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SITE CRUNCH

New-construction restrictions force landlords to expand existing shopping centers

BY DONNA MITCHELL

PMI Retail Property’s José Nazario, pictured above at the Plaza del Norte, Hatillo, says the center has remained fully occupied for eight of the past 10 years.

They don’t build shopping centers in Puerto Rico like Plaza del Sol anymore.

This enclosed, 675,343-square-foot mall, which opened in Bayamón in 1998, is among the latest regional shopping centers to be built on the island. According to some industry professionals, it will be the last.

“Big shopping centers, of more than 400,000 or 500,000 square feet, are a story of the past in Puerto Rico,” said Epifanio Fabregas, vice president and director of operations for the Puerto Rico division of The Sembler Co., a St. Petersburg, Fla.-based, privately owned retail real estate development group.

There are several reasons for this, retail property professionals say. Land suitable for development is hard to find in Puerto Rico, and the permitting process takes a long time. In addition, some point to a change in the commonwealth’s attitude toward real estate development. Developers say that for the time being they are focusing instead on renovations and expansions.

Sembler, for one, is planning to renovate the 235,343-square-foot Juncos (P.R.) Plaza strip center, which was built in 1998. The project’s anchors are Amigo Supermarket, Pep Boys and Walgreens. Sembler will fill a former Kmart anchor with three or four smaller tenants, says Fabregas.

It’s not all beaches and resorts. Much of Puerto Rico’s hilly interior is protected from development, ensuring that existing centers remain packed with customers and stores.

A group of private investors plans to redevelop the 441,834-square-foot Plaza Palma Real, Humacao, as an enclosed mall, says Edwin Tavarez, vice president of the South division of PMI Retail Property Management, a San Juan-based third-party manager that oversees 17 shopping centers on the island.

The main reason for land scarcity in Puerto Rico is that the island’s interior is largely mountainous. As a result, the cities, the infrastructure and much of the population are heavily concentrated on the shoreline. Regional malls that measure 600,000 square feet need about 50 acres, and the cost has become prohibitive, says José Nazario, vice president of the PMI Retail Property West division. The price of land in San Juan for regional centers jumped from $404,700 per acre in 1996 to $1.3 million per acre in 1999, according to a study of the local real estate market in the Urban Land Institute’s ULI Market Profiles 2000. (The study was based on research by San Juan-based H. Calero Consulting Group.)

Today the cost is about $4 million per acre, says Gisella Castro, president of Tiri Real Estate, a Guaynabo-based real estate services company. Even if developers could afford such a sum, she says, regional center development in San Juan is still just about impossible, because the land is not available anyway.

Securing approval to build can take as long as eight years, says José Ortiz, CSM, vice president of PMI Retail Property Management’s East division, and general manager of Plaza del Sol. For one thing, the government agency that grants land-use and construction permits is increasingly sensitive to environmental concerns; the agency wants to preserve parks and forests for public use, prevent soil erosion around the waterways and protect the island’s native plants and birds, says Ortiz.

Developers also have to contend with a public hearing process that can take up to two years — during which time public pressure can oblige developers to reduce a project’s square footage.

“It will take longer to build here than anywhere else,” said Nazario. “The fact of the matter is, there are limitations.”

Most of the projects under construction or recently completed were approved before Sila M. Calderón was elected governor in 2000; her administration has been stricter about development, executives say.

“Developers feel the economy is stalled partially because of these [government] attitudes,” said Ortiz.

But things were not always this hard in the commonwealth. Real estate development took off in Puerto Rico during the 1990s, after then-governor Pedro Rosello Gonzalez took office in 1992. During Rosello’s two terms in office, the government invested more than $1 billion in new housing development and modernized public housing. It also invested $300 million in the construction of the SuperAqueduct North Project, which supplies more than 100,000 tons of water daily to 15 municipalities on the north coast. An additional $1.5 billion went to an urban commuter train system that runs between the northern cities of San Juan and Bayamón, according to Calero Consulting.

