NEW YORK — Twelve years ago, Mills Corp. was a minor player on the national development scene. But a big idea to build a fleet of unique outlet centers got Laurence C. Siegel, then executive vice president for leasing, an audience with the top brass at Saks Fifth Avenue.
“I was in their offices for hours, for days, with Mel Jacobs, Burt Tansky, Phil Miller and Arthur Martinez. It was an amazing group of guys,” Siegel recalled. Starting up outlets had been a topic of internal debate at Saks for some time. Some executives wanted them; others were circumspect.
“We went in begging them on our hands and knees,” said Siegel, who is now chairman and chief executive of Mills. “Those meetings led to the start of Saks Off-5th,” the Saks outlet division currently operating 54 units, with 15 situated in Mills outlets.
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Tenacity has continued to pay off at Mills, which convinced several major American retailers and manufacturers to spawn its first outlets and devise new concepts — such as Bass Pro Shops Outdoor World, Last Call from Neiman Marcus, Ann Taylor Loft, CrayolaWorks and ESPN X Games Skatepark — specifically to help tenant Mills’ projects and provide consumers with something new.
In the past decade, few developers have had as much impact altering the retail landscape as Mills, which controls about 34 million square feet of retail space. And since the dawn of the new millennium, the company has adopted a more complex strategy for growth, involving international expansion, acquiring and redeveloping traditional malls, and injecting it all with new entertainment components.
But as Mills zooms ahead, some retail experts have been questioning whether the company is taking on too much; whether it might rethink the magnitude of its malls, which require a lot of energy to navigate from end to end, and whether the costs of reenergizing some recently purchased big malls will be steep.
“Mills does offer very exciting shopping formats, but they’re behemoths,” said Steve Greenberg, president of The Greenberg Group real estate advisers to retailers. “You end up running all over the place exhausting yourself because you want to visit all these stores, whether it’s Off 5th or Nordstrom Rack or Neiman’s Last Call.”
During an interview, Siegel addressed the issues and stressed that — aside from continuing to build huge outlet/entertainment centers in North America, all branded under the Mills name and rigged to get families to spend more and more time there — Mills is moving faster on the international front than any other U.S.-based developer. Following its foray into Europe last year by opening Xanadu, the 2-million-square-foot retail/entertainment complex in Madrid, Mills properties, Siegel suggested, will be the vehicle for some European retailers to enter the States. Mills is also exporting U.S. retailers to its properties abroad, such as Nike, Tommy Hilfiger and Skechers, which are among the Madrid Xanadu tenants.
“In our projects over the next 12 to 24 months, we are going to be seeing many more European retailers,” Siegel stated.
He also sees a big opportunity to populate his properties with many more category-killers, “particularly in electronics.”
In the past two years Mills has jumped headfirst into the acquisitions arena, from being just a builder. In 2002, it purchased five properties from Cadillac Fairview of Toronto, including The Galleria in White Plains, N.Y., and has been targeting properties with obvious redevelopment potential and space to fill, such as Del Amo Fashion Center in Torrance, Calif. The 35-year-old center, the fourth largest in the country, was bought by Mills last year for $442 million before transaction costs. Del Amo, with sales per square foot of around $465, is located in the South Bay submarket of Los Angeles and is anchored by Macy’s, Macy’s Home and Furniture Gallery, Sears, Robinsons-May and J.C. Penney. Mills plans to invest heavily to redevelop approximately 670,000 square feet of space, including the vacant northeast section, which will become a “lifestyle wing” with 1,000 apartment units as well as a movie theater, a day spa and a gourmet market, according to Siegel.
“We can reinvent a property so that it’s not just a regional mall with three anchors,” Siegel said. “We can create ‘zones of uses’ that bring people to shop there.”
Mills also plans to add a couple of department stores, which should open for back-to-school in 2006. “Del Amo has the number one Robinsons-May and number one Macy’s in Los Angeles County,” Siegel said.
