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Developers are lightening up.
This story first appeared in the May 15, 2012 issue of WWD. Subscribe Today.
So what if mall traffic has been sapped by rising gas prices, high unemployment and Internet usage, and mall development in the U.S. has dried up. They see a future in downtown revitalizations, retrofitting malls, building outlet centers and forming partnerships overseas, primarily in Brazil, China, the Middle East and India, where there’s emerging consumerism and opportunities to build.
Developers generally had a good first quarter, buoyed by traffic that’s better than they’ve seen in awhile, and good retail sales. Yet it is a tale of two halves: The nation’s top malls, in major urban centers and tourist destinations, sometimes referred to as “A” malls, continue to show improving performances, while many “B” and “C” malls in secondary and tertiary markets still struggle and disappear.
“It was a really good quarter, especially for the property owners with the better malls,” said Glenn Rufrano, president and chief executive officer of Cushman & Wakefield Inc. “Expectations are for good results for the year. Occupancy rates and rents are increasing.”
Rufrano said that overall for malls, traffic has been declining, but it’s primarily the case in B malls. “I don’t think there is any question of mall viability as a concept. The As will be here. How many B malls there will be, that’s a question. It really depends on where they are and what’s the competition. A C mall is a mall that’s just dead.”
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Further optimism is being fueled by retailers being generally in good financial positions, having honed their operations to survive the great recession, and now many are looking for space for existing or emerging formats. There are also several overseas retailers eager to gain turf in America. Among the ones to watch: Joe Fresh, Desigual, Uniqlo, Topshop, Tesco Fresh and Marks & Spencer’s Simply Food. Zara and H&M continue to expand.
On the homegrown front, Forever 21, Gap Inc.’s Athleta, CityTarget, Urban Outfitters Inc.’s Free People, Bloomingdale’s, Wal-Mart Express, Victoria Secret’s Pink and even Lord & Taylor, which this year started opening stores after a 10-year hiatus, are among the retailers on the move, while Gap and Best Buy are aggressively closing stores.
“In a sense, retail is becoming bifurcated,” said Michael Fascitelli, president and ceo of Vornado Realty Trust, referring to so-called “A,” “B” and “C” malls. “The good gets better and the less good gets worse. The internet is exacerbating that.”
“We’re still seeing a fair amount of [retail] growth,” said Andrew Graiser, copresident of A&G Realty Partners, a retail estate investment firm. “After 2008, about 2,500 stores went dark. Landlords have done a good job filling those spaces.” Graiser sees growth in the food category, with 7-Eleven, Panera and Chipotle expanding. Dollar General Corp. is rolling out 100 units of its new Market format, which offers fresh produce, dairy and meat along with apparel, home decor and cleaning products, and Target Corp. this fall will unveil a freestanding store in San Francisco for its C9 by Champion brand. E-tailer Piperlime in the fall will open a 4,000-square-foot store in New York’s SoHo neighborhood and Microsoft is making a push into brick-and-mortar with 75 units expected by 2013 or 2014.
A lingering effect of the less-than-robust economy is store downsizing. Graiser cited Macy’s Inc. as looking to shrink some stores in certain markets by half, from 200,000 square feet to 100,000 square feet. “Filling strip centers is a problem,” he said, adding that the malls are welcoming health care services to space once occupied by retail. “Some mall owners have leasing people dedicated to the health care category,” Graiser said.
“Retailers start to come up with new concepts because they are looking for growth vehicles. That means their core concept is doing extremely well, but they may feel it has limited growth. Many are talking about new concepts,” said Randy Brant, executive vice president of real estate at Macerich Co., the Santa Monica, Calif.-based operator and developer of 65 retail properties.
Going into next week’s RECon in Las Vegas for developers and retailers and all the peripheral industries that feed off those sectors, “there’s none of the overhang of pessimism” from the recession that plagued the last few conventions, observed Michael P. Kercheval, president and ceo of the International Council of Shopping Centers.
Registration is running 10 percent ahead of last year, with between 30,000 and 35,000 registered attendees expected, and another 50,000 to 75,000 who go to Vegas for the event and meet with developers but don’t actually register for the convention. RECon, which stands for the Retail Real Estate Convention, opens Sunday and runs through May 23.
“There is no new traditional mall development under way, but there is an amazing amount of redevelopment,” Kercheval observed. “Owners are rethinking uses to create different types of retail. Our industry is being drawn to urban centers, as well as places like Erie, Colo., north of Denver, which will be among the 70 cities exhibiting at RECon trying to bring retail into their towns. Developers like Forest City out of Cleveland, General Growth Properties, Simon and smaller niche companies are looking to help cities and get involved in redevelopment.
