Regional Malls Focus on Destination Concepts to Lure Customers.
Since their heyday in the 1970s and 1980s, regional malls have suffered their share of hits. In the early 1990s, the trend toward power centers, which feature four or five big-box category killers, provided increased competition for malls, especially their anchor department store retailers. Older properties that weren't reinvented also were hurt when newer, more innovative properties chipped away at their market share.
The past decade also witnessed significant changes in retail delivery channels and consumer preferences. Today's time-sensitive consumers are focused on concepts that offer convenience and price, which, in many instances, has left malls out in the cold. Discount retailers such as Kohl's and T.J. Maxx steadily have in-creased their sales, while department stores have been losing ground.
New mall construction also has slowed to a crawl in recent years. Only 11 new U.S. malls opened in 2001, according to the International Council of Shopping Centers. Seven are scheduled to open this year, and eight are planned for completion in 2003.
“In terms of the construction pipeline for new malls, you don't see new mall development like you used to because of the increasing cost of land, overall assemblage costs, the planning and zoning process, and the time-value of money, which are all factors decreasing the new stock inventory,” says Kahlil Barnard, a retail investment specialist in Marcus & Millichap's Indianapolis office.
Twenty of the 34 regional and super-regional malls that were slated for completion between 2001 and 2004 are located in the South, according to ICSC. Job and employment growth in the South generates the necessary demographic profiles for such projects.
For example, the Mall at Millenia, a 1.2 million-square-foot retail center in Orlando, Fla., opens in October within a trade area of more than 1.3 million people, which is projected to increase by 10.4 percent by 2005. The mall is the centerpiece of a 5 million-sf development that will include a mix of premier office space, hospitality, and other commercial uses.
Successful malls have responded to the challenge by creating environments that are high-energy, entertainment-based social gathering destinations. While the country's top malls have reinvented themselves to capture and hold the imagination and sales dollars of consumers, others have fallen victim to changing demographics and consumer patterns, increased competition, and functional obsolescence.
The current mall market presents a dichotomy: a case of haves and have-nots. On the one hand, a small group of large dominant players, such as Simon Property Group, Taubman Centers, General Growth Properties, the Mills Corp., the Macerich Co., CBL & Associates Properties, Forest City Enterprises, Westfield America Trust, and the Rouse Co., own the top-performing class A fortress malls. Generating sales of $450 or more per square foot, these malls possess all the right qualities: good location, favorable demographics, strong anchors, little or no direct competition, excellent tenant mix, and superior management.
On the other hand, older or smaller market class B and class C malls are facing varying degrees of economic and operational adversity. “There are a lot of malls in what we call a ‘ disaster spiral,'” says Mark Lasman, a retail specialist in Marcus & Millichap's Fort Lauderdale, Fla., office. “These are properties where demographics have moved away or they have faced increased competition. Once sales figures plummet and vacancies start to climb, it can be a domino effect.”
While many class B and C malls have endured declining sales, increasing vacancies, and falling rents, class A properties maintained their solid footing during the recent economic downturn. Simon Property Group, the largest publicly traded retail real estate company in North America, reported a first-quarter 2002 occupancy rate of 90.9 percent for its mall portfolio, compared to 90.2 percent one year prior. During the same period, rents increased 3.2 percent to $29.51 psf.
At Taubman Centers, average annualized rent for comparable properties was $41.96 psf, up 1.3 percent from $41.44 psf for first-quarter 2001. Average occupancy was 87.2 percent for the first-quarter 2002 vs. 88.2 percent for first-quarter 2001.
Similarly, Macerich Co.'s mall portfolio occupancy remained high at 92 percent as of March, a slight decrease from 92.4 percent one year earlier. During the first quarter, Macerich signed new leases at average initial rents of $37.92 psf, substantially in excess of average portfolio minimum rents of $29.14 psf. First-year rents on mall and free-standing comparable store leases were 26 percent higher than expiring rents.
By contrast, a representative example of a struggling class B mall is Landover Mall, a 30-year-old property in Prince George's County, Md., owned by Lerner Corp. It has been suffering a slow, lingering death, and in late April, only 36 of the 130 storefronts in the mall were open with many displaying final sale signs.
The mall investment market is somewhat of a dichotomy as well. Class A fortress mall sales are limited and trade primarily at the institutional level, while much of the sales activity is occurring in the class B and C markets. Opportunistic entrepreneurial players seek troubled properties where they can make acquisitions at cap rates in the 11 percent to 12 percent range.
“Class C mall properties that need repositioning are a very big play with investors right now,” Barnard says. “There is a huge pool of capital that is looking for investments with significant upside potential.”
New Mall Concepts
Recently built malls and those currently in the construction pipeline are accommodating a greater variety of tenants -- not only stores with consumer goods but also entertainment and service components. Some developers also have realized the importance that restaurants play in the tenant mix. By securing restaurants that attract the targeted demographic profile, owners can leverage their negotiations with desired anchor tenants.
