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The retail real estate business has bounced back, but it’s unclear just how big the bounce will be.

This story first appeared in the June 10, 2013 issue of WWD. Subscribe Today.

After recession-era pronouncements about the demise of the mall and the takeover of brick-and-mortar by online competitors cast a pall over the sector in the past few years, shopping-center owners and operators are now decidedly cheery that most retailers seem to have turned the corner, retail unit growth is being considered again, shoppers haven’t abandoned malls and retail rents are increasing at core properties and streets.

But questions raised during the recession remain, including the fate of middle-income consumers, the sort of store footprints suited to a digital world, the retail environments that should be cultivated to pull people away from their devices, and the lack of new mall development.

“Business is better,” declared Peter Lowy, co-chief executive officer of Westfield Group, the world’s largest mall owner with 105 shopping centers in five countries, which saw net profits advance 18.3 percent in 2012 to 1.72 billion Australian dollars, or roughly $1.66 billion at current exchange, and average specialty rents at U.S. malls rise 2.3 percent for the year to $63.56 a square foot. “We are comfortable that the recovery that has been going on for the last two or three years, while slow, is continuing. Retailers are expanding. There is big demand for the top centers around the world.”

The recent International Council of Shopping Centers RECon in Las Vegas reflected the renewed confidence. “There’s a lot more optimism and definitely a risk on versus risk off mentality,” said Anthony Buono, executive managing director for retail services at commercial real estate services and investment firm CBRE Group Inc. “The mood is positive,” concurred Rick Caruso, founder and ceo of Caruso Affiliated, owner of The Grove, The Americana at Brand and The Commons at Calabasas in the Los Angeles area, among other properties. “The bankers realize their job is more challenging. That means there is a good economy, and they have competition.”

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The financial equations being crunched by bankers and shopping-center firms have led to a spate of shopping-center acquisitions and divestments, but haven’t yet resulted in a slew of new U.S. malls. According to Matthew Sullivan, a managing director and principal at Lee & Associates’ investment services division, shopping-center transaction volume has jumped 100 percent year-over-year, a figure unlikely to be matched again in the near future. “The prices have already gone up, and there will be fewer transactions,” he said. “Most of it was coming from the distressed side, and there is less distress out there.”

Even if the number of transactions dwindles, demand for retail assets remains strong. As an example, Craig Killman, senior vice president and West Coast market lead at commercial real estate services company Jones Lang LaSalle, pointed to a Kroger-anchored center outside of Atlanta that received 28 offers and three of the final 10 bidders had $1 billion in capital to spend. “The investment community is just desperate to place capital,” Killman contended. That desperation means properties that previously may not have warranted a glance are getting looked at.

“There’s a window that hasn’t been there since ’07, and there is a half dozen to a dozen credible buyers for B malls,” said Michael Glimcher, chairman and ceo of Glimcher Realty Trust, owner and manager of 29 properties. “The pricing has gotten so aggressive on the top end, so it is forcing people to reconsider.”

Lofty shopping-center prices could make new development more attractive. That is the case at Caruso Affiliated, where Caruso said, “Our focus is clearly ground-up development, especially given where cap rates are for acquisitions.”

Caruso Affiliated has been on the hunt for land in the San Francisco Bay Area to plant retail roots and is in the early stages of designing a retail complex on 48 acres in Carlsbad, Calif.

Robert Taubman, chairman, president and ceo of Taubman Inc., owner and manager of 27 shopping centers, said, “It’s a good time for us to think about development.” He estimated Taubman would open four or five new centers this decade. The company premiered City Creek Center in Salt Lake City, Utah last year and is set to open The Mall of San Juan in March in San Juan, Puerto Rico. In Hawaii, Taubman said a proposed project at the current International Market Place in Waikiki is “not yet final to go forward,” but that he hoped to make an announcement soon about its progress.

In general, new full-price mall projects are few and far between. Bill Di Santo, president of Englewood Construction Inc., a commercial general contractor specializing in retail, said significant new mall development is “far out.” “I don’t think we are going to see new centers. There are so many centers that need to be retrofitted,” he noted.

James Ratner, chairman and ceo of the commercial group at Forest City Enterprises Inc., stressed redevelopment is the “big emphasis. We are all looking at reengaging our customer base. We need to pay more attention to our existing product,” he said. Ratner singled out an anticipated upgrade to the 580,000-square-foot Ballston Common Mall in Arlington, Va., which opened in 1986 and was bought by Forest City in 1993. “We are going to be converting and redeveloping that center. We are going to open it up to the street and put in different retailers,” he said. Forest City envisions street-facing store entrances, two-level storefronts and outdoor terraces.

Howard Hughes Corp., the real estate development and management company spun off from General Growth Properties in 2010, has several redevelopment projects in the works. It is turning the Riverwalk Marketplace in New Orleans into the 250,000-square-foot The Outlet Collection at Riverwalk, which it calls the nation’s first downtown outlet center, at a cost of $70 million. Due to reopen in 2014, Howard Hughes vice president of marketing Caryn Statman Kboudi said the center is 70 percent leased and 100 percent committed. Howard Hughes is also revamping 365,000 square feet of retail at South Street Seaport in New York with construction, which is expected to take two years, starting in October. The upgraded South Street Seaport will “have local shops and international retailers with some of their first locations in the U.S. It will definitely be upscale. It will include a lot of food and beverage,” said Kboudi.

