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LAS VEGAS — Retailers want the best, and mall owners are trying to give it to them.
This story first appeared in the June 14, 2012 issue of WWD. Subscribe Today.
With the recession zapping many retailers’ appetites for unproven real estate and miniscule recent mall development in the U.S., demand for space at prime shopping centers has begun to outpace supply — and mall companies are sensing an opportunity to react. At the International Council of Shopping Centers’ RECon convention that ran here from May 20 to 23 and was attended by 33,000 people, up 1,000 from last year, developers gauged retailers’ interest in a few key new shopping centers, downturn-stalled retail developments rising from the dead, expansions to existing retail gems, urban infill possibilities and a slew of outlet projects.
One of the most elaborate presentations came from Westfield Group, which dedicated a room at Caesars Palace Las Vegas Hotel & Casino to unveil a three-dimensional model and digital imagery of the World Trade Center redevelopment. Last month, Westfield struck a deal with the Port Authority of New York and New Jersey for a joint venture on the retail component of the World Trade Center, a 352,000-square-foot, five-level area that will officially open in May 2015. The joint venture also gives Westfield the ability to spearhead retail in another 90,000 square feet at the World Trade Center.
“When you look at the retail we have done in London and in Sydney, we will do something similar at the World Trade Center,” said Peter Lowy, Westfield’s co-chief executive officer, who stressed food would be an important element of the retail mix. He added, “You won’t see all upmarket or all services. We need to fit the retail into the right spot for the customer.”
The customer base, he explained, will be made up of tourists — eight million visitors annually are expected to go to the National September 11 Memorial Park & Museum — and roughly 310,000 office workers.
The World Trade Center isn’t alone in garnering Westfield’s attention. Lowy estimated the developer would spend $2 billion to $3 billion over the next four to five years on U.S. mall improvements. Westfield’s first substantial renovation of a U.S. mall in three years started last September at Westfield UTC in San Diego. “It’s getting a whole makeover,” said Lowy. The $180 million remodeling, due to be finished in the fall, will include the addition of a 14-screen ArcLight movie theater and various eateries, a dining terrace redo, common area enhancements and a rehab of the storefronts.
Work on Westfield Century City in Los Angeles will kick off this year with the addition of 600 parking spaces, but will ramp up beyond the parking lot in the next three to four years, according to Lowy. He believes Westfield Century City can easily sustain 250 stores, about 100 more than its current count. Lowy pointed to Westfield Montgomery in Bethesda, Md., Westfield Garden State Plaza in Paramus, N.J., and Westfield Valley Fair in Santa Clara, Calif., as other malls slated for remodels.
“You will see more development at the better malls,” said Lowy. “It is not happening today or tomorrow, but it is happening.”
Plenty seems to be happening in the near future at Taubman Centers Inc. The company opened the only major U.S. mall in the last few years with the 700,000-square-foot City Creek Center in Salt Lake City and isn’t stopping there. Taubman chairman, president and ceo Robert Taubman was optimistic the International Market Place in Honolulu would move from the planning stages to execution. Taubman signed an agreement in 2010 with Queen Emma Land Co. to erect the open-air shopping center with 275,000 square feet of mall tenant space scheduled to bow in spring 2015. Taubman said, “Hopefully, in 2013, we will be able to announce when construction is starting.”
Taubman has already said construction will get under way this year at the 640,000-square-foot Mall of San Juan in Puerto Rico, where Saks Fifth Avenue and Nordstrom have made commitments, and the 880,000-square-foot Mall at University Town Center in Sarasota, Fla., a property Taubman jointly owns with Benderson Development that’s expected to feature Saks Fifth Avenue, Dillard’s and Macy’s as anchors. Both centers are scheduled to open in 2014. “There’s no better retail at all in the market. At least half the tenants with be completely new to the market,” said Taubman, speaking of the Sarasota project. “It’s completely on its way.”
Taubman’s progress at the Sarasota mall, which originally was set to open in 2010, is evidence of the wider trend in retail real estate of dusting off projects delayed during the recession. Construction resumed at the 600,000-square-foot open-air Collection at RiverPark in Oxnard, Calif., after a three-year postponement. Target opened at RiverPark last July, and Century Theatres will open this November, followed by REI and Whole Foods in spring of next year. There is space for some 90 shops. “We are seeking contemporary fashion, dining [and] home goods tenants that will round out the experience,” said James Williams, vice president of marketing and communications for RiverPark owner Shea Properties.