One new concept has been the advent of hybrid malls that combine indoor and outdoor components. Properties that incorporate such designs include the Mall of Georgia in Buford, Ga., and FlatIron Crossing in Broomfield, Colo.
The Richard E. Jacobs Group employed the hybrid design for its newest development, the Triangle Town Center in Raleigh, N.C. This 1.3 million-sf super-regional mall features both an outdoor collection of shops and restaurants and an enclosed section of stores.
“Our vision for Triangle Town Center has been a retail destination that literally has something for everyone, both in terms of experience and stores,” says William Fullington, Jacobs' vice president of marketing.
The Mills Corp. has adopted the term shoppertainment to describe its centers' unique blend of name-brand, value-oriented stores and dynamic entertainment. Typically Mills' destination centers include large multiscreen movie theaters, interactive retailers, and entertainment venues such as nightclubs, restaurants, and skate parks. “We generally become one of the top tourist destinations in the markets we enter,” says Ramsey Meiser, Mills' vice president. “Each Mills development is designed to be unique and different from any other retail project. Every market has its own character. Our goal is to fit the character of the area and provide value-oriented retailers.”
The company's latest development, the 1.2 million-sf Colorado Mills in Lakewood, Colo., is an example of the shoppertainment concept. Scheduled to open in November, Colorado Mills will feature 18 anchor stores and more than 200 specialty retailers, as well as a variety of theme restaurants, casual dining, and cutting-edge entertainment venues. The mall's shopping mix will include manufacturers' outlets, specialty retail outlets, and full- and off-price retailers. E-Street, a unique outdoor component, will feature themed restaurants and entertainment venues, including a 16-screen theater.
Tuck and Lift
With limited new construction, stiff competition in the marketplace, and low interest rates, many mall owners are investing money in redevelopment, renovation, and expansion projects. Realizing the necessity to stay in front of the curve in their respective markets, many aim to attract the top retailers.
Several high-profile malls undergoing extensive renovations include Fashion Show Mall in Las Vegas and the Shops on Ocean One in Atlantic City, N.J.
Owned by the Rouse Co., Fashion Show is in the midst of an extensive, multifaceted redevelopment. With an expansion doubling its size to more than 1.9 million sf, the mall has attracted new anchor tenants such as Nordstrom, Bloomingdale's, and Lord & Taylor.
Park Place Entertainment Corp., which owns the three-story Shops on Ocean One, plans a major overhaul of the 20-year-old mall. Built to resemble an ocean liner, the mall will close later this year for a two-year renovation project that will convert it to a retail, dining, and entertainment venue.
Dominance Through Consolidation
Consolidation among retailers is one of the most persistent trends in the industry. Today, the top two or three retailers in each category capture a majority of sales and have gained bargaining power with vendors, suppliers, and landlords. They can negotiate better prices and have more leverage over lease terms.
Consolidation also is prevalent in the retail real estate sector, as the industry's largest players seek to increase their mall property holdings. For example, General Growth Properties announced a $1.1 billion deal to acquire JP Realty and its retail portfolio of 18 regional malls and 26 community centers. Macerich Co. announced that it was acquiring Westcor Realty for approximately $1.5 billion, which will add nine regional malls to its portfolio.
Many of the large mall companies are pursuing a strategy of dominating certain primary markets through the acquisition of competing properties. For example, Macerich's acquisition of Westcor will give the company ownership of two malls in the Denver/Boulder market: Macerich's Boulder Crossroads and Westcor's FlatIron Crossing. This strategy gives them more control over tenant rosters, rents, and their properties' destinies.
The Future of Malls
The trend toward obsolescence for some older malls will accelerate. According to a report issued by PricewaterhouseCoopers last year, 7 percent of U.S. malls can be considered greyfields -- older, economically obsolescent properties. Another 12 percent of troubled malls could be headed toward closure over the next five years, the report states.
The public sector continually is pressured to underwrite and conduct feasibility studies on how greyfield malls fit into a city's long-term plans. In most cases, developers and investors are willing to step in only after such studies are completed. The redevelopment of these properties will be an increasingly important issue at the local level, as communities seek to increase their property tax bases and provide new jobs.
As the economy picks up steam, retailers and retail property owners will enjoy improving fundamentals. In April, the National Retail Federation raised its retail sales estimate for this year, predicting an increase of 6 percent.
The retail sector also received good news from the National Association of Realtors, which recently projected that net absorption in the retail sector would increase from a negative 12 million sf in the first quarter to a positive 26 million sf in the fourth quarter. NAR estimates that net absorption for 2003 will reach 146.6 million sf.
The bottom line: Consumer trends constantly are changing and at a faster pace than ever before. Owners and retailers know their properties continually must adapt to survive in today's competitive retail marketplace. Keys for success will be creating shopping efficiency, offering convenient locations with an assortment of goods and services, promoting multichannel points of purchase, offering a strong price-value proposition, and enhancing the shopper experience.