REAL ESTATE

Mall for One and One for Mall

It’s a turbulent time for many American malls, and several owners and operators have had success reversing the fortunes of underperforming malls by transforming them into mixed-use destinations. This can radically change a mall’s fortunes – particularly those with great locations and favorable demographics – but it is not a magic bullet. Mixed-use redevelopments take time. They come with design and development challenges, new value calculations, and complex economic, demographic, and leasing considerations.

For retailers, the process can be extremely beneficial, but also incredibly disruptive. They need to be attuned to the signs that a redevelopment is needed and cognizant of what they can do to navigate the process once it begins. Ultimately, they need to envision what the “new” mall will look like and what their roles will be in the new space. Recognizing when a mixed-use solution is a possibility, what to do when it happens, and what results can reasonably be expected are musts for strategically minded retail executives.

What to look for
Declining sales. It seems obvious, right? But the signs can be surprisingly easy to ignore. Given inflation, a steadily growing economy and continuing population growth, your sales should be going up. If numbers in your store and in the overall mall are decreasing – or even just stagnating – that’s a red flag that a change is in order.

Anchors away. Do a critical analysis of how your anchors are performing and how they are calibrating their brands to marketplace changes. Large anchors in general (particularly traditional department store anchors) have generally been slower to respond to the nuances of an evolving marketplace. Some have been more successful than others, and some have moved in the right direction, but simply selling products online does not make you an online retailer. Walmart’s online platform and digital infrastructure proves that reinvention is possible, but for every anchor brand able to reinvent itself there’s another on a glide path to irrelevance. Learn to recognize the difference and understand what it means for your mall.

Demographic erosion. This is a big one. If the demographics have abandoned you, almost nothing you do will matter.

What to do
Practice what you preach. It’s one thing to be critical of brands and businesses that are slow to evolve in a changing marketplace, but, first and foremost, retailers need to be focused on their own growth and carrying their own weight. Retail executives and decision-makers must be cognizant not only of their own efforts to bolster their digital profile and integrate e-commerce, but to appreciate what needs to happen in their brick-and-mortar locations to complement those efforts. Some retailers are being more creative and aggressive than others, pushing to integrate new services and technologies like virtual dressing rooms, in-store pickup and ordering, and next-day delivery for items/options that are out of stock in the physical store.

Right-size your shop. Stores can get smaller, but that’s not necessarily a bad thing, especially as smarter inventory management and online sales and ordering integration come on-stream. Retailers can end up with less square footage, but sometimes less is more–provided there is sufficient consumer traffic in the mall and in the store. As many retailers have learned firsthand, one of the best ways to generate that traffic is by leveraging the social and commercial synergies of new and different uses, notably dining, hospitality, and entertainment concepts.

What to expect
Disruption. Any comprehensive mixed-use redevelopment will be disruptive. That can manifest itself in lower foot traffic and lagging sales or, perhaps, even a temporary closure. Owners and developers may need to shift tenants to a different part of the mall – either to accommodate construction or as part of a permanent new reconfigured space. Relocation issues are not uncommon, and some tenants may work to negotiate rent reductions or short-term deals.

A mixed-use renovation or redevelopment can be an expensive and time-consuming undertaking. When you factor complications such as the need to potentially secure anchor approvals or negotiate anchor buyouts, things can get tricky very quickly. Retailers should have realistic expectations about timelines going into the process, and should be willing to be patient, and flexible – while still protecting their interests.

In the near-term, developers setting out on a renovation or redevelopment are looking for as much revenue as possible. Consequently, they may be more willing than usual to agree to short-term deals. The long-term strategy, however, is likely to be very different. Mall owners and operators work closely with developers and consultants to figure out how to reposition the asset, and how to build a vibrant and dynamic tenant mix that makes sense and is sustainable over the long run.

For their part, retail executives need to carefully and critically consider their place in that future, not only asking “Do I want to be here?” but also “Are they going to want me?” Sometimes what is best for all parties is the same retail brand, but a different concept: perhaps switching to an outlet store or discount model. In the end, quality mixed-use renovations and redevelopments are not just about compromises, but also opportunities. A restaurant tenant having the opportunity to expand out and create a patio or outdoor dining area is the kind of move that could liven up the public space in the newly redeveloped mall and boost sales for the retailer – the kind of win-win outcome that every mixed-use transformation tries to achieve.

A registered architect, John Schupp implements retail center renovation plans for the development services team of Avison Young. Stephanie Skrbin, a principal at Avison Young, is recognized as one of the top retail brokers in Southern California.

 

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Deals of the Year — Westfield and GGP
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Deals of the Year: Westfield and GGP

BY Debra Hazel

The past six months have seen transactions that are realigning U.S. mall ownership. In December, Paris-based Unibail-Rodamco, the largest commercial property owner in Europe, announced plans to acquire Westfield Corp. in a $16 billion deal. In March, after an earlier failed bid, Brookfield Property, a unit of Toronto-based Brookfield Asset Management, said it would acquire the two-thirds of Chicago-based GGP it doesn’t already own in a $15 billion transaction. Meanwhile, other real estate investment trusts are facing challenges from activist investors seeking to maximize the value of their properties.

With all this activity, could there be another round of retail real estate consolidation similar to 25 years ago? Not likely, observers say. An already consolidated industry (at least in the mall sector) and plain old blood ties should keep major portfolio transactions down for now.

The past 15 years have seen a number of acquisitions, observed Alexander D. Goldfarb, a managing director and senior REIT analyst at New York-based Sandler O’Neill and Partners L.P., including Wilmorite by Macerich in 2005 and GGP’s purchase of Rouse Company in 2004. More recently, Forest City had considered selling itself, but could not come to terms with a potential buyer. A number of assets, however, were sold to Australia-based investment firm QIC.

Given that Brookfield already owns 34% of GGP, “The Brookfield bid for GGP was expected. The question is, what are the future pair-ups?” Goldfarb asked.

The Unibail-Rodamco/Westfield deal is a unique situation where two companies’ assets are complementary, said Herman Kok, head of research for Meyer Bergman, a Brussels-based pan-European investment manager specializing in urban mixed-use real estate. Westfield’s 35-center portfolio dominates in the United States and the United Kingdom, while Unibail-Rodamco has properties across the European continent. The combined entity will have 104 centers, 56 of them being flagships.

“Both companies have highly dominant centers in their markets,” Kok said. “Both boards respected each other a lot, making for a very strong opportunity for Unibail-Rodamco and Westfield to unite their focus.”

Each firm can learn from the other. Westfield’s branding capabilities will be transferred to Unibail-Rodamco centers. While Westfield is being acquired, it’s that name that will be rolled out to the combined company’s destinations. Kok observed that Unibail-Rodamco is known for four-star hospitality at its projects, but the greatest advantage may lie in leasing.

“Unibail-Rodamco deals with all of the European retailers, Westfield with the U.S. and U.K. retailers. There will be a lot of crossover,” Kok said.

In late March, Brookfield Property Partners and GGP finally reached an agreement, after Brookfield sweetened an earlier bid for the 66% of GGP it didn’t already own. Under the final agreement, GGP investors would have a choice between $23.50 per share in cash or stock in either Brookfield Property or a new REIT being formed. The deal, which will create a combined company with assets of more than $90 billion, is expected to close in the third quarter.

But that doesn’t mean we’ll see more international crossovers. The U.S. mall industry is more heavily consolidated than in Europe, Kok noted. Though Unibail-Rodamco is by far the largest player on the continent, other major owners include Klépierre, British Land, Hammerson, and a number of funds. And there’s plenty of easier consolidation to take place within the continent.

Instead, future activity could take place within U.S. REITs themselves. In March, activist investor Jonathan Litt of Land & Buildings Management made a second bid for a board seat on Taubman Centers. The company also has seen hedge fund Elliott Management take a stake. Dan Loeb and his hedge fund Third Point LLC similarly is targeting Macerich.

In a way, though, the activity can be seen as a testament to the power of the super-regional mall. In the industry’s early years, malls were built on the outskirts of metropolitan areas; but as populations have grown, and housing has expanded, many of these projects are now located within urban areas. This makes them appealing, Goldfarb said. Meanwhile, millennials seek social activities, while brands want foot traffic to build awareness.

“The Class A mall is still a powerful animal,” Goldfarb said. “The people buying Teslas are not kicking tires. And why are they based at malls? Because that’s where the people are.”

However, what could also be stopping further corporate sales is pure sentiment. Though the companies are public, many are still helmed by their founding families, Goldfarb said. It’s not surprising that the Westfield deal took place seeing as founder Frank Lowy is well into his 80s.

“It comes down to the CEOs,” Goldfarb said. “When the CEO is ready to hang up his hat, it will happen, but not yet.”

Debra Hazel is an international retail and real estate journalist and media consultant. She is the author and editor of several books for ICSC; plus, check out her blog aroundtheworldin80malls.com.

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Second office building sells out at Celebration Pointe

BY Al Urbanski

Celebration Pointe, the newly opened mixed-use development in Gainesville, Fla., has fully leased the space in the second office building on the site. The combined 135,000 sq. ft. of office space will deliver retail tenants a daytime shopper population of 700 employees, according to the developers.

Luxury outlets highlight the extensive retail offerings at the 160-acre project. Nike Factory Store, Tommy Hilfiger, and Kilwins confectionery have opened.

“All of Celebration Pointe’s office tenants, their employees, and their guests will have many amenities at their door step, including immediate access to a beautifully landscaped, park-like setting called Tech Park,” said Ralph Conti, president of RaCo Real Estate, who is co-developing Celebration Pointe with Viking Companies.

Dining and entertainment options play a central role at the town center, home to the 140-room Hotel Indigo. Rascal Flatts Bar & Grill, Miller’s Ale House, MidiCi Pizza, and a second location for Gainseville’s popular Reggae Jamaican restaurant figure to be popular early attractions, Conti said.

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