“Outside the U.S., development is booming, in places like Honduras, China, India, Brazil and Russia. Now the U.S. developers are leaders in asset management, revitalizations and redevelopment, whereas most of the development overseas is by local developers that may have partners like Taubman [Asia] in China and Korea, and Westfield [Group] in Brazil.”
“I don’t think people are feeling weighed down by concerns,” added William Taubman, chief operating officer of Taubman Centers Inc. “People will be coming to the convention to make deals. They’re optimistic, but cautiously so because the economy is not full steam ahead. There are concerns over the long-term sustainability of the consumer-driven economic recovery. If employment does not continue to get better. If taxes go up. If gas prices spike again. If European problems expand much out of Europe — those are the concerns. Underperforming stores are closing.”
Results in women’s apparel are “uneven” but better in men’s, home, fast fashion and accessories, and talk about a $5 gallon of gas is gone, Taubman said, with prices falling below $4 and less likely to impact mall traffic, particularly Taubman’s portfolio of high-end properties.
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Taubman suggested developers may not be doing enough with new technologies and media. Mobile technologies that enable retailers to customize e-mails to consumers as they shop, or allow consumers to compare prices at different stores, “seems to having an impact, though it’s pretty much at this point at the margin. Over the next five years it will be central to the experience.
“We need to provide WiFi. It costs money but it’s easy,” Taubman said. But as far as what roles shopping centers will play in the world of social media, “it’s not clear. As landlords, we just don’t have the capability to be competitive with the Googles and Facebooks of the world. I see malls connected to it, not controlling it.”
On the brick-and-mortar front, Taubman cited three projects in the works. One is a mall in San Juan, Puerto Rico, which will open in late fall 2014, with Saks Fifth Avenue and Nordstrom as tenants, making it the only upscale offering in the market. Taubman is also planning a mall in Sarasota, Fla., for an October 2014 opening with Saks, Dillard’s and Macy’s, and an outlet center called Taubman Prestige Outlets in the Chesterfield suburb of St. Louis in fall 2013. In addition, projects in China are being planned with local partners, though Taubman hasn’t made any announcements yet.
He said traffic at Taubman’s new City Creek Center in Salt Lake City has remained strong since it opened about six weeks ago, although he expects traffic will ease somewhat. The Cheesecake Factory is taking in more than $250,000 a week, on track to generate $3 million to $4 million above the average of $10 million in sales at a typical Cheesecake Factory.
“In the heartland of America, there is way too much retail and many malls that don’t deserve to exist,” said Joseph Sitt, founder and ceo of Thor Equities. “The dense cities are still underserved and that’s why we’ve been seeing success in our retail advisory business, Thor High Street, which has a more urban focus.” Sitt said most of his retail clients are growing in the major U.S. and European cities, though requests for locations in places such as Moscow, Africa and Iran are rising.
In terms of expanding retailers, Kercheval cited Limited Brands Inc. as a company looking to expand abroad, particularly with its Victoria’s Secret brand. He also said Red Bull is becoming “a real brand” and opening stores in shopping malls, with jerseys for soccer teams and Red Bull-logoed clothing. “They are willing to pay significantly higher rents,” primarily for brand awareness.
He also said retailers may be realizing they don’t need stores as large as they have, and could have “showcase” stores that are like showrooms for products to be bought online. “Originally, Apple stores were a showcase for the technology, not expecting to move much merchandise. But shoppers wanted to walk home with the product. Ron Johnson quickly changed the format. The same thing happened with Microsoft. They opened a showcase in Bellevue, Washington.” Amazon.com is opening a store in Seattle and is believed to be considering stores in shopping centers, he added.
“What shopping center owners have recognized is that the answer for them is not selling merchandise through a virtual shopping mall, but using technology to drive people into the malls,” such as with Shopkick, which rewards shoppers on their mobile devices with points and discounts as they step inside a store, Kercheval said. Best Buy and Target are rolling out the product.
In a recent real estate report, Citibank outlined some key 2012 trends, noting that high productivity mall real estate investment trusts, marked by sales growth and low occupancy costs, should yield solid rent growth. Citi also said that competition in outlet development continues to intensify, and redevelopments are on the rise at high-quality projects with strong demographics and high expected sales productivities. Citi said the financing environment remains very favorable with the window of opportunity seen continuing for some time and refinancing opportunities potentially leading to modest earnings accretion. “With nine quarters of solid sales growth and generally good retailer operating margins, we expect bankruptcy activity to remain light through the year,” Citi wrote.