Real estate services and development firm Oliver McMillan has resurrected the mixed-use Buckhead Atlanta project, formerly known as Streets of Buckhead, that covers six city blocks containing 300,000 square feet of retail and restaurants, 100,000 square feet of office and 400,000 square feet of residential. Jeff Zeigler, a managing director at Oliver McMillan, said construction would commence in July or August. Hermès is the sole store that Oliver McMillan has openly talked about coming to Buckhead Atlanta, but Zeigler said the project is 40 to 50 percent leased and that there would be 60 to 80 stores upon its completion. “We’ve had a really good response,” he said.
Laura Pomerantz, principal and founding partner of PBS Real Estate LLC, is convinced Buckhead Atlanta will move forward. Ben Carter Properties LLC initiated the Streets of Buckhead in 2006 with a vision to make it the Rodeo Drive of Atlanta, but couldn’t cobble together the money to turn that vision into reality. Zeigler said the revived Buckhead Atlanta project is fully financed. Boston hedge fund The Baupost Group has pledged to inject a $300 million equity investment to get it built. Although Simon Property Group Inc.’s Phipps Plaza, which has Vince, Intermix, Michael Kors, Bottega Veneta, Versace, Valentino and Barneys New York Co-Op stores, is near Buckhead Atlanta, Pomerantz said, “I think there is room for everyone.”
In fact, in markets where luxury has exhibited strength, Pomerantz suggested retail developers are smart to enlarge their properties. Bal Harbour Shops in Florida is growing with 200,000 square feet of new space to house an additional 40 to 50 stores. “The waiting list is so long. It is going to be unbelievable,” said Pomerantz, who estimated annual sales per square foot at the shopping center are now tracking around $2,500.
Retailers want into the Bal Harbour Shops even as it is facing increasing competition from the Miami Design District, where LVMH Moët Hennessy Louis Vuitton SA has reportedly promised to locate 12 of its brands. “The good streets are getting stronger. The A malls are getting stronger,” said Pomerantz.
As A malls, which typically generate at least $400 in sales per square foot annually, charge ahead, B and C malls are lagging further behind. “At the B malls, they roll out the red carpet. Whatever you want, they will give it to you. It is feast or famine in the shopping center business. There is no middle,” said Robert Cohen, president of the Southern California office of the retail real estate firm RKF.
Rent growth at A malls versus B malls underscores the divergence in demand between the mall segments. Cedrik Lachance, managing director of the research firm Green Street Advisors, estimated market rents at A malls have climbed 8 to 10 percent over the past 12 months, while market rents at B malls are flat to up by no more than the rate of inflation. “Retailers are not in a position to support rent growth consistent with sales growth, especially in B malls,” he said.
The comparative anemia of B and C malls is a dilemma for retailers pursuing expansion in the U.S. that have saturated the A classification. “We see groups that are trying to figure out going from 250 to 500 stores, and you can’t do that in A malls,” said Greg Schuster, senior managing director and principal of commercial real estate services provider Cassidy Turley. He added that some retailers are debating whether to go to weaker malls with their original concept, a variant of that concept to suit the B or C customer base or an entirely unique concept. For mature retailers, Schuster concluded, they might achieve “better ROI with a totally different concept instead of [going after] just 10 percent of the market with an old brand.”
There are select underperforming retail properties getting a second look by retailers and mall companies. Caruso Affiliated chief operating officer Paul Kurzawa said the owner of The Grove and The Americana at Brand in Southern California is exploring properties “slightly off A that can be there.”
“We, along with a lot of other developers, are taking a look at our criteria for properties. You have to have a wider underwriting standard to take a look at opportunities that might be a little bit more price, but will have more of an upside,” he said. Kurzawa noted Caruso Affiliated had success elevating The Waterside at Marina Del Rey, a 140,000-square-foot retail center formerly known as Marina Waterside, with $11 million in renovations completed in 2005.
On the distressed end of the spectrum, Harold Bordwin, copresident of GA Keen Realty Advisors, said he received a spate of inquiries at ICSC about the possibility of deals similar to one that he’d advised on for the 210,000-square-foot Closter Plaza Shopping Center in New Jersey, which resulted in a $52 million joint venture between an affiliate of the shopping center company Edens, and the center’s long-time owners Aspi and Bakhtaver Irani, who had filed for Chapter 11 in 2010. “We’ve got lots of real estate debt maturing done in 2006 and 2007. The property values have declined, and those properties are under water. There is opportunity,” said Bordwin.
R. Webber Hudson, an executive vice president at Related Urban, said the real estate company is vetting distressed properties in dense areas. “You have to be careful. You don’t want to be the greater fool. You have to do your research. You can’t move fast,” he said, although he continued, “In the next year or two, you will see steel coming out of the ground in urban infill [by Related Urban.]”
