Retail

A Breath of Fresh Air

Lifestyle centers evolve to meet shoppers' demands for convenience.

"From a new development point of view, it seems that three pillars have decided that open air is the best: the municipalities that are approving these new centers, the tenants who are going in them, and the customers who are shopping in them," says Michael E. McCarty, president of Simon Property Group's community shopping center division in Indianapolis, whose company currently isn't developing any enclosed retail assets. "Everything we're working on is open air," he says.

Where shoppers decide to shop, developers build "quickly, before consumers change their collective mind. If necessity is the mother of invention, then the shopping center business -- from both the development and leasing sides -- is the quintessential mother of invention," says Alan E. Smith, executive vice president of Konover Development Corp. in Farmington, Conn.

Or reinvention as the case may be. While not exactly innovative, today's open-air shopping centers offer a contemporary twist on group retailing. Smith and other commercial real estate professionals understand that open-air centers' new shapes are a response to consumers' shopping patterns, retail economic trends, and even shoppers' aesthetic preferences.

"There are quite a number of different trends converging on open-air centers," says Michael D. Beyard, senior resident fellow/retail and entertainment at the Washington, D.C.-based Urban Land Institute. Perhaps most notable is their emergence as major players in regional shopping areas. While enclosed mall construction has slowed, open-air centers -- many with as much or more retail space as traditional malls -- are enjoying a brisk development surge.

Removing the Roof

Open-air centers and various hybrid concepts are popular with shoppers and, therefore, developers. "We're seeing a range of projects, including combinations of open-air and enclosed lifestyle centers appended to malls or collocated with malls," Beyard says.

The trend is growing among mall redevelopers as well. Many struggling traditional mall owners are removing roofs, rearranging tenants, and reconfiguring site plans to create open-air centers.

"What was built 30 or 40 years ago may not serve the market appropriately today," Smith says. "In some cases it requires a redevelopment of the property or, in other cases, a re-leasing of the property -- maybe you have the wrong anchors. Then it's really incumbent on the owners and the leasing people to understand the market and work with the tenants that don't belong there to get them out, and work with the tenants that do belong there to get them in."

"You do that when the market makes sense," McCarty says. "There are some malls where the market has just left, and there's not a lot of retail opportunity there. You're probably better off considering an alternative use for that property. Where the market hasn't left, the consumer is still there, and it's still very viable from the retail point of view, the answer is clearly to retool the asset and convert it into an open-air environment."

Grant M. Ehat, executive vice president and director of leasing for JBG Rosenfeld Retail in Bethesda, Md., currently is "demalling" a local 1970s mini-mall that includes a grocery store and two now-departed department stores. When the project is complete, half of one department store will be demolished, and the remaining 40,000 square feet will be converted into big-box space. The grocery will move to a new, 58,000-sf prototype store; its current location will be turned into smaller shops. All of the new tenants will face outward rather than inward.

Though clearly open-air centers are not a new concept, "what is new is the scale of them, how large they're getting and the unique and different mix of stores that you find in them," McCarty says.

New Tenants Mix Things Up

As open-air centers' physical configurations expand, so do their tenant mixes. While some centers retain a similar-is-best approach -- lifestyle centers seek high-end retailers, power strips get big-box discounters -- others successfully blend discounters, full-price stores, and restaurants.

While such a mix may have been taboo in the past, current shopper demands propel the shift. "Consumers are changing their habits in terms of how they want to shop, when they want to shop, and where they want to shop," Beyard says. "And this has major implications for the introduction of new forms of shopping centers."

Many centers are morphing to meet consumers' demands. But, "Nordstrom can't fulfill all those needs and neither can Target," McCarty says. "Why make [shoppers] go somewhere else, if you can capture the demand that they have?"

Simon Property Group is a prime developer of these hybrid centers, such as the Waterford Lakes Town Center in East Orlando, Fla. The company originally planned an enclosed mall for the 133-acre site, but it "determined that an enclosed mall would not be that unique in the marketplace," McCarty says.