Other redevelopment projects are 108 North State Street in Chicago, which includes 400,000 to 450,000 square feet of retail, but with a twist. The top two floors — levels five and six — will be anchored by a 120,000-square-foot department store, while restaurants and specialty retailers are seen residing on the lower floors. For further differentiation, State Street is where Mills is pushing to lure European tenants, though Siegel declined to name them. The project is expected to break ground this fall and will include offices for the CBS network and an express subway stop to O’Hare Airport.
Another Mills redevelopment project is on the San Francisco waterfront, where Piers 27 to 31 will be transformed into a recreational zone, anchored by a new YMCA as well as restaurants and some retail.
But Siegel said that tackling new types of projects abroad and domestically doesn’t suggest a slowdown in the original Mills outlet/entertainment format. Mills projects will open in Cincinnati and Toronto later this year, and Siegel sees a ceiling of 35 to 40 Mills concepts operating in North America. Currently, there are 15. Mills branded projects, Siegel contended, can fit into areas that are already well served by traditional malls. “It’s a whole different mix and different consumer shopping experience,” he said. “For example, the Arundel Mills center in [Hanover] Maryland is in an area where there are several major malls, but it is doing well.”
Mills’ three most productive properties are Sawgrass Mills in Sunrise, Fla., Ontario Mills in Los Angeles and Del Amo. Mills’ 27 properties yielded sales per square foot of $337 last year, versus $326 in 2002. Net income per share for the year increased 24.7 percent to $2.07 per diluted share from $1.66.
“We have been building about two Mills centers a year,” Siegel said. “Over the next five years, I see one-third of our portfolio in regional malls, one-third in Mills and one-third in international.” The current plan categorizes the properties under the banners of landmarked Mills centers, international retail and entertainment development, and 21st Century retail and entertainment. “But I think the industry changes every day,” Siegel said. “Every day, we see consumer changes. The venues need to change, too. We are very good about reinventing.”
Sawgrass is a prime example. In addition to having a renovation in the works, the mall is expanding with the corporation’s first enclave of designer and upscale outlets, called The Colonnade. Mills does have a few designer outlets scattered across its properties, but none have a real concentration. The Colonnade will feature Mediterranean architecture, fountains and plazas in an open-air setting. There currently are no plans to replicate the design at other Mills centers.
Also planned to open in July at Sawgrass is a unique anchor: Wannado City, a 140,000-square-foot city for kids, which is making its debut. There, kids can pretend to be firefighters, reporters, policemen, airline pilots, learn to flip a pizza, solve a crime, and experience other professions under supervision, and parents can either watch them or relax and get a bite to eat. There’s also a jet fuselage where, after going through a “security check,” kids can enter and use flight simulators. The concept was created by Luis Javier Laresgoiti, who is currently chief creative officer of Wannado City; he was involved in a similar role-playing project built in 1999 in Mexico City called La Ciudad de los Niños. The concept is owned by Grupo Magico, an amusement park operator based in Mexico City, and a subsidiary of the CIE entertainment company, based in Mexico City, which owns Wannado City. CIE, Mills and other investors are spending $40 million to build Wannado City at Sawgrass, according to Valerie McCarty, a marketing and communications executive with Wannado City.
Wannado City, in its strategic alliance with Mills Corp., will situate in other Mills locations and represents an advancement of Mills’ accent on entertainment across its venues, which entail food courts, full-service restaurants such as the Hard Rock Cafe and the Rainforest Cafe, cinemas and games.
“What Mills tries to do is keep people in their centers longer,” observed real estate adviser Greenberg. “I personally am not a huge fan of entertainment components in a shopping venue. I believe the concentration should be on getting better stores. But I do like restaurants. Everybody needs to take a break and eat.”
Lately, Mills’ concentration on going overseas has been what has captured the industry’s attention. “There are three opportunities that are fairly imminent — Valencia [Spain], north of Milan and Glasgow. In the next four to five months, people will see a very vibrant development program,” predicted Siegel. “We are also working on Rome, Seville, Vienna and other places.”