There’s a broadening slice of mall owners and retailers that would rather direct their energy toward growth abroad than toward feeble properties at home. Anthony Buono, executive managing director at CBRE, said, “There’s a lot less risk for a U.S. retailer today abroad. There have been the pioneers in Asia and South America. Instead of going into a B mall where they’ve had a negative EBITDA [earnings before interest, taxes, depreciation and amortization] experience, they are rationalizing Chile, Colombia, Mexico and, of course, China.”
The same dynamic is at work for mall companies. Rather than do the difficult job of turning around depressed assets in the U.S., they have set their sights outside the U.S. There is “little ability to grow in this country if you want to be focused on this particular [A] asset class,” said Sandeep Mathrani, ceo of General Growth Properties Inc. during a panel discussion on the globalization of retail. At the panel, he commented, “The distress in Europe is a true opportunity for the rest of the world.”
GGP has a 31.4 percent ownership interest in Aliansce, manager of the second-largest portfolio of Brazilian shopping centers among the four publicly held companies in the Brazilian shopping center sector. Last year, Westfield followed GGP into the Brazilian shopping center market by acquiring 50 percent of Almeida Junior, which had five shopping centers and two under development at the time of the acquisition. “In Brazil, the issues you face are not that different from Australia from a retail perspective. Australia had very few foreign retailers because Australia traditional had a very local market. Historically, it had very high barriers to entry that were dropped in the Eighties,” said Lowy. “As the economy and consumer grows, global retailers will figure out how to do business there [in Brazil.]”
Robert Taubman said he’s been spending a lot of time in Asia, and mentioned Taubman could be close to unveiling a “bunch of projects” in China. “You see this acceleration of consumerism, and there has to be more supply,” he said. “China is a repeat of the U.S. [shopping center] growth on steroids.”
If any sector in the U.S. were on steroids, it would be outlets. According to Value Retail News, nine new outlet or value retail projects are expected to open by the end of the year, pushing the total number in the U.S. to 187 — and 41 outlets projects are planned for 2013 and 2014. “There is a lot being talked about because I definitely think there is the buzz. Developers react to what retailers are looking for,” said Chris Weilminster, senior vice president of leasing at Federal Realty Investment Trust, which recently broke ground on Assembly Row in Somerville, Mass.
The first phase of Assembly Row will have 315,000 square feet of retail, including 150,000 square feet of soft goods outlet concepts. Glimcher Realty Trust is busy updating and rebranding its current outlets. Jersey Gardens will become The Outlet Collection Jersey Gardens, and the SuperMall in Auburn, Wash., will become The Outlet Collection Seattle. Glimcher is pouring $60 million into redeveloping the outlet centers, which will feature entrances reminiscent of the Louis Vuitton store on Fifth Avenue in New York. Josh Lindimore, Glimcher’s vice president of leasing, said, “These will look like fashion malls.”
Like in the U.S., the Canadian outlet landscape is getting more crowded. European outlet developer McArthurGlen is jumping to North America for the first time with an outlet project in Vancouver it forecasts will register $1,200 in sales per square foot, three times the sales of an average U.S. outlet center. The project will have 340,000 square feet of retail space, with 200,000 square feet scheduled to open in the fall of 2014, divided into 150 stores.
“From this, we hope that we will find other North American opportunities. We have yet to see anything matching the quality of what we do in the U.S.,” said Gary Bond, McArthurGlen’s managing director of development.
Tanger Factory Outlet Centers Inc. is forging ahead in Canada as well. With RioCan Real Estate Investment Trust, the company bought the 161,000-square-foot Cookstown Outlet Mall in Cookstown, Ontario, last year, and Tanger ceo Steve Tanger said the center should double in size by next year. The company is also partnering with RioCan and developer Orlando Corp. to add 312,000 square feet of retail to the existing 2 million square feet at the Heartland Towne Center in Mississauga, Ontario, and with RioCan on a 350,000-square-foot factory outlet center in the suburban Ottawa market of Kanata.
The list of proposed outlet centers may be swelling, but Steve Tanger warned that it doesn’t reflect the number of outlet centers that will come to fruition. “My guess is that at most, with the exception of Tanger and Simon, maybe 15 percent will actually be opened and built. Historically, it is less than 10 percent. I am giving the benefit of the doubt because there are very sophisticated, well-funded companies that have found sites,” he said. “The litmus test will be if you make calls to these people on Sept. 1 and ask them to show you photographic evidence that they’ve actually broken ground. Then, you will actually know for certain if they are going to deliver by 2013.”