“Development of all kinds was on a fast track,” said Ortiz. That includes retail real estate development. About 11 million square feet of new retail space was built in Puerto Rico between 1996 and 1999, representing both the construction of new centers and the expansion of existing ones, according to Calero. Eight of Puerto Rico’s largest shopping centers were built between 1992 and 1999, according to a survey published in September in Caribbean Business, a San Juan-based newspaper. In 2000 there was an expansion of the Plaza Las Americas, which at 2.1 million square feet is and will likely remain the island’s only super-regional.

Plaza del Sol, at 673,343 square feet, could be the last center of this size to open in Puerto Rico, the island’s retail real estate players say. The Bayamón regional center opened in 1998.

But new development has slowed significantly under the Calderón administration’s firmer hand.

“A lot of construction associated with mega projects did not follow proper permitting procedures,” said Heidie Calero, president of Calero Consulting. The new administration was not opposed to issuing approvals for new development, she says, but it wanted to do things by the book.

However, there is a bright side to the tight development restrictions. In 1998 shopping centers in the San Juan market boasted vacancy rates of a mere 3 percent, according to Calero Consulting. These days, rates are still under 5 percent, says James De Winter, director of retail services for Latin America and the Caribbean at Los Angeles-based CB Richard Ellis.

San Juan is not the only Puerto Rican market to enjoy healthy occupancy. On the island’s western side, the 671,180-square-foot Plaza del Norte, Hatillo, in particular, has been fully leased for eight of the 10 years it has been operating, says Nazario. But that also means PMI sometimes has to turn away retailers that desperately want space in their centers. Marshalls, for instance, has been trying to open a 30,000-square-foot store in Plaza del Norte for five years now. However, mall management has never been able to find the right space and configuration for the store.

“When people come into your office and say, ‘Where do we sign?’ but you have nothing, it’s hard to say no,” said Nazario. “But at the same time, it makes the center more successful.”

Successful as in high rents. In 1996 a women’s apparel retailer typically paid between $20 and $30 per square foot annually for space in a San Juan-area regional mall, according to Calero Consulting. These days, annual rents can range between $30 and $50 per square foot, according to De Winter. That is slightly higher than the $25 per square foot paid in U.S. regional shopping centers in 2000 (the latest figures available), according to the 2002 edition of the Urban Land Institute’s Dollars & Cents of Shopping Centers.

Common-area maintenance charges are also high. Landlords in Puerto Rico must cover the skyrocketing security and insurance costs caused by the island’s high risk of earthquakes and hurricanes. After Hurricane Georges hit Puerto Rico in 1998, insurance rates leaped from about 60 cents to $1 per square foot. By comparison, regional malls on the U.S. mainland incurred insurance costs of about 64 cents per square foot, according to the 2004 edition of ICSC’s The SCORE.

CAM fees can run between $2.25 and $2.75 per square foot in strip centers throughout Puerto Rico, according to Mary Ann Savarese, vice president and director of real estate at New York City-based RD Management. In the island’s regional malls those charges can exceed $9 per square foot, according to Sembler’s Fabregas. Average CAM charges for U.S. enclosed malls was $6.69 as of year-end 2002, according to SCORE. The publication does not break down costs for strip centers, but calculates open-air center CAM costs, including landscaping, snow and trash removal, and painting/minor repairs, at about 67 cents.

A mountainous interior has concentrated development along Puerto Rico’s coastline.

Observers say Puerto Rico could use more shopping centers. The island has about 10 to 12 square feet of retail space per capita, compared with 24 square feet per capita in the United States, says Ortiz.

What developers need to do is plan smaller projects in less congested areas of the island, says Savarese. RD Management owns 22 million square feet of shopping centers throughout the United States, 3.5 million square feet of that in Puerto Rico.

Developers have at times moved mountains to build their centers — or at least blasted away pieces of them. That’s what Lake Worth, Fla.-based BY Ventures did to put up Plaza del Sol, says Ortiz. Clearwater, Fla.-based Gibraltar Development Corp. did so too for its 450,000-square-foot Rexville Towne Center, also in Bayamón, which opened August 2002. That project cost approximately $70 million, says Savarese.

“I have no doubt about it,” she said. “There is still a need for shopping centers of that size.”

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