By  on June 9, 2011

LAS VEGAS — Cautious over the economy’s stutter-step improvement, developers and retailers are tiptoeing into expansion mode, eager to avoid the recent mistakes of too much square footage and an over-dependence on the illusion of unending growth in consumer spending.

Rediscovered in the wake of the recession, discipline is the industry’s new overriding theme, with a focus on identifying the right retail real estate to put in the right sized stores. Both shopping center and retail companies are carefully evaluating their portfolios to home in on the most profitable assets — and replicate their successful formulas.

Many retailers are zeroing in on the best malls and retail districts in gateway cities, rather than taking risks on secondary and tertiary retail real estate that has yet to recapture its pre-downturn luster. And mall owners are shoring up their prime properties, while attempting to get rid of languishing shopping centers having a tough time attracting tenants intent on nailing down better real estate.

“There’s a definite flight to quality in the retail world,” said Anthony Buono, executive managing director of retail services at CB Richard Ellis, at the recent International Council of Shopping Centers RECon convention here May 22 to 25. Arthur Coppola, president and chief executive officer of Macerich Co., which has interests in 71 regional malls, said, “The retailers want more and more to be in urban locations, and they want to be in Class A shopping centers.”

The concentration on prime real estate is lifting rents in desirable locales. Rents elsewhere aren’t experiencing similar acceleration. For instance, R. Webber Hudson, executive vice president at Related Cos.’ Related Urban division, said that rent at Related’s fully occupied Time Warner Center have reached $1,600 a square foot, “where they were before the recession.” At RECon, he said, there was “a real palpable sense of optimism that we haven’t seen in three, four years.”

Faith Hope Consolo, chairman of the retail leasing and sales division at Prudential Douglas Elliman, said, on major retail thoroughfares such as Michigan Avenue and Madison Avenue, retailers “have to step up to real numbers. Madison is almost where it was,” although it has dipped 4 percent from last spring to $919 a square foot, according to the latest figures from the Real Estate Board of New York. Rent concessions are being cut back as well, and Consolo said wannabe Madison tenants are being offered four months free rent versus six to eight months during the depths of the recession. On less vital streets nationwide, the turnaround is shakier, and Consolo said rents are “probably inching toward 75 percent of where they were before the recession.”

Shopping center owners with sought-after malls are beginning to record rent increases. Michael Glimcher, chairman and ceo of Glimcher Realty Trust, which partially or wholly owns around 23 malls and four community centers, said his firm is signing new leases at 5 to 10 percent above expiring leases. Robert Taubman, chairman, ceo and president of Taubman Centers Inc., owner or manager of 26 operating shopping centers and six in various stages of development, anticipates rent growth of 3 percent this year. “Unemployment is high, but the stock market has been very buoyant. Our sales tend to track the stock market, not the housing market. We feel very good,” he said.

Overall, however, prerecession retail rents aren’t going to be matched soon. Buono said rents peaked in 2007 and hit their bottom in 2010. He doesn’t anticipate a return to peak levels again until 2015 or 2016. “We will see a small amount of rent growth this year and more next year,” concluded Buono, who described rent recovery as “scattered.”

“It’s still a tenant’s market,” said Robert K. Futterman, chairman and ceo of the retail leasing, investment sales and consulting firm Robert K. Futterman & Associates.

With the retail revival uneven, Buono noted the ranks of deteriorating malls are swelling, and publicly traded real estate investment trusts are trying to off-load them. “To some people, there are 70 B and C malls that need to get sold by the REITs. I would argue it could be more than 100,” said Buono.

In the first quarter, Developers Diversified Realty, owner and manager of 520 retail properties, sold six non-prime assets and three parcels for $43 million. General Growth Properties and Westfield Group have put North American properties on the market. “We are looking to sell our less productive assets, where we feel that we can no longer add growth through development,’’ said Peter Lowy, joint managing director of Westfield, at the world’s largest mall company’s annual general meeting.

At Class B, C and D malls, tenants and landlords are being flexible to make store openings happen. “You are finding nimbleness from the landlord and retailer now,” said Andy Graiser, co-president of retail real estate marketing, restructuring and disposition company DJM Realty. Speaking specifically of deals at Class B malls and below, he continued, “You are still seeing 20 percent or more of a reduction, in some cases, 35 to 40 percent.” And he added that retailers eyeing that caliber of malls are asking to pay a percentage rent — perhaps 10, 12 or 15 percent of sales — during the first three years and switch to market rent after that.

As the financial deals in B, C and D malls sweeten, there are a few retailers heading from off-mall to mall real estate to take advantage of mall foot traffic. “We have actually shifted back to the mall versus two to three years ago,” said Jeffrey Gerstel, executive vice president and chief operating officer of the Ascena Retail Group Inc.-owned value-priced chain Dress Barn with nearly 840 stores. He estimated Dress Barn would grow to at least 855 stores over the next two years, with 75 percent of the store growth coming from mall locations.

Nimbleness on the part of retailers and landlords is also crucial to fill the remaining empty big box spaces. Shopping center owners are looking to break up these spaces to entice retailers opening smaller stores, which represent a growing swath of the retail universe. As retailers operate more efficiently, Buono emphasized they are figuring out they can get equal or higher sales per square foot in smaller locations. Wal-Mart Stores Inc. is expected to open 30 to 40 Wal-Mart Express locations at 40,000 square feet or less; Target Corp. could open 10 of its CityTarget urban concept stores next year, starting with a 54,000-square-foot store in Chicago, and Best Buy Co. Inc. plans to add 150 smaller Best Buy Mobile stores in fiscal year 2011.

Even stores in the roughly 10,000-square-foot to 15,000-square-foot range are becoming more ubiquitous. According to Graiser, it used to be that “no one was in that range, but it is growing.” He pointed to Lululemon, which is adding 61 stores this year, Dollar General, expected to open 625 new stores this year, and Sav-a-Lot, which has 160 new stores planned this year, as examples of retailers expanding in the comparatively compact square footage range.

Regardless of store size, spaces in outlet malls are hot commodities for retailers and wholesalers — and developers are responding to the demand. Taubman forecast his company would build four or five full-price shopping centers this decade, but five to 10 outlet centers. And developers are reevaluating properties already developed or being developed to determine if outlets can be a component of the mix. Federal Realty Investment Trust is making 180,000 square feet of ground floor retail at its Assembly Row at Assembly Square project in the Boston area, which has a total of 880,000 retail square footage, available to outlet concepts and restaurants.

“It may open up a whole new strategy for those retailers on a collective basis” hungry to spread outlets, said Chris Weilminster, Federal’s senior vice president of leasing.

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