“Everyone’s hoping the employment picture is going to improve,” said Kenneth Himmel, chairman and ceo of Related Urban Development, a division of Related Cos. “We’re hoping we get a lot better traction as it relates to capital spending and employment-driven initiatives. The key is that the consumer confidence factor has to get a lot better. We are revisiting a number of things that were put on hold and relooking at them with a more realistic eye. In L.A., we are moving into our next relook at our Grand Avenue project [a $3 billion, 3.6 million-square-foot development in downtown Los Angeles]. Himmel said the company has invested $50 million in a major park and civic space connected to the project and is anxious to get it back on line.
“We will continue down our path on Hudson Yards,” a 12 million-square-foot development with office, residential, retail and hotel space spread over 12 acres. “We’re starting construction before the end of the year. Along West 30th Street will be a residential building with an office tower so far leased to Coach. Most of the emphasis in 2013 will go into the two flanking office buildings with retail in between. Everyone who has seen this presentation knows that there’s a significant department store at the center of it. We won’t announce anything until the deal is done.”
Nordstrom Inc. is said to be looking at the site for the possible location of its first store in Manhattan.
While the U.S. is generally significantly overbuilt with retail, the exception is Manhattan, said Himmel. “The West Side has become the new frontier. Washington, D.C., continues to be a vibrant market, Boston’s Back Bay and Seaport district are underserved and there’s opportunity in Miami. Europe is going to be quiet for a long time. We’re still active in the Middle East. We’re working on a major project there, a significantly pre-leased retail project in Abu Dhabi. We also opened offices in Rio de Janeiro and São Paulo and are looking at a number of projects there.”
On the down side, “Clearly there is too much retail space, more than there is demand for,” said Michael Ewing, principal of Williams Jackson Ewing Inc., which has conceptualized and developed a variety of urban retail concepts in cities and towns around the world and has restored some of the country’s most famous transportation landmarks, including Grand Central Terminal in New York. Ewing noted that the U.S. has 14.2 billion square feet of total retail space, which comes out to 46.6 square feet of retail space per person. “Europe has eight and Japan, five.”
Hot spots for development include South America and Asia, Ewing said. Of the world’s 10 biggest malls, based on gross leasable area, nine are in Asia, with the two largest in China. South America has survived the recession better than other regions and American retailers consider it a good place to test a new concept.
“In the U.S., retail in downtown Washington, D.C., has been very good these past couple of years and will continue to see rising sales and rents in the coming years as the residential component improves. We are doing the retail leasing for Hines and Archstone, a 2.5 million-square-foot mixed-use development with 285,000 square feet of retail. Leasing is very strong for both fashion and restaurants at prime rents.”
Luxury retail is filling in vacancies in the U.S. by offering more bridge merchandising and outlets, Ewing said. “Now that the foreign mass merchants like Topshop, H&M, Uniqlo and Zara have established their brand identities in the U.S. with high-profile locations such as Fifth Avenue, they will be looking at other main streets and A malls. The new concepts and trends in the food industry will continue to create new opportunities for landlords and developers as celebrity chefs go mainstream and local food entrepreneurs expand beyond their home territories.” He cited Danny Meyer’s Shake Shack and the alternatives to Starbucks, such as Blue Bottle and Joe’s the Art of Coffee, as examples.
While there is an oversupply of retail space in the middle of America, Benjamin Fox, executive vice president of retail leasing at Massey Knakal Realty Services, is another observer who wonders whether there’s too little retail square footage in others areas, especially in New York. “There’s not a vacant store to be found on 34th Street, Times Square, Broadway in SoHo or Union Square,” he said.
Fox agreed with others who suggested the success of Internet shopping, which he said constitutes 10 percent of all sales, “begs the question of whether retailers are going to open up full-fledged stores or showrooms.”
Meanwhile, “Retailers from abroad are flocking here,” Fox said. “It’s the domestic retailers who aren’t expanding as much as they used to. On the one hand, you see retail stocks doing very well and on the other hand, stocks such as Best Buy are doing not so well. They rent 50,000 square feet of space. When a tenant like that reduces space, it makes an impact.”
Asked what retailers and developers should focus on, Fox said Hispanic and Asian markets are ripe for being tapped, noting that big cities are almost 50 percent Hispanic. “There’s a growing middle class in the Hispanic community with more disposable income than ever.”
Fox talked about Manhattan’s Hudson Yards. The area dubbed NoMad for north of Madison Square Park, from 23rd to 30th Streets and Madison to Ninth Avenues, is on the cusp of gentrification. “The restaurants are already happening,” said Fox. “You’re also seeing a high-tech sector evolve slowly from 16th to 17th Streets between Eighth and Ninth Avenues. The FIT [Fashion Institute of Technology] neighborhood is becoming hot as things get better further north toward Penn Station.” Fox also cited the redevelopment of the South Street Seaport by the Howard Hughes Corp., and developments in the 34th Street-Herald Square area, including the Moinian building in Herald Square and the Vornado Tower on Seventh Avenue between 32nd and 33rd Streets.
