By Ben Johnson
Some 32 million square feet of new mall space has come on the market between 2000 and 2002 and the battle for consumers has begun.
The Mall at Stonecrest, a 1.3 million-square-foot project located about 30 miles east of downtown Atlanta, opened last October, and despite the tragic events of September 11 and the slumping economy, the timing was right, believes Harriett Edwards, regional director of leasing for Stonecrest’s co-developer, Cleveland-based Forest City Enterprises. There was nothing within a 15- to 20-mile concentric circle. The area isn’t served at all but the household growth is there. Traffic counts ranged from 60,000 to 80,000 people per day during the mall’s first week of operation, she reports. Atlanta is the hub of the South, and you’ve got to pass our mall if you’re coming from the eastern part of the state to Atlanta to shop, notes Edwards.
The area has anticipated this mall for over 18 years the pent-up demand was incredible, concurs Stonecrest marketing director Vickee Armstrong. The Mall at Stonecrest is the first ever in Georgia to have opened with five anchors and 90 percent leased, and still new deals are flying in daily.
About 30 miles north of downtown Atlanta, in burgeoning suburban Gwinnett County, Arlington, Virginia based Mills Corp. was eyeing its own opening date in early November for a 1.4 million-square-foot megamall known as Discover Mills. According to both Edwards and Dennis Connolly, Mills vice president and development director, there is plenty of room in this growing market, but competition for the consumer dollar still is paramount. Opening two malls at the same time was not a concern when we set our commencement [opening] date, says Edwards. In fact, we had not heard of Discover Mills date when we set ours. Ours was announced first.
According to the New York City based International Council of Shopping Centers (ICSC), 32 million square feet of new retail space in a total of 28 malls has come on the market across the country in the past two years. Absorbing that volume of retail space may prove to be a daunting challenge for most major cities, particularly in the South, where 14 of the 28 new malls are located. Atlanta, for example, was already one of America s largest retail markets: the National Research Bureau reports there was more than 27.24 square feet of retail space per Atlantan in 2000, versus the national average of 18.15 square feet per person. But even with 12 malls in Atlanta with 1 million square feet of space or more, developers are planning to continue building. For the most part, [Atlanta malls] are all doing well, says Edwards. I believe that people shop where they live, and I still believe that Atlanta is not overretailed based on that principle alone. Absolutely not.
With so many major malls opening nationwide in such a compressed time frame, the question is whether the country really needs them all right now. The issue is not one of too much space, but too much obsolete space, notes Geoffrey Booth, director of retail development at the Washington, D.C. based Urban Land Institute (ULI). Malls will continue to be built where they meet a currently unsatisfied or undersatisfied retail need of the target demographic within that center’s catchment.
Both Stonecrest and Discover Mills, for example, are striving for differentiation. Stonecrest, a joint venture between Forest City Enterprises and Toronto-based Cadillac Fairview, is part of a 1,100-acre master-planned community that will include 1,000 homes, as well as a 16-screen movie theater with stadium seating the first of its kind in the area due to open this spring. Discover Mills offers discount stores that are traditional in all Mills properties. However, Mills made what is considered a retail licensing coup a year ago by signing Discover Financial Services, a unit of Morgan Stanley Dean Witter & Co., to be the first major sponsor of a mall development in the country, in a ten-year, multimillion-dollar deal. The mall opened more than 90 percent leased with some 200 stores. We expect the property to develop a sizable base of regular shoppers from the surrounding neighborhoods, including counties such as Fulton and Cobb, says Connolly. However, the size, value, and entertainment experience of Mills properties traditionally generate a much broader appeal that extends beyond local and regional interest.
Such differentiation could spell the difference between success and failure. Differentiation has never been more important, says Michael Beyard, senior resident fellow of retail and entertainment at ULI. It is one of the keys to success because the market is so overbuilt with obsolete space that all looks the same.
When brand-new mall properties enter markets, neighboring retail venues are forced to keep pace with redevelopment to compete. It s not so much a matter of the country needing more malls, but the fact that regional malls constantly need to be reconfigured, refreshed, and retenanted, says Merrie S. Frankel, senior analyst with New York based Moody s Investors Service.
In the 1990s, the decline of major urban centers was attributed to suburban mall development, which, pundits pointed out, pulled consumers away from traditional city centers and closer to where everyone was moving the suburbs. Now, the urban fabric is changing again. Downtowns are making their most significant comeback in the past decade, reverse commutes are becoming more commonplace, and both new and old malls are having to cope with increased competition.
The future of malls is assured, but their current stand-alone fortress design and pedestrian-unfriendly connections to adjoining development will not last, predicts Booth. In the post September 11 environment, Americans are demanding that property assets embrace and foster a sense of community. Malls that fail to meet this need will become obsolete as their competitors move to fill the need.
In fact, Booth s own research, in the book Transforming Suburban Business Districts (ULI, 2001), found that the nation s 200-plus suburban business districts will be the new focus of smart growth in the years ahead, each embracing a more refined sense of community. And where are most of the nation s regional malls located? The burbs.
Most of the newest malls are already stretching the traditional perception of what malls can become. First, they are getting bigger. The ICSC observes that the average gross leasable area in the newest malls built in 2000 to 2002 is 1.15 million square feet. That closely tracks the 1997 1999 period, when 29 malls opened totaling 33.3 million square feet an average of 1.38 million square feet per mall. But going back to 1990 1992, 47 malls opened with an average of about 942,000 square feet each.
All that space allows developers to play with both what is inside and what is outside. The current buzz in the mall industry is about shopertainment and more open-air formats. Even movie theaters are making a bit of a comeback. New malls often have an entertainment function, e.g., cinemas, children s activities, cafés, and restaurants, which were absent from many older malls, and/or include a lifestyle component, which can comprise entertainment especially food and cafés plus retail tenants selling clothes and household goods that are more akin to fun fashion accessories than necessity goods, says Frankel.
