In uncertain times, familiarity breeds contentment, particularly for the dominant form of retail project in the United States, open-air centers.
Whether a neighborhood project or lifestyle center, the format continues to grow and evolve, albeit at a slower pace. But right now it is doing so cautiously, even as investors become more interested in and knowledgeable about the format.
“With power centers, the value of the asset is getting up there,” said Michael Longmore, senior VP and head of the open-air center division of Jones Lang LaSalle (JLL), Atlanta. “The owners and institutional investors are expecting more, as they do with the big malls, from the financial and leasing perspective.”
Today, that is resulting in developers blending established formats, financing conservatively, working with tenants they know, locking them in early and seeking alternative sources of income a la regional malls.
The evolution of the format has now resulted in a wide range of open-air projects. Once pretty much defined as either a neighborhood center anchored by a grocery, a community center anchored by a discounter or a power center with multiple category killers, open-air centers now can encompass or accompany mall tenants.
“The 200-acre site on a ring road now will be a hybrid, with a mall and a power center,” Longmore said.
It might also be two open-air projects. Town & Country Center in Miami, managed and leased by Jones Lang LaSalle, is converting a small, enclosed mall into a lifestyle center that will connect to the existing convenience center.
Regency Centers’ nearly 400,000-sq.-ft. Suncoast Crossing in Spring Hill, Fla., will marry power and lifestyle tenants to achieve a critical mass, said Robert McGarrity, senior manager of investments of Regency, based in Jacksonville, Fla. And now, communities that once were leery of development are extremely supportive.
“We’ve really turned a corner in Florida,” McGarrity said. “Before, it was, ‘Developer, go away.’ Now they help you.”
That help is needed, given the current financial environment.
“There is a vicious cycle of rising construction costs, tenants doing harder bargains, and needing more equity in deals,” said Adam Ifshin, president of DLC Management Corp., Tarrytown, N.Y.
But filling those centers at a time when many tenants are cutting back on expansion plans has become more challenging. In the current environment, developers are focusing on expanding and strengthening already healthy tenant relationships.
“We’re really trying to focus on Target and Kohl’s,” as well as Publix in Florida, Regency’s McGarrity said. “Everyone is rather cautious in their decision-making.”
Supermarkets, too, are critical for the more neighborhood-oriented projects, and are staging something of a comeback, Ifshin said.
“We acquired 31 assets last year, only two of which were not grocery-anchored,” he said. “We see groceries staying healthy as Wal-Mart slows its openings and food prices, frankly, go up. They’re making more pennies on each transaction.”
Grocers also are building smarter. Particularly in the Northeast, consumers’ obsession with superstores is cooling off, Ifshin noted, with even grocers downscaling from 85,000-sq.-ft. mega-units to 45,000 sq. ft. Stores are focusing on shelf space, offering fewer choices of any particular item, cutting back on non-grocery items, and not necessarily using the most expensive design features.
DLC also is working extensively with smaller anchors such Family Dollar, Dollar Tree, LA Fitness, Planet Fitness, PetSmart and Petco. Spas and other alternative uses also are becoming popular.
“It’s all about the value proposition,” Ifshin said.
But one should not necessarily assume that the opportunity is now greater for small shops. The credit crunch that has slowed development has also slowed store growth for entrepreneurs, some say.
“A lot of franchisees typically have taken a home-equity loan,” to fund another store, JLL’s Longmore said. “Now, they’re not doing that any more.”
As a result, developers are cautious. Mom-and-pops are feeling the pressure and, once again, familiarity is important; Ifshin noted that he would fill a vacancy by encouraging a successful tenant to open another unit.
“We are being more selective on the amount of [small] shop space,” McGarrity said. “Our preference is to have more nationals. For locals, I see us going to service providers. We have doctors and dentists who are successful and looking to expand in the community. We’re seeing more of that.”
Landlords also are being proactive about renewing leases, opting to guarantee occupancy rather than wait and hope for an extra $1 per square foot in rent. That also means that managers are looking to maximize income by using regional mall methods such as sponsorships and specialty leasing, Longmore added.
“They’ve been doing it in the mall for a long time,” he said.
The current challenges, though, pale in comparison to the early 1990s credit crisis, and are considered by many to be a long-overdue correction. There has been no major loss of talent, Ifshin said, and opportunities still exist for centers of all sizes. DLC continues to hire leasing staff, Regency has grown and JLL’s open-air division, which was created in 2006, has expanded rapidly.
“Only 7% of open-air centers are owned by the self-managed REITs,” JLL’s Longmore said. “There is tremendous growth in open-air.”