NEW YORK — Mills Corp. is out to blaze a path of development in Europe even before the verdict is out on Xanadu, the 1.4-million-square-foot retail-entertainment complex the developer opened in Madrid in May. It’s the first major retail project opened by a U.S. developer in Europe, and Mills is preparing more for the Continent.
“We hope to open another project in the next two years or so [in Europe],” said Laurence Siegel, chief executive of Mills, a real estate investment trust based in Arlington, Va.
Siegel said projects mixing entertainment and retail components are being considered for Barcelona, Valencia, Rome, Florence, Milan and a second, smaller center in Madrid. Europeans spend more time outside their homes than Americans and are looking for “that affordable entertainment experience,” he added. (For more on Mills’ U.S. expansion, see page 3.)
Mills is alone when it comes to international expansion. Other U.S. developers just aren’t ready to heed the call from overseas, though there’s a growing case for it. Real estate opportunities are drying up domestically, foreigners crave American brands and there’s less competition abroad. Unlike the U.S., where several developers control scores of malls, the biggest European developers control only a couple of dozen or so and aren’t nearly as advanced in design and construction, marketing, merchandising, leasing, special events, parking facilities and monitoring consumer shopping patterns, industry executives say.
Also, with the dollar depressed and U.S. retailing weak, it’s a good time to repatriate euros and pursue faster-growing overseas markets. Mills, which is expecting Xanadu to rake in up to $870 million, or one billion euros, annually, sees no reason why its revenue stream can’t be as multinational as such companies as Colgate-Palmolive, Texas Instruments or Tupperware, where more than 70 percent of sales are from abroad. According to Merrill Lynch, 25 companies in the S&P 500 get more than 60 percent of their sales from overseas.
“It behooves certain American developers, particularly publicly traded ones, to follow the example of large American companies and have at least a certain part of revenue stream coming from non-U.S. markets,” said Isaac Lagnado, president of Tactical.org, a market research and consulting firm. “Spain in particular — and other markets in Asia, South America and some countries in Eastern Europe — are growing faster than the U.S. market for retail sales, because of population growth in some cases, and the growth of discretionary income. China has been growing double the rate of anybody in the region, due to rapid industrialization and a middle class growing by leaps and bounds.”Lagnado also said retailers can extract high rents. “I have seen numbers in some of the newer developments in Spain quoted at roughly $50 to $100 a [square] foot.”
In China, Urban Retail Properties Co., which manages more than 40 million square feet of property in the U.S., is partnering with “a large Chinese commercial development concern” to create a $6 billion planned community in Zengcheng City, covering several thousand acres combining retail, entertainment, residential, offices and exhibition centers.
“This will be something China has certainly never seen before — the largest of its kind in all of China,” said Ross Glickman, chairman and ceo of the Chicago-based Urban Retail. He said Urban is now going through approval processes with local and provincial governments and the new national government in China, and would be involved in leasing, managing and consulting on the development. Urban does such work for the Goshono Town Center in Akita, Japan; Core Pacific City in Taipei, Taiwan, and the Al Faisaliah Center in Riyadh, Saudi Arabia. The Chinese migrating from farmlands to urban areas are “capitalistic in nature. They want places to shop, work and live,” Glickman said, though he acknowledged the project isn’t a definite yet and that SARS has stalled things. An official announcement could be made in late summer.
“Development is a strange world,” said Glickman. “Anything can happen. You have to be careful when you go to Europe or the Far East. You have to understand the culture, the politics, the monetary systems and shopping habits. We have never gone abroad and owned property. We didn’t want to be presumptuous and feel we were experts. We have opportunities in Moscow, St. Petersburg, Belgrade and a few in South America, for new development. If we are asked to get involved as a consultant, we will probably get involved, but we are weighing our options and waiting to see how these develop. You absolutely better know what you are doing. There is very little margin of error.”
“As difficult as it is to manage projects both from the perspective of leasing and financial expertise, it’s particularly hard doing it thousands of miles away,” said John Bucksbaum, chief executive of Chicago-based General Growth Properties Co. “But really it comes down to the fact that there has been ample opportunity within our own country. Looking at the risk-reward ratio, it has been weighted in favor of staying in this country. That being said, going forward, globalization is certainly part of the retail world. Everybody is starting to cross borders — as retailers do more of this, it wouldn’t be unusual for owners and developers to follow suit. At least in our case, we would want to only associate with strong local partners — local owners of existing shopping centers who have a good sense of the retail market.”But for now, U.S. developers concentrate on renovations and remerchandising to increase sales productivity and adding square footage at their existing American centers. They are trying to lure European retailers here, albeit with limited success, rather than exporting U.S. retailers. There’s also consolidating and asset sales left to do in the U.S., reflecting the pressures of public ownership.
“We’ve explored various [overseas] alternatives, but there’s nothing that we are currently focused on,” said Robert Taubman, chairman and ceo of Taubman Centers, based in Bloomfield Hills, Mich. “We are focused on our core operations. We have worked on various projects [overseas], but never actually built one.”
“We would favor new development, rather than buying existing businesses,” said David Simon, chief executive of the Indianapolis-based Simon Property Group, which has an investment in a French development company building malls in Poland and France; owns interests in four parcels of land for possible future development, and has ownership interests in eight retail real estate properties in Europe and Canada.
“I don’t think [international development] is a must for us, but I wouldn’t discount it,” said Tom DeRosa, vice chairman of The Rouse Co., based in Columbia, Md. “To date, we haven’t seen the right risk-return scenario. Shareholders may see it as high on the risk spectrum and expect a greater return. The retail market outside the U.S. is very different. We have not put in a lot of time understanding those markets, although we have managed properties in Canada. Most likely, if we did go into Europe, it would be as a partner” with a local developer or landlord.
“I can say we are working with more European retailers on bringing them to the United States, Zara among them,” which he said will be opening in Rouse’s Fashion Show mall in Las Vegas. Others include Canali, Schedoni leather goods, Villa Estillo from Spain and Jigsaw andMonsoon from the U.K., which have opened in Rouse’s new lifestyle center, the Village of Merrick Park, in Coral Gables, Fla. “There are some great High Street retail concepts” that could be imported as well, DeRosa added.Does he think the Mills experience in Madrid will entice other developers abroad? “I don’t expect a chain reaction,” he said. “Mills is a different operation. It’s not utilizing classic department stores,” which would be tough to transport abroad.
“In this country, developers have been spoiled by the open-growth kind of approach,” Lagnado noted. “In Europe, you have a multilayered regulatory environment, road and parking requirements, permitting and land acquisition requirements and above that, you have strong lobbies of small retailers — extremely strong lobbies that are not rolling over and playing dead when large guys come in. These are well-organized trade organizations. In a city like Barcelona or Madrid, there are decades-old merchant associations with a lot of political clout. Brussels is well known for having strict eco-friendly guidelines about pollution, traffic, infrastructure, right on down the line, and on top of that there are EU regulations, not just those from sovereign states. The EU has a very firm hand. That’s why you don’t find lots of large-box developments inside the boundaries of major cities. Xanadu is almost 40 kilometers [25 miles] from Madrid, though within the boundaries of greater Madrid.”
“The independents are what make European towns so special and that’s why there is resistance [to American chain stores moving in],” said John Mulligan, ceo of Retail Resorts International, a developer in the U.K. However, some chains, such as McDonald’s, are persistent. “McDonald’s operates in India, but with signs indicating, ‘No beef sold here. We sell lamb burgers.’ They are tasty.”
Fernando Zobel De Ayala, chairman of Ayala Land Inc., the largest real estate firm in the Philippines, suggested there is opportunity for development in his country. Fifty percent of the Filipino population is age 26 or younger and conscious of trends; 30 percent of the mall space is filled by eateries, compared with 15 percent in the U.S., and about 450,000 people visit the malls each day, though not everybody spends every day, said De Ayala.
Javier Sordo Madaleno, director of Sordo Madaleno & Associates, a leading shopping center developer in Mexico, said, “I do think it is a very good time for investment [in Mexico]. Almost 50 percent of the population is under 18. There is a lot of room in Mexico for companies like Gap. The market is much more open to new concepts. There is a very large opening for anchor stores.”It may just take an American developer to get them there.
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