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MASTER TOUCH

Retail developers are increasingly building master-planned projects

By Curt Hazlett

Newland Communities has big plans for its Estrella Mountain Ranch, a Manhattan-sized parcel of arid land in Arizona’s Phoenix Valley. The master-planned community has just 3,000 houses at present. But when construction ends, a quarter century from now, there could be about 55,000, all set amid hiking trails, a Jack Nicklaus-designed golf course and 72 acres of private lakes.

Along with that legion of homes — more than can be found in all of Peoria, Ill. — will come offices, public services and retail. That will be essential to the residents, since Phoenix is a half-hour drive away.

“We’ll be creating the demand for retail goods and services in an area that’s not heavily susceptible to competition,” said John S. Pagliuso, the vice president for commercial property services at San Diego-based Newland. “It’s a great opportunity.”

Builders agree that master-planned communities are booming, though the trend is difficult to measure. “There are many more of them than there used to be, certainly in the thousands, but it’s hard to say exactly how many,” said David Laube, a senior consultant with Robert Charles Lesser & Co., a Maryland-based company that tracks the industry for developers. “We’re the experts at it, but to be honest, even we don’t have a good number.”

Still, Laube’s research points to an upsurge in popularity over the past 10 years. Master-planned communities now account for about 20 percent of new home sales in most major metropolitan markets, whereas “a decade ago it was probably 5 percent,” Laube said. The greatest growth has been in the Sun Belt.

“Planned communities are alive and well, but the retail component of them was really not a big issue for a long time,” said Anita Kramer, director of retail development at the Urban Land Institute. “Only recently has there been more interest on the part of developers in providing it.”

Developing retail in such communities takes hard work, vision and patience. Because the retail components of most master-planned communities are limited in size, they have not always drawn much attention from large retail developers. The rigorous entitlement and planning process can be time-consuming. Then there is the delicate timing element of developing retail in a new community: Build it too soon, and the market won’t be there; arrive too late, and you’