Luxury projects are a rare breed of development, but they are occurring. Kemper Development Co. is planning a $1.2 billion, 2-million-square-foot expansion to The Bellevue Collection in Bellevue, Wash., targeting prestige retailers. The Whitman family is enlarging the Bal Harbour Shops by 200,000 square feet and has partnered on Brickell CityCentre in Miami, a 2.9-million-square-foot project with 500,000 square feet of retail, with Swire Properties. Mixed-use real estate developer Oliver McMillan is in the midst of two projects with a luxury bent. It has recently secured loans for both of them: a $175 million loan led by PNC Bank for Buckhead Atlanta, which will have 300,000 square feet of upscale retail and restaurants, and is expected to open in 2014, and a $150 million facility led by Bank of America for the River Oaks District in Houston, which is slated to have 270,000 square feet of high-end retail, restaurants and entertainment, and open in 2015.

Morgan Dene Oliver, ceo of Oliver McMillan, said more than 60 percent of the retail space at Buckhead Atlanta has been leased by retailers accustomed to locating on the likes of Rodeo Drive, Michigan Avenue and Madison Avenue. Hermès is the one retailer Oliver McMillan has publicly confirmed for the project. While luxury retailers are keen to expand, McMillan said it’s difficult to put together developments in areas that can sustain luxury. “Any time you are doing new construction in America at this scale, it is difficult. It takes a lot of bandwidth and a lot of passion,” he said. “What’s difficult is to come up with a parcel or parcels of land in the right locations in cities where there is a need for more luxury.”

Rather than building luxury retail destinations, Buono suggested many developers are interested in replicating Brooklyn outside of Brooklyn. The goal is to make desirable urban environments with good housing stock, retail that runs the gamut serving daily needs as well as drawing aspirational spending, restaurants catering to local tastes and contemporary office spaces, all to satisfy affluent, young people. Consumers now “want an environment that is consistent with how they view their lives,” suggested Ratner. It’s not an easy task to bottle Brooklyn, though, and Geoffrey Bailey, head of retail services at the Brooklyn commercial realty firm TerraCRG, thinks it is next to impossible. “You have a lot of young people who have moved to Brooklyn who are taking advantage of the industrial and loft spaces that were abandoned by traditional industry as they moved out of these areas. Artisans came in. You have so many different creative people mixing with ideas about everything from food to technology to art to performance. I don’t know how you can go and really recreate that. It is very unique,” he said. “There are so many factors that came together to make Brooklyn what it has become and is becoming.”

Mixed-use developer Edens, which has 111 properties predominantly in Boston, New York, Atlanta and Miami, is trying to figure out the recipe that makes modern communities flourish. Jodie McLean, president and chief investment officer of Edens, said the company doesn’t want to fill retail square footage at its developments entirely with retread mall tenants, and strikes a balance between national names and smaller retailers, with about 30 percent of space going to emerging concepts. “Our customer wants an artisan retailer,” she said. Floyd’s 99, a barbershop with a rocker edge, might be more appropriate than a Supercuts at one of its sites. Mom’s Organic Market and Red Apron Butchery are other concepts that Edens has embraced. If Edens can’t find a current retailer to meet a community need at a project it is working on, it will seek out entrepreneurs to operate a store that meets that need. McLean insists that upstart retailers demonstrate they can perform and generate close to $1,000 in sales a square foot.

The retail real estate industry realizes it won’t stay relevant in the face of e-commerce if it stands in place, and its approach to the digital world has changed. Instead of viewing e-commerce as a threat to be overcome, the rise of omnichannel strategies has given physical space important duties — stores are being used as platforms for same-day delivery, Web purchase pick-ups and e-commerce fulfillment — that retail real estate executives at ICSC RECon were championing. “You go on Nordstrom’s Web site and decide to buy a sweater. If you want to take it back, chances are you are going to take it back to The Grove or Americana and then the chance is you will buy something else. I think that’s great,” said Caruso. As omnichannel infrastructure is laid down, Daniel Hurwitz, ceo of DDR Corp., owner and manager of 450 retail properties, said the size requirements for selling space may decrease, but not overall square footage. “You better have inventory, and it better be at a convenient location,” he said, mentioning that Best Buy has reported as much as 40 percent of its online purchases are picked up at stores.

If the recovery dispelled the myth that e-commerce would render stores meaningless, that myth wasn’t alone in being debunked. The idea that condensed retail footprints were going to rule the retail landscape hasn’t been borne out. “There are a lot of things from a few years ago that were extreme opinions,” said Hurwitz. “It [downsizing] really wasn’t happening. It was a rounding error at best.”

Of reductions in big-box footprints, Andrew Graiser, copresident of A&G Realty Partners, said, “They are very hard to execute. The landlords don’t want to bastardize a box. The cost to split up a box is never cheap.” Today, he said retailers aren’t sticking to cookie-cutter footprints. They may open bigger stores in areas that demand them — for instance, flagships on major city streets — and smaller stores elsewhere. “Retailers are doing a lot more research. They are a lot more attuned to customer profiles and demographics, and they are adjusting to it better,” said Graiser.

Another myth that’s gone by the wayside is the myth of the absent middle. While dollar stores and luxury stores expanded as middle-market retailers largely reined in growth during the recession, retailers betting on the middle class have come rushing back. Gap and Macy’s were frequently cited at ICSC RECon as midtier retailers that have had recent success, and fast-fashion players peddling affordable, trendy attire continue their global spread with no signs of stopping. Mark Burlton, a partner at Cushman & Wakefield’s retail services branch, said, “I think there’s room for a lot more brands in that [fast-fashion] sector. Landlords are desperate for something fresh and new, and they will offer attractive deals.”


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