Where once malls only stood for a sterile, perfectly regulated 78-degree environment sheltered from the elements, increasingly they are evolving into much more. The big trend is to provide retailers and customers with a choice of enclosed or streetfront retail within the one retail asset. What this means is that place and community are the hot issues in all retail environments, says Booth. September 11 has only accelerated the need for Americans to come together; it s the Starbucks/Barnes & Noble phenomena extended to the whole retail environment of live/work/shop places. It’s about being much more than just a shopping mall. Even the largest mall developers, including Indianapolis-based Simon Property Group, are drawing up plans to break out of the traditional box, creating smaller lifestyle centers of 150,000 to 450,000 square feet.
In the new competitive environment, change and new concepts are good things. The strong survive; the weak perish, points out Booth. In essence, if your retail offering is more attractive than your competitor’s, you take the market share; nothing has changed in that respect. Will this demand continue? Clearly, yes.
Location and fit ultimately win the day. [Success] depends on the location and on the type of store. It’s important to think about co-tenancies and merchandising the mall properly with the right sort of stores, matched to the demographics and psychographics of the locale, says Frankel.
According to Beyard, retailing on a national scale is undergoing some dramatic changes, with many existing shopping centers not meeting the increasingly sophisticated demands of their customers. But where there is change, there are enormous opportunities for providing new shopping environments because of several factors, adds Beyard.
For starters, we are overbuilt with obsolete space that no longer provides the shopping experience that customers are looking for and that doesn’t meet the needs of the new consumers, who increasingly are single, nontraditional, childless, elderly, have two incomes, or are empty nesters. In addition, he says, much existing space is in locations that well-heeled customers no longer want to go to or is in configurations that do not accommodate the latest retail formats. Customers are looking for more convenience in their lives and want to frequent stores that are closer to home and easier to get to. They also want shopping environments that are better connected to other aspects of their daily lives and that include nonretail land uses, services, and amenities. Customers want to be entertained and have more fun when they go about their daily lives, he adds, and they want a shopping environment that reflects their lifestyle, values, and aspirations. They don t want to go to a cookie-cutter mall that looks the same everywhere. Multidimensional developments with outdoor environments with gathering places, outdoor cafés, and coffee shops are becoming popular, notes Beyard. Mixing retail with residential, office, hotel, entertainment, and civic and cultural activities also is on the increase.
Many malls are already undergoing their first round of facelifts to compete with their newer brethren. In Miami, the 1.1 million-square-foot Dadeland Mall is about to get a $30 million renovation from its owner, Simon Property Group. According to Simon regional vice president Gary Moss, the investment should equate to an additional $45 million to $60 million in spending for the area.
After the September 11 terrorist attacks, the atmosphere of fear hit many mall tenants hard. Tenants first went into a wait-and-see mode; however, landlords say leasing is starting to come back, says Frankel. Mall owners are more focused on filling space than fighting tenants for the last dollar of rent. The retail REIT [real estate investment trust] sector has been cautiously stable throughout the past year but warrants a negative credit outlook into 2002. Upscale retailers may suffer disproportionately if consumers move down-market, which impacts regional malls. We’re already seeing this, she notes.
It just so happens that the largest mall developers are in the retail REIT sector, which Frankel says could face significant challenges this year, including the constant demand for fresh concepts, updated buildings, and the continued, but reduced, threat of e-commerce.
The negative outlook for the retail property sector varies by the subsector, with community centers being comparatively better off. The gap between the strong and the weak properties is widening and contributes to the negative outlook, in addition to the continued slide in consumer confidence, says Frankel.
In the aftermath of September 11, malls have focused more attention on security to help attract customers. The real focus is on securing the environment of the mall the air conditioning plants and building services, maintains Booth. In this regard, the Legionnaires [disease] scare in the late 1980s was instructive. The biggest asset of a mall is its safety; attack the public’s perception of the quality of the air you breathe in a mall, and you can seriously impact the public’s subliminal habit of repeat visitation and, thereby, the capital value of the asset, he adds.
Because malls have a major influence on overall retail sales, they will continue to be regarded as key barometers of retail market strength or weakness. In the short term, the trend is decidedly sour. According to the Chicago-based Real Estate Research Corp., retail sales will continue to fall early this year as economic uncertainty lingers and consumer spending continues to drift lower. The year 2002 will be a tough time for consumers and, therefore, for retailers, the group notes in its recent report.
Not everyone shares the dire outlook, however. It pays to keep in mind that malls are long-term assets, advises Christian Redfearn, assistant professor of finance and business at the University of Southern California's Marshall School of Business, which is affiliated with the Lusk Center for Real Estate. The numbers may work out in the long run if the recession is mild. In the short term, there will be more players fighting over a pie that’s certainly no bigger and perhaps substantially smaller. In fact, he adds, it may not be the new malls that are most vulnerable to a slowdown in consumer spending. If they’ve done their market analysis correctly, the new malls may offer a product that’s more attractive than the older malls. Aging, marginally attractive malls may be most hurt.
That is a big if, however. Keep in mind that the malls coming online now were planned when the economy was still growing, and if they had wealthy and confident consumers and growing income built into their designs and forecasts, they may be in trouble, he notes. The wild card remains consumer spending. Consumer debt was at record levels before the economy turned down, and still they spent. We’ll see if that keeps up.
Others are not waiting around for the answer, but are pushing ahead with their mall plans. The latest southern entrant is Chattanooga, Tennessee based CBL & Associates, which is interested in building a 1.3 million-square-foot mall in Newnan, Georgia, just 20 miles down the road from downtown Atlanta.