Financing is available, but lenders have imposed stringent requirements and developers are looking abroad.
Even with the credit crunch squeezing wall street, financing is available for promising retail real estate projects — at a price.
Developers are finding they can generally move ahead with solid proposals. However, in order to close deals, they have to put up more of their own money and contend with more stringent borrowing terms.
"Banks are more selective," said Russell Schildkraut, principal at the Ackman-Ziff Real Estate Group. "They're looking for higher-quality projects, higher-quality sponsorship, more equity. But I'm getting deals done currently. If the economics of the development deal make sense, there's money available."
In the go-go days, deals could be done with 80 to 90 percent of the money borrowed. Now developers can only borrow 65 to 75 percent of the total, he said.
But several large mixed-use developments have been put on hold or delayed as the economy endures soaring gas and food prices, inflation worries, falling consumer confidence and sliding retail sales.
In Manhattan, Cablevision Systems Corp. said it would spend $500 million to renovate Madison Square Garden rather than move the venue as part of a $14 billion plan to overhaul Pennsylvania Station and revitalize the area and add retail space.
In downtown Los Angeles, the start date on the Grand Avenue project, set to include shops, condominiums, a hotel and a park, was pushed back until February 2009 because of difficulties in obtaining construction loans, said the developer Related Cos.
"The general climate is tight," said Sherif Mityas, a partner at management consulting firm A.T. Kearney. "At each stage of the store development process, whether it's freestanding or in the mall, people are putting on the brakes. A lot of folks are basically stuck with assets and-or investments that they're going to need to hold on to for a while."
As retailers merge and close excess stores and bankruptcy filings let other chains get out of their leases and shutter underperforming doors, there is less pressure to build space, especially with major players such as Kohl's Corp. and J.C. Penney Co. Inc. slowing their expansion because of the economic climate."The first inclination will be to use what's already out there," Mityas said.
That means larger players are increasingly looking to expand abroad to countries with fast-growing economies such as India, Russia, China, Vietnam and Ukraine, which A.T. Kearney has pegged as ripe for more stores.
"Many of the major mall companies are actually doing much more of their business outside of North America right now," Mityas said. "Not only is the capital better, but the retail environment is so much better."
In late April, Taubman Centers Inc. said it signed Lotte Department Store to anchor the shopping center in the Songdo International Business District, in Incheon, South Korea.
The 12-floor flagship will have two levels of parking and cover 521,800 square feet. The double-level enclosed shopping center designed by Daniel Libeskind will be a first for South Korea and will include a multiplex cinema and 150 specialty stores.
It is part of a grander venture that demonstrates the potential growth abroad.
The $30 billion, 100 million-square-foot Songdo project, dubbed the "Gateway to Northeast Asia," will be the first city designed and planned as an international business district. When completed in 2014, the district will employ 300,000 people and offer everything from a hospital and international preparatory school to a 100-acre central park and Jack Nicklaus golf course.
In the U.S., the economy and what is generally seen as too much retail space as shoppers cut back on spending may curtail retail real estate growth.
"The bottom line is that we could have a decade of slow retail development," David Simon, chairman and chief executive officer of Simon Property Group, said on a conference call with Wall Street analysts.
However, he saw positive fallout for Simon and other major retail real estate companies.
Simon, one of the largest U.S. real estate players, is focusing on redevelopment and expansion of its franchise assets domestically and new premium outlets in the U.S. and Asia.
"Capital is a precious resource," Simon said. "We remain very diligent in the allocation of that capital."
Even if new retail building slows, there should be plenty of space as chains rejigger."The big issue for us the rest of this year and into early 2009 is going to be with store closings," Simon said. "We are going to get more space back because there are tenants that are closing stores."
Already chains have been closing units. Among others, Wilsons The Leather Experts Inc. is shuttering 160 doors, Foot Locker Inc. trimming 140 locations and Zale Corp. closing 105 stores and kiosks.
Such decisions represent an opportunity for fast-growing players looking to expand.
"It's good for an up-and-coming or a new concept or a retailer who's really in its infancy, because instead of building a new store or building a new development, one can go and create mass in a hurry," said Mez Birdie, director of NAI Realvest's retail investment services and a member of the Institute of Real Estate Management's retail property sector advisory group. "You can have instant entry into a new market."
The balance of supply and demand will differ from market to market, though that might be mitigated some for chains with a national scope.
"In the past few years, there has been a strong emphasis on a landlord and a retailer developing or having a relationship," Birdie said. "In the old days, it used to be transaction-driven, more is now driven by 'Let's look at this picture as a whole.'"
Some sections of the country will also hold up better than others and developers with a track record with their lenders will have an edge.
"Our business is in two of the hottest markets in the country, Hollywood and downtown [Los Angeles]," said Bradley Luster, president of Major Properties.