“What’s about to happen in downtown Manhattan at the site of the former World Trade Center site will be game-changing over the next five years,” said Peter Ripka, ceo of Ripco. “Beautiful architecture, the memorial pools and the tremendous mass transportation infrastructure that is currently under construction will combine to create massive pedestrian activity and tourism. It’s busy already and with all that is coming online, we could be looking at another Fifth Avenue- or Times Square-type of a trade area in the near or midterm future.”
Ripka sees numerous health-club chains proliferating across the U.S., from small private training facilities to yoga and spin studios to up to 100,000-square-foot facilities. “In particular, I love what Equinox is doing with its Equinox namesake brand, and Blink and Soul Cycle. They are expanding all three carefully and they understand demographics and trade areas when they make a decision. When people work out they want to look good, hence the success of Lululemon and the move of Athleta to bricks-and-mortar. They are both expanding and it goes right to the heart of this theme.”
Meanwhile, three HBA players continue to expand. “Sephora, Ulta and Harman are growing to service this trend,” he said.
“Over the last few quarters and, it is still true right now, things continue to improve more than what most people might have expected,” said Cedrik Lachance, managing director of research firm Green Street Advisors. “That is true on all fronts. Sales have been growing faster than what most people have expected — it is quite visible in the results of the mall real estate companies — and real estate fundamentals are improving.”
According to the International Council of Shopping Centers, comparable-store sales at apparel chains, department stores, discounters, drugstores and wholesale clubs climbed to 6.6 percent last year from 6.2 percent the prior year and 1 percent the year before that. Lachance added that square-footage sales at malls owned and operated by publicly traded shopping center companies increased 9 percent last year and 7 percent in 2010, versus declines of 7 and 5 percent in 2009 and 2008, respectively. “They average mall REIT has better sales now in their malls than they had at the previous peak in 2007,” he said.
The progress in sales has translated into higher shopping center occupancy rates and rents as retailers recommit to existing units and think about multiplying their store counts, especially at the best malls with reliable foot traffic and performance. Lachance estimated rents at publicly traded mall companies rose 7 percent last year and said their occupancy rates are hovering around 93 percent, up 91 percent from their recent bottom in 2009. “There is currently more space occupied at malls in the United States than there was in 2007,” noted Lachance.
The gains are being made against the backdrop of scant mall development. After Taubman Centers opened the 700,000-square-foot City Creek Center in downtown Salt Lake City in March, no new malls were under construction in the country. Perhaps partly due to the lack of mall square footage coming online, investors are taking a closer look at mall properties. Westfield said in April it had sold eight U.S. shopping centers for $1.15 billion, including seven to the Starwood Capital Group. Greg Miles, Westfield’s chief operating officer for its U.S. operations, believes more deals like that will happen.
“To the extent that the capital markets allow there to be buyers, I think you will probably see more transactions in the market over time,” he said. “As the [better] consumer sentiment and optimism becomes more evident in the sales side of the business and as the investment community becomes more comfortable with malls, it will probably get a clearer focus by a whole bunch of people in the next few years.”
Lachance cautioned that the current optimism should be tempered. “At some point, the breakneck pace of sales growth is going to have to come back down. The pace of sales growth should moderate this year,” he said. Looming on the shopping center horizon is Amazon, which is pushing harder into fashion and other categories, and could one day be bigger in volume than Wal-Mart Stores Inc., according to some pundits.
Simon also reported an occupancy rate of 93.6 percent, which was 60 basis points higher than the previous year, raised its quarterly dividend to $1 per share from $0.95 and said it has Premium Outlets developments happening in several countries, including two in the U.S., one opening in Merrimack, N.H., in June and one in Texas City, Tex., in October. In addition, Simon has renovation and expansion projects under way at 23 centers in the U.S. and two in Japan.
Still, as David Simon, chairman and ceo of Simon Property Group Inc., said in a first-quarter conference call, “We are off to an excellent start in 2012 with the completion of two significant transactions, the execution of two international partnerships to build outlets in Brazil and China, the ground breaking for four new outlet developments, the reporting of strong financial and operational results and the raising of our dividend.”
Himmel sees more American brands traveling overseas. “Ralph Lauren is doing a remarkably good job of expanding internationally, as are Calvin Klein and Tommy Hilfiger,” he said. “Now brands like J. Crew are opening international stores. Bloomingdale’s has had enormous success in Dubai. The wave is there and a lot of them are going. The world is in love with American brands.”