doesn’t look pretty right now and it will get worse before it gets better.”
The average vacancy rate could reach 10 percent by the end of the year, and there likely will be more retail bankruptcies to come, Solomon predicted, before the market settles down.
Some projects have stalled or been called off: Two of Related Cos.’ projects have experienced financing holdups. Downtown Los Angeles’ Grand Avenue, a $3 billion project to include a shopping center, a supermarket, other stores, high-rise condos and a hotel, had been scheduled to break ground in fall 2007, but the date has been moved to February, with completion in 2012. The second phase of the company’s CityNorth project with Thomas J. Klutznick Co. in Arizona has been delayed because potential lenders want to wait until the economy improves. The first phase of the $1.2 billion project is expected to open in October.
THE MOOD
“Developers have become very introspective and defensive,” said Gary Mozer, managing director and principal at George Smith Partners, a financial intermediary that raises debt equity and mezzanine financing for commercial real estate. “They’re trying to find how to deal with the marketplace in the most productive ways. There are more face-to-face meetings between [developer principals] and tenants, bankers, equity sources, city leaders and contractors. Nowadays, senior guys are cutting deals with senior guys. There is a lot more stress on the business and people are reacting to that.”
How else are deals different these days? “There is a lot more equity required up front in transactions. The projects are more about urban infill rather than growth markets, and developers are getting squeezed because of increased construction costs and stagnant retail growth,” Mozer said. Asphalt, which is oil-based; steel, and PVC are getting more expensive.
However, overall, he believes, developers are “doing OK right now. They’re not going off the cliff.”
“Over the last eight months, the deal cycle has lengthened from 60 days to 90 to 120 days,” observed John Bemis, executive vice president and director of leasing and development for Jones Lang LaSalle. “Retailers and developers are negotiating leases harder. Lots of retailers are looking for options,” such as five-year leases with options to renew.
“Nobody is really panicking. I thought the mood would have been worse,” said Vincent Ottomanelli, president of Ferragamo USA, who was spotted walking the leasing floor of the Las Vegas Convention Center. “This is not a garage sale, but traffic is lighter” than a year ago.
The event was busy, but not as robust as in recent years, executives said. However, many sought to present a positive front by unveiling plans for new projects and beefing up existing facilities with an eye on the long term. They see retailers cutting their openings for next year by half of what they might have originally considered and getting back on track by 2010 with more aggressive expansions.
At the malls themselves, “my perception is traffic is off significantly, but we still have a full schedule with people looking to do business,” said R. Webber Hudson, executive vice president of Related Urban. “If you buy into the notion that there’s been economic turmoil for at least six months, and that typically you see an 18-month downturn, then it’s easy to see 2010 as a safe bet for a strong recovery.”
According to an ICSC media official, registration at just less than 50,000 was around the same as last year’s, though the final tally will be released later this month.
GOING GREEN
GGP’s Bucksbaum said his company has many initiatives to help the environment, some noticeable to the general public, others not so. The company has a program to install waterless urinals, for example, which will be obvious. “Ultimately, we will have them at every location,” Bucksbaum said. “We have saved 6 million gallons of water this year.”
He also said there has been a dramatic reduction in kilowatt usage through the GGP portfolio by using energy-efficient heating and cooling management systems. The company also is testing or introducing alternative sources of energy in certain markets, and as roofs come up for replacement, GGP is making them white to reduce the heat in the malls and cooling requirements.
“Rather than lowering quality of design or budgets, something we have noticed is an inclination of retail developers to explore more green design and new materials,” said Kimberly Sheppard, design partner at Gabellini Sheppard Associates. “This is especially the case with some of our larger luxury retail projects like Westfield London, and in Las Vegas, City Center and Echelon.”
Some shopping center operators said they were exploring Leadership in Energy and Environmental Design certification for projects in development to achieve long-term cost savings and attract an eco-minded consumer. While retailers picked up a lot of steam on the green front, it generally seems to be more of a catch-up for developers.
“The retailers are really getting into the green movement, and are trying to push that agenda more and more,” said Justin Doak of the U.S. Green Building Council. “For big developers, it’s easier to take an eco-friendly approach before things are built. Afterward, you typically see resistance, at least until we reach a critical mass of retailers that push for it.”