Mills is moving aggressively, because, as Siegel said, “We are starting to see other developers looking abroad. It’s an amazing opportunity, but it is hard to do business. We have a five-year head start, and now we are a lot more believable with Xanadu. It’s been designated a tourist attraction, enabling us to operate every Sunday of the year, whereas centers not designated as entertainment can be open 12 Sundays a year in Spain. Since we opened Xanadu, opportunities have been presented to us from all over the world. If you just go over there and say that you are going to develop a million square feet, they’ll say ‘go home,’ but they covet entertainment. They spend more time outside their homes than inside. In Madrid, we get customers from 18 countries. That’s unheard of. With the advent of the euro, people are crossing borders like never before.”
Madrid Xanadu, like other Mills projects, is huge and diverse, with close to 2 million square feet; 20 anchors, including Spain’s premier department store, El Corte Ingles, H&M, 200 other specialty retailers, and the Snow Dome,?Spain’s only indoor ski facility.
The Xanadu format is coming to New Jersey, just five miles from Manhattan, on an even larger scale. The mixed-use project will have 4.76 million square feet of gross leasable area for retail and entertainment, including a Wannado City, offices and transportation facilities.
“‘Big’ works, but it depends on what the mall is offering the consumer,” Siegel said. “Big assets like Sawgrass and Ontario Mills — that’s what works. The big and powerful are important. That’s what continues to draw.”
Asked about lifestyle centers, which are smaller, more intimate formats popping up a lot more rapidly than major malls, Siegel replied, “I consider them market fillers — nice places to go.” They’re not on the Mills agenda.
Nevertheless, “Mills has been taking on a lot,” observed James S. Rosenfield, national director of retail services for Cushman & Wakefield and president of his own retail redevelopment company. “All of the big guys [developers] considered Del Amo, analyzed it, dropped out of the running and Mills got it. Time will tell whether Mills overpaid or not. The property will need a considerable amount of work to be renovated, and they are not afraid to do the job. It’s such a large property, its going to be multiple centers in one. Money wasn’t put into that mall for decades. There is also a lot of vacant space, but there’s also a lot of opportunity.”
In the race to purchase properties, “General Growth, Westfield and Simon — they are all very hungry,” Rosenfield said. “But Mills is one of the most aggressive, too, and they are smart enough to understand that people need people, and that shopping centers provide the environment for humans to connect with one another. What’s interesting about Mills is that they were in the outlet business, they invented a new type of outlet center, a hybrid big box/outlet/entertainment center, and the company has evolved further into traditional malls with part entertainment features, part lifestyle. Wal-Mart and Target are becoming a part of traditional malls, too. But Mills has a greater comfort level with hybrid properties than anyone else.’
Real estate consultant Greenberg said a few of his retail clients were concerned about the performance of certain Mills properties, as the company has grown so fast, but he noted that Mills has staffed up to support the growth and find solutions to problems.
“Riverside Square [in Hackensack, N.J.] has always suffered under the shadow of Garden State Plaza, and Del Amo has suffered under the shadow of South Coast Plaza,” he said. “But it’s interesting that Larry Siegel convinced Jim Napoli, a former Golden Gloves boxer, to come out of retirement from the Simon Property Group [about a year and a half ago], and obviously Napoli brought in Lloyd Miller, who was head of leasing at Kravco, as group vice president of leasing. In a short time span, Mills now has two heavy hitters. They have a lot of clout. Napoli and Miller are two of the most respected people in leasing, who have access to all of the retailers. They have been addressing problems,” including merchants who might want to resize their stores. “Clearly, they weren’t turning their backs.”
“They’ve done a lot to make their centers more exciting, more festival-ish,” added Isaac Lagnado, president of Tactical.org, a marketing and consulting firm. “Mills understands the value of branding, which a lot of outlet centers have never understood until recently. That’s where Mills has been smart.”
Mills said the branding is being reinforced through two new advertising campaigns, launched last Thursday. The campaigns, created by Pedone & Partners Advertising, will be seen in 26 markets in print, TV, radio, direct mail and outdoor advertising, as well as in malls, and they aim to differentiate the Mills shopping experience through the theme “where great shopping lives” for Mills landmark properties, such as Sawgrass. For its more traditional malls like The Galleria in White Plains, the theme is “more than you’re looking for.”
No one would ever accuse Mills of having a minimalist array.