The result: A 1.2 million-sf open-air marketplace with a mix of restaurants, specialty stores, and 17 anchors -- without a conventional department store among them. Instead, the center's anchors include Super Target, Barnes & Noble, and OfficeMax, which mingle with more traditional mall retailers such as Bath & Body Works, California Pizza Kitchen, and the Children's Place.

"The traffic counts on that property rival our best regional malls," McCarty says. "We have the same customer, but where they may make it to the mall two or three times a month, they get to our project two or three times a week because of all the goods and services there."

And because enclosed-mall growth has slowed, retailers traditionally wedded to that format now find themselves with limited options.

"If [a retailer] says, 'We go into regional malls,' and there are only three new malls planned this year but they are going to open 50 new stores, what do they do? They have to get comfortable [with the idea] that they can do business in an open-air environment," McCarty says.

The Paradigm Shift

Shopping center tenant mixes started changing when department store Montgomery Ward closed 250 stores in late 2000. "Montgomery Ward had a lot of traditional mall locations, and in many of those cases, they were replaced with a Target," McCarty says. When that happened, "Other anchors in the mall weren't happy about it, but after a while they said, 'Maybe this isn't so bad.' It was a paradigm shift of the thinking."

Around that time several other regional chains went out of business, and national department store chains regrouped and downsized, leaving shopping center managers with empty anchor space to fill. While many were re-leased to department stores, just as many ended up with different tenant types entirely.

A 2002 International Council of Shopping Centers Research Quarterly study surveyed 132 shopping center owners about their reuse of Ward's space. Department stores took 54 of the stores, and discount stores leased 38. Uses such as home furnishings stores, apparel chains, wholesale clubs, and supermarkets filled 30 others. In some instances, owners subdivided the space: A two-story store got two tenants, each leasing a floor. But in other instances, nontraditional retail anchors, such as Target or Burlington Coat Factory, took the entire space.

In some cases, replacement tenants are very nontraditional. John D. Spake, CCIM, president of Spake Real Estate in Asheville, N.C., has filled numerous grocery clients' empty shopping center stores. For example, he's placed six post offices, which are "one of the best uses to turn around a dying shopping center. It creates a destination that the public wants to visit on almost a daily basis," he says. He also has filled the spaces with medical offices, such as dialysis or physical therapy centers. In those instances, surrounding stores and restaurants get a boost from people passing time while friends or relatives undergo treatment. A charter school, call centers, and churches are other nontraditional tenants Spake has placed in shopping centers.

Self-storage facilities also are a popular reuse. "That's a trend I'm seeing in older centers where the retail corridor has moved away," says Marc J. Blum, CCIM, CPM, principal and chief operating officer at Next Realty in Northfield, Ill. The vacant spaces lend themselves to this use because of their high ceilings, open floor plans, column clearance, and loading docks, he says.

Shoppers Want Convenience and Ambience

A broader tenant mix is just one factor increasing open-air shopping centers' popularity. Often the centers also are easier to navigate.

"People are time-starved," says Paul G. Fetscher, CCIM, CLS, president of Great American Brokerage in Long Beach, N.Y. "You need to build places where people want to go that are convenient and accessible." Open-air centers offer shoppers the chance to choose a store, park near it, do their shopping, and be on their way.

Convenient access increases retailers' visibility as well, says Clay Smith, executive vice president and managing director of Staubach Retail Services Southwest in Dallas. "It's easier for tenants to create their own image and style," he says. The outside exposure is more likely to stick in potential shoppers' minds, "where in an [enclosed] mall the only tenants who get exposure are the big anchor tenants."

Retailers also like open-air centers for their lower operating costs. "In an enclosed mall, you've got common-area maintenance charges that can be as much as what your rent is," he says. "In an open-air mall, you don't have that." ICSC's The Score 2004 shows that CAM expenses for more-than-200,000-sf open-air centers are 59 cents per square foot and operating expenses are $2.82 psf; CAM expenses for enclosed malls less than 500,000 sf are $1.15 psf and operating expenses are $11.94 psf.

