In retail development, as in fashion, what was out of style has a way of coming back into vogue.
Shopping center owners and developers, particularly in California, are turning to redevelopment to help engage customers. The Macerich Co., Westfield Group Inc. and the Irvine Co. are among the firms involved in major renovations.
The trend has gained traction in recent years as land grows more scarce and markets mature. It is likely to continue at least until economic recovery is well under way.
“It makes no economic sense to build at this time,” said David Solomon, chief executive officer of NAI Global’s ReStore division. “New development is just suicide right now…as a long-term strategy, for those who can afford to do it right now, redevelopment is simply the only way to go.”
The overhauls involve expansion and redesign of aging properties, adding upscale tenants and amenities, including movie theaters and outdoor village-style projects, lush landscaping, valet parking and elevator operators, as well as playgrounds, trolleys and elaborate water displays.
The work doesn’t come cheap. Typical price tags reach more than $250 million. And, to be sure, the strategy carries risks as retail vacancies and store closings rise and consumer spending falls — with no quick end in sight.
“Companies can buy [existing centers] for low replacement costs,” Solomon said. “You can’t buy land and develop it for what these centers are selling for, forget about the time it takes for permitting and approvals and all of that. The yields aren’t there.”
The liquidation of Mervyns, the Hayward, Calif.-based moderate chain, presents developers like Macerich, which counted the retailer as a major tenant, with additional challenges. That scenario is being repeated with the collapse of stores such as Circuit City and Linens-N-Things.
General Growth Properties Inc., the real estate investment trust that owns 24 properties in California, including Northridge Fashion Center and Glendale Galleria, both in the Los Angeles area, has put planned upgrades and other projects on hold because it is facing possible bankruptcy. The company, which wants to sell three Las Vegas properties, could file for Chapter 11 as soon as the end of this week if it is unable to refinance more than $900 million in loans and another $3.1 billion due next year.
Macerich, which owns and operates more than 70 U.S. shopping centers, has redevelopment under way in California and Arizona, including the $265 million renovation of Santa Monica Place, which includes the addition of a Nordstrom, and a new Neiman Marcus at Broadway Plaza in Walnut Creek, Calif. Macerich also is nearing completion of a $275 million renovation of The Oaks Mall in Thousand Oaks, Calif.
Other projects include the redevelopment of Marin County’s Northgate Center and the 60,000 square-foot expansion of Vintage Faire mall in Modesto, Calif. At Scottsdale Fashion Square, in Scottsdale, Ariz., Macerich is expanding to add a Barneys New Yorkand 30 specialty shops.
“Our formula [for redevelopment] is pretty simple: it has to be an outstanding market, with very high barriers to entry and a built-in, attractive consumer base,” said Ken Gillett, Macerich senior vice president of property management.
For Santa Monica Place, the strategy is to lure high-end retail tenants and restaurants to target an area demographic that has an average household income topping $100,000. Bloomingdale’s and Nordstrom have signed leases, along with retailers such as Joe’s Jeans, Kitson, BCBG and True Religion.
“For some of these centers, surrounding areas usually have gotten denser, with more people now than 20 or 30 years ago [when they were built], which means now a much better customer base,” said Gary Mozer, managing director at George Smith Partners, a Los Angeles firm that raises financing for commercial real estate.
Macerich bought the 550,000-square-foot Santa Monica Place for $130 million from Rouse Co. in 1999. Construction is under way to turn the enclosed shopping mall into a three-level, open-air center with a rooftop dining deck. The opening is planned for 2010.
Westfield has numerous redevelopment projects in California, including overhauls of large retail properties in Valencia, Culver City, the San Fernando Valley and the San Francisco Bay area. The company’s portfolio consists of some 120 shopping centers in four countries, most in the U.S., with more than 100 million square feet of leasable space.
Among West Coast projects scheduled to open in the fourth quarter of 2009 are: Westfield’s $270 million renovation of Galleria at Roseville; the $120 million redevelopment of Westfield Santa Anita; Westfield Valencia Town Center’s $120 million makeover, and Westfield Fox Hills in Culver City’s $170 million upgrade.
A $350 million, 300,000-square-foot expansion at Westfield Topanga mall in Canoga Park, Calif., was completed this fall with tenants such as Neiman Marcus, Jimmy Choo and Louis Vuitton.
Although luxury is a focus for many of the centers, bringing value-oriented retailers into the mix is important during economic hard times. Westfield, for example, houses Target as well as Neiman Marcus in its Topanga center. Macerich opened a Costco in a former Macy’s at Lakewood Center, one of the largest enclosed malls in the Los Angeles area.
“We try to give our customers everything they look for in one place, to keep them on site,” said Westfield spokeswoman Katy Dickey.
Westfield has a proposal for a $750 million outdoor village connecting the existing Topanga and Promenade malls that includes plans for a 300-room hotel, residential units, offices and 550,000 square feet of shops and restaurants — a combined 3.8 million square feet of space. No department stores are planned for the new mall.
Redevelopment isn’t confined to the largest mall owners.
Caruso Affiliated, which operates nine regional centers in California, got the green light from the municipality of Montecito, Calif., in October to renovate the Miramar Hotel, a once-storied resort property that’s been vacant for more than five years. Plans call for a luxury retail component.
“If we had to go to market today it would be extremely challenging, but we’re fortunate that our time line is farther out,” said Todd Russell, vice president of leasing for Caruso Affiliated.
The Irvine Co.’s Fashion Island in Newport Beach, Calif., and the Segerstrom family owned South Coast Plaza in Costa Mesa, Calif., have undergone significant renovations and additions in the last year, including a Nordstrom that opened at Fashion Island in January. South Coast added Bloomingdale’s and a floor dedicated to luxury retailers like Oscar de la Renta and Canali.
The strategy isn’t foolproof because of the glut of retail square footage.
Developers have built one billion square feet of retail space in the 54 largest U.S. markets, including Los Angeles and San Francisco, since the start of 2000, about 25 percent more than during the same period in the Nineties, according to Boston-based Property & Portfolio Research Inc.
The U.S. retail vacancy rate average increased to 9.3 percent from 7.5 percent between December 2007 and September 2008, according to a Colliers International report. Los Angeles’ vacancy rate for neighborhood and community shopping centers rose to 8.8 percent from 3.2 percent over the same period.
The International Council of Shopping Centers said in a recent study that some 144,000 stores will close this year, a 7 percent increase over last year, and the largest jump in 14 years.
“You have to make sure you have enough income to support the center, what you are buying it for and what you’re going to do to it,” Solomon said.
According to Turner Construction’s Building Cost Index, commercial building costs rose almost 1.8 percent in the third quarter compared with the previous quarter and about 6.5 percent over the third quarter 2007.
“People need to have the cash to do it,” said Mozer of George Smith Partners. “Construction financing is next to impossible to get right now. One, there’s construction risk. Two, there’s lease-up risk, and also you don’t put all your money out on day one, it’s over time. It’s higher risk and less profitable lending.”
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