By  on January 12, 2005

NEW YORK — Real estate developers admit the U.S. has plenty of retail space out there. The more pressing problem, though, it that it is just the wrong kind of space.

This is why the major real estate investment trusts are rethinking their strategies and looking within their portfolios for growth opportunities, which follows a year of robust acquisition activity in the sector.

These new strategies, which involve tactics such as luring mass merchants as anchors and creating a more “entertaining” experience for consumers, are forever changing the face of shopping malls.

“We’re underdemolished, not overretailed,” joked John Bucksbaum, chief executive officer of General Growth Properties Inc. “Every property in our portfolio is capable of being improved.”

Richard Sokolov, president and chief operating officer of Simon Property Group, the biggest mall developer and owner in the country, conceded that there is a lot of retail real estate in the market, “compared to European or other international markets.”

Sokolov added, “and some of that retail space is not going to continue to effectively function as an appropriate channel for retail distribution.”

Roughly 850 million square feet of mall retail in the country is controlled by just 10 REITs, for which new development is boldly written into company scripture. Last year’s numbers, however, indicate a significant change in the “grow by development” mantra.

In 2004, the largest REITs invested almost $20 billion more on acquisitions and redevelopment of existing property than they did on ground-up development, which totaled roughly $800 million. General Growth Properties, which acquired The Rouse Co. for $12.6 billion in the biggest deal in retail real estate history, was the 800-pound gorilla in the M/A market last year, but it was not alone. Simon completed a $4.8 billion acquisition of Chelsea Property Group Inc. that pushed the REIT into the outlet business, and The Macerich Partnership L.P. acquired Wilmorite Properties Inc. and Wilmorite Holdings L.P. for $2.3 billion.

From here, acquisitions are expected to slow down — for-sale malls are already growing scarcer — as REITs turn their eye inward to make money. But there are some hurdles. The major mall owners are discreetly trying to address the problem of creating a more modern, appealing shopping experience without adding retail space that most markets can’t absorb.“People have been saying the U.S. is overretailed for a very long time, but you have to look at each market and submarket rather than the country as a whole,” said Peter Lowy, managing director of Westfield Group. “You can’t just take the amount of square footage and divide by population and say it’s overretailed. You need to look at demographics, income and disposable income to understand the country’s capacity to purchase goods and services.”

To meet that capacity, mall owners are investing in ways that change the face of retail, and in ways that grow revenues. They are upgrading the tenant base of their malls and increasing rents.

Simon, for example, expects a 20 percent rent increase in the nearly 30 million square feet of space that will turn over in its portfolio in the next five years, an increase that totals more than $230 million in new revenue.

It is also taking excess space returned to it from now-defunct retailers, such as Service Merchandise and Montgomery Ward, as well as recent store closures such as Lord & Taylor, and redeveloping it for higher-performing big-box tenants such as Best Buy and Linens ’n Things. Westfield has used a similar strategy, taking empty Montgomery Ward stores and replacing them with Target units.

The Australian-based owner is also the first to house a Wal-Mart designed and built specifically for an enclosed regional mall, which opened this past fall in San Diego. In its push to make its malls more diverse and modern, it is also negotiating with discounters such as Target and Costco for mall sites and expansions.

“We’re basically going through all of our properties to come up with programs that accommodate our existing retailers by building additional space on exterior facades, and taking advantage of the department store space that we are getting back to add more retailers that are doing better sales than the former occupants,” said Sokolov.

Other major mall owners are reshaping their buildings.

“I just laugh when I hear people say that malls are obsolete,” said Stephen Lebovitz, president of CBL & Associates Properties Inc., based in Chattanooga, Tenn., which owns 170 properties in secondary markets. “We feel the mall is such a proven success vehicle.”Even with such unbridled optimism, Lebovitz is revamping the look of his portfolio. He is adding restaurants around the perimeter of the malls and plans to add big-box retailers to nearly half the enclosed malls in his portfolio. Glimcher Realty Trust, which owns 24 million square feet of retail, is undergoing a similar overhaul, adding outward facing retail and restaurants to roughly half its portfolio. In Dayton, Ohio, for example, the firm is adding 200,000 square feet of exterior retail and restaurants to two traditional enclosed malls.

“You can’t develop with the reckless abandonment that we used to,” said Larry Siegel, chairman and ceo of The Mills Corp. “You can’t build projects down the street or across the street or around the corner from an existing mall and expect to be successful.”

Simon, for example, is developing an open-air mall in Jacksonville, Fla., that features far fewer big-box stores than the traditional enclosed mall.

Rather than building 1 million square feet in one building with four department stores, the open-air format can fit more users in a flexible format for different retailing configurations.

Nearly all the major developers are also looking at mixed-use properties, which feature retail, apartments, offices, hotels and entertainment, as the new frontier for development.

The Mills, for example, has had success with a major retail and entertainment complex in Europe [see sidebar] and is working on a mixed-use project on State Street in Chicago that will feature 450,000 square feet of retail space, a hotel, apartments and the Chicago headquarters of CBS Corp. Glimcher, General Growth and Simon are also investing in mixed-use, which in theory could allow a person to live, work, play and most importantly, shop, in the same space.

The traffic driven to the new shopping mall, which may soon become a live-work-play experience, of course does have its drawbacks for consumers. Retail owners are increasingly viewing their properties as media unto themselves, and are partnering up with advertisers to make mall marketing a larger part of their ancillary revenue. Both Simon and General Growth worked with Arbitron Inc., a media and marketing research firm, to audit their customer base and legitimize the use of the mall as a marketing tool to advertisers, some of whom are also tenants in the properties.“There are no hard-and-fast rules as to what is most appropriate for a retail project,” said Bucksbaum. “You don’t need to build new projects to grow. You need to take existing projects and evolve them into what’s most desirable today for the consumers and retailers.”

To Read the Full Article

Tap into our Global Network

Of Industry Leaders and Designers

load comments
blog comments powered by Disqus