While their convenience draws shoppers, open-air centers also are designed to encourage customers to linger. Retail experts call it a "sense of place" with wide sidewalks, inviting architecture, and attractive landscaping. Some aim to duplicate a nostalgic Main Street atmosphere; others try for something new. "I'm seeing big-box, lifestyle, and convenience retail all rolled into a sort of street-front concept. That's very new, but I think we're going to see an explosion of these types of developments in the future," Beyard says.

"It's all about the environment that's being created. It used to be that just the merchandise reflected the kind of environment you see yourself being part of; now it's everything about the shopping center and everything about the store that reflects how you see yourself, how you live, and how you want to live," he adds.

Fetscher concurs. "The business that we're really in is how people feel about themselves when they're in our space. So we need to create better experiences, which will be rewarded with a higher frequency of customer visits."

Traditional malls don't offer shoppers the same ambience or experience. "With an enclosed mall you haven't got a clue as to where you are -- there's no sense of character, nothing unique about it," Fetscher says. On the other hand, "you can't cookie-cutter [an outdoor center's look] -- each one needs to interface with its city. It's finding out what's unique and what has character in your area, to finding the local restaurateurs and retailers."

To further encourage customer lingering as well as provide a one-stop, all-in-one destination, the centers integrate food and entertainment into the mix.

"The whole range of innovative food concepts is one of the emerging success stories in shopping centers and will become bigger and bigger," Beyard says. These concepts range from marketplaces with local farmers and specialty produce providers to flowers to all of the kinds of things you'd see in a city public market years ago. I'm seeing a mix of gourmet and local specialty products and the best of national chains. It's a very stylized, personalized mix that includes sit-down restaurant clusters that can be extremely high end or middle market. Upgraded food courts, fast-casual restaurants, and even retailers that offer food service, such as bookstore cafes, often complement these new concepts.

However, Fetscher cautions about mixing food and entertainment tenants with customers' shopping patterns. Movie theaters and high-end restaurants draw crowds, but primarily on weekends. "You need a nice mix of casual restaurants and night spots -- a bookstore poetry reading, guitar playing at Starbucks -- neat little things that'll bring up the Monday-through-Thursday crowds when there's moderate traffic at the screens," he says.

Mixed-Use Makes Sense

The addition of residential properties to open-air centers provides a built-in market for the centers' attractions, experts say.

JBG Rosenfeld is working on a number of mixed-use retail/residential projects, Ehat says. Currently, they are developing a 140,000-sf retail/220,000-sf residential property in Herndon, Va. The company also is working on a Whole Foods Market in Alexandria, Va., that will have three levels of condominiums above it.

Spake is developing a mixed-use project on a former baby food plant site in Asheville. "We basically took a plant site that was located in a good retail corridor and worked with the city to rewrite a new zoning district called the urban village district," he says.

Half of the 750,000-sf plant was demolished; he sold the other half and 25 acres to a wholesale building supplier. On the remaining 25 acres, Spake is developing an urban village concept -- a mixture of 75,000 sf of retail and office space and 400 residential units. The development will be a mix of free-standing buildings around the perimeter with shared parking in the center; stores will front on the street. Retailers will include national chains, such as Office Depot and Hollywood Video, as well as local retailers and chain restaurants. Office and residential space will be above the ground-level retail; at the rear of the site, multistory residential units will be built.

The proliferation of mixed-use developments is a trend that probably won't go away any time soon. "Communities are recognizing that they have to integrate their retailing in a more efficient way with residential development, with other commercial development, with a balanced transportation system," Beyard says. "This is, of course, challenging. It's much easier to find a big open space at the fringe of a metro area and build a big shopping center surrounded by a parking lot. The process is slow and tends to be more individualized than in the past."

However, these projects offer numerous advantages despite the somewhat lengthy approval process. "The upside is that the communities will benefit -- through more livable neighborhoods and commercial centers," Beyard says. The sites also are more sustainable for developers and investors "because there will be fewer opportunities to abandon these properties and fewer opportunities for new fringe construction that will suck the life out of [them]. We see it as a win/win/win situation for the consumers, for the communities in retaining their tax bases, and for the developers in maintaining their portfolio values."

Sarah Hoban

Sarah Hoban is a business writer based in Chicago.

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