Developer Stephen Karp has built 60 percent of New England’s malls — about 25 million square feet of selling space. The chief executive officer of the New England Development Co. has seen booms and busts — but nothing tougher than the current economic crisis.
“This is the worst I can remember in 30 years,” Karp said during an interview at company headquarters in Newton, Mass. “There is no availability of capital. Banks usually are in a position to lend, but now capital is simply not accessible. And there’s no exit market. There are no buyers. Everybody is afraid to make a move. We are stuck until the market reestablishes itself.”
Karp, 68, put one major project on hold this summer — a proposed 1 million-square-foot mixed-use development on Pier Four in South Boston. However, he has more than a half-dozen deals in progress.
They range in size from Westwood Station, a 135-acre mixed-use development in Westwood, Mass., to boutique redevelopments in historic Newburyport and Nantucket. He owns more than 50 percent of the island’s retail space, three wharves and the largest hotels.
In 1972, in his late 20s, he built his first mall in Danvers, Mass., making him among the first developers nationally to use discount stores as high-traffic anchors for malls.
After several decades in business, Karp saw real estate values for regional malls skyrocket while opportunities to build them waned. And in 1999, he sold 14 properties to Simon Property Group for about $1.7 billion.
Others might have pocketed the cash and retired. Karp bought 3,000 acres in Plymouth, Mass., and began The Pinehills, a 3,000-home master-planned community for affluent empty nesters with a village-style commercial downtown. He is also building The Shops at Wisconsin Place, the retail component of a mixed-use development anchored by Bloomingdale's and Whole Foods in Chevy Chase, Md., and a specialty retail center in Chestnut Hill, Mass.
Despite everything he has built, Karp keeps only one architectural model in his conference room. It is of Children's Hospital Boston, of which he is chairman, and is made of yellow Legos.
WWD: Tell me about your background.
Stephen Karp: I grew up in the Boston area. I got into real estate because I graduated with a degree in political science and couldn't get a job. I went to work renovating old buildings in downtown Boston and making them into office buildings. After four or five years, I found a piece of land I liked on [Route] 128 with a bunch of cows on it and thought there was an opportunity to build an enclosed mall. I thought of doing it with discount anchors, which had never been done before. I convinced [discount pioneers] the Chase family of Ann & Hope in Cumberland, R.I., to come up and open a big store. It was 220,000 square feet and it was mostly soft goods. Eventually, I was able to make a deal with [Dayton Hudson's Lechmere] to be the second anchor of my mall. I had a 160,000-square-foot Lechmere store with hard goods and Ann & Hope with soft goods. We were able to build a mall with conventional stores between the two discount stores.
WWD: What mall was that? S.K.: It's called Liberty Tree mall, in Danvers, Mass., and that started me.
WWD: Any rough patches, comparable to today? S.K.: When the economy was bad in New England in the Eighties, I thought about opening an office in the Washington, D.C., market. So we went down there and developed some properties. When the Apple Blossom mall [in Winchester, Va.] opened, interest rates were 21 percent and you couldn’t get gasoline — it didn’t matter what the price was. Only 16 stores out of 118 opened. As bad as today seems — and it is bad — that also seemed pretty bleak at the time.
WWD: You seem to have a merchant’s instinct. What drives you to a prospective deal or development? S.K.: My instinct first is location — and understanding what the market around the location does or wants to do.
WWD: Was that what drew you to Nantucket? S.K.: I flew down for a weekend with my wife, who was interested in having a store there.…We looked around and the real estate agent said, “You know what you need to look at,” and it was the Wauwinet [hotel]. It was a fabulous piece of property, but it was a dump. My wife took one look at it and said, “You’re out of your mind.” But we bought it, ended up redoing the entire thing and it’s become one of the top-rated inns in the U.S.
WWD: Then what came next? Did you go on a buying spree? S.K.: No, we've spent about 25 years acquiring property on Nantucket. Nantucket has a tradition of having a major landowner. Walter Beinecke [Jr., who is credited with preserving and redeveloping Nantucket as an affluent resort after World War II] sold me my first retail site on the island. He owned most of the downtown. He built the boat basin and it was his idea for preserving Main Street and land through the land bank [conservation] system.
WWD: There has been some controversy in Nantucket about your plans for redeveloping some of the hotels and even concern about small stores being squeezed out by high rents. How do you proceed as the big guy in a small community? S.K.: People fear change. We have no intention of making wholesale change in Nantucket. We look at projects one at a time and we are thoughtful about the changes we make. We keep a tenant mix [in the retail]. The ones complaining are often the ones not doing the business. Stanley Marcus said the consumer votes every day and they vote for the winners.
WWD: Why did you eventually sell to Simon Property Group? S.K.: We sold in 1999 after briefly considering going public….I looked at the marketplace and I saw cap rates changing. [When the Hahn Co. was sold to Westfield and Rouse Co. in 1998] I looked at the deal and said if we could sell our company at that kind of [capitalization] rate, I think I’d be interested. I frequently said I was in a one-generation kind of business, and the generation for regional malls was going to be over and the time was now to get out….General Growth and Simon [Property Group] were the two most interested bidders.
WWD: You didn't sell the Cambridgeside Galleria in Cambridge, Mass., in that deal. Why not? S.R.: We had a partner that didn't want to sell.... I'm glad we hung onto it. It's a great property and it became a great urban success and kind of an experiment for us [for future development]. It's frequented by a very diversified market and it's also designed around being transport-related, which is so important now. It's very reliant on the MBTA [Massachusetts Bay Transportation Authority] and the [bus] shuttle we run. A lot of people can get there and have access to it without cars. We did a lot of things there that were revolutionary and different. You can't see the anchors when you are in the mall, so it feels intimate.... We put it on three levels and all the parking is actually built below the Charles River, which was expensive and a little bit revolutionary at the time.
WWD: After selling to Simon, where did you put capital next? S.K.: One of the first things we did was buy 3,000 acres in Plymouth. We spent a lot of time thinking of how to develop it.
WWD: It became The Pinehills, right? What’s the retail like? S.K.: It’s not driven by retail. It’s a major housing development built by the Green Co. — 3,000 homes as we’ve planned it, about 1,500 built now, I think. We have the Village Green, but it’s not just retail. It’s village services like the post office, a cafe, doctors’ offices and things. We’re just opening a gourmet market down there.
WWD: What changes have you made in Nantucket retail? S.K.: We ask everyone leaving our hotels, "What did you like about your stay? What do you wish was different?" We kept hearing they wished stores would stay open later. So that's something we are working on: staying open later in the day and longer in the season.
WWD: What about Pier Four in South Boston? You’ve put the project on hold — do you think the South Boston Seaport District reinvention [a combined $7 billion effort from three main development teams] is in trouble as a whole? S.K.: The area needs retail and some restaurants built first. When there is retail down there, I will feel better about moving forward. What happened, which no one would have expected, was that the perimeter area was built first — the [Boston] Convention [& Exhibition] Center and the Westin and so forth….Once the markets recover, that will move forward again in a few years.
WWD: Obviously, you don’t have to do this anymore, so it must be fun. How do you spend your time and are you transitioning more responsibility to successors? S.K.: I do have fun. I spend a couple of days a week at Children’s Hospital Boston and it’s the kind of place when you walk out, you feel like you’re the lucky one, to be able to give a little back. I work with great people and I have my son Doug [33, who founded and eventually sold Lids, a 250-store specialty chain selling hats] firmly entrenched. He's taken over a lot of responsibility.
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