PRINT THIS STORY:

CHANGE TEXT SIZE:

OUTLOOK FOR 2003 BRIGHTER, EXECS SAY

By Debra Hazel

Following an economic downturn, a still weak recovery and the bankruptcies of several retailers, the worst may be over for shopping center owners and managers, say industry leaders. But they warn that 2003 will present challenges for retail real estate nonetheless.

Developers face retail vacancy rates, consolidation and uncertain consumer spending, against a backdrop of possible war and the threat of further terrorism. Nevertheless, they paint a generally optimistic picture for the industry. No one expects a slew of tenant bankruptcies or resultant store closings, and neither is there a Kmart-size Chapter 11 on the horizon. Consolidation among landlords is likely to continue, most say, and some expect a healthy recovery of retail sales by the end of the year.

Most of the bad business news has already taken place, they note, and the weak players are now gone. The high-profile Kmart bankruptcy aside, retail Chapter 11 filings and store closings actually declined in 2002 from previous years. And while some major tenants, such as Gap, have announced a net decrease in square footage for 2003, others, such as Hot Topic and Limited Brands, have been trying out new concepts — in this case, Torrid and Aura Science, respectively.

But even with the growing strength of retailers, not everyone expects leasing to be easy.

“Retailers are very strategic in how they conduct their real estate, and that could impact occupancy,” said Ross Glickman, CEO of third-party management firm Urban Retail Properties. “It will depend on how flexible landlords will be.”

Successful tenants are being cautious about expanding, favoring top-level malls. Landlords will have to spend more time with retailers and develop innovative strategies to persuade them to try new markets or centers.

“We just work hard,” said Richard Green, vice chairman of Westfield America Trust. “There may be some deal differences, but I don’t see occupancy dropping.”

But there won’t be a boom in occupancy either, others say.

“The past two years have been such that if we maintain a sort of flatness, we’d consider that successful,” said General Growth Properties CEO John L. Bucksbaum, CSM. “I’d see 2003 as being the same.”

Another factor that may boost regional mall occupancy is the near total lack of new construction. Only two new malls are scheduled to open this year — Short Pump Town Center, Richmond, Va., and St. Louis Mills, Hazelwood, Mo. Most of the industry’s major companies are looking to expand their portfolios, but through acquisitions of other companies or their assets, not the construction of new centers.

“We have a number of things in the pipeline, but development will continue to be a secondary vehicle,” said Michael P. McCarty, senior vice president of research and corporate communications at Simon Property Group, which made public its bid for Taubman Centers in November.

But with the industry abuzz over the attempted Taubman takeover, the question remains how many properties or portfolios are still available. That, Bucksbaum said, makes transactions hard to pinpoint.

“You don’t know what activity will be in the marketplace,” he said. “Acquisitions are very hard to predict.”

Aggressive pricing had slowed the market, but funds remain available, particularly for the largest companies.

“Prices border on unrealistic,” said Westfield’s Green. “And there are only five or six of us left. Still, I suspect there will be more [acquisitions].”

Malls — and the companies that own them — are not the only format in play. Cleveland-based Developers Diversified Realty also expects to be active in community center acquisitions, either at the corporate or asset level.

“Smart growth continues to enhance shareholder value,” said Daniel Hurwitz, Developers Diversified’s executive vice president. The company also continues to build, however. “We will have new construction starts in 2003, but we’ll continue to be selective,” he said.

Those looking to acquire or build shouldn’t have much trouble finding money for the right project, analysts say.

According to Lend Lease Real Estate Investments’ Emerging Trends in Real Estate 2003, real estate will continue to maintain its value “absent any nasty surprises from investor overpaying and overleveraging in the current down market. In fact, further cap rate compression wouldn’t be surprising as various asset classes, including stocks, return to more ‘normalized’ returns in this reversion-to-the-mean process.”

Lend Lease recommends that investors cut back grocery-anchored retail, however, because pricing is looking less attractive for this hitherto hugely popular sector.

Owners of ‘B’ malls also have the best opportunity in years to sell their assets.

But some analysts are beginning to wonder when REIT performance, which was spectacular in 2002, will slow down. Speakers at the National Association of Real Estate Investment Trusts’ annual conference in November expressed concern that an influx of overseas and pension fund investors could mean the stocks are overpriced. Mall REITs, in particular, are a source of concern.

“Malls outperformed in 2003 and had an incredible run,” said Jonathan Litt, senior real estate analyst at Salomon Smith Barney. “People are trying to time when that run will end.”

Open-air center REITs could also be overpriced, given the lingering fallout from the Kmart and Ames bankruptcies.

“Strips in a year or two are going to be the property type that people will love to hate,” said Matthew Ostrower, a Morgan Stanley REIT analyst. Ostrower continues to favor mall REITs, however, given their lesser exposure to tenant bankruptcies.

Much of this is dependent on how retail sales hold up, and here opinions differ. According to ICSC research, 2002 nonanchor mall sales per square foot had declined 2.3 percent through September, while department store sales per square foot had dropped 4.3 percent for the same period. The home improvement sector, however, had gained 11.7 percent through September.

Simon’s McCarty notes that consumers have cut expenses by refinancing their mortgages and car loans, thus freeing money for disposables. For the most part, he said, consumers are upbeat.

“Sept. 11 is a bit behind us, and it’s reasonable to expect Iraq will either be resolved or no longer a front-burner,” said economist Donald Straszheim, vice chairman of the Milken Institute and president of Straszheim Global Advisors, Los Angeles.

That will probably help consumer confidence. Bucksbaum said he expects sales to hold their own.

“The beauty of the mall is that it has always shown some stability,” he said. “If you have what people want, they will continue to frequent your mall.”

But others wonder whether following the spending of 2001 and 2002, largely on such durable items as cars and furnishings, consumers will now stop buying and focus instead on paying down debt.

Unemployment, also, is likely to remain troublesome, several economists predict. But “this, too, will pass,” opined Straszheim. The United States leads the world in the development of new technologies, and he said he expects the back-to-school and holiday seasons in 2003 to be markedly improved over last year.

Donna Mitchell contributed additional reporting to this article.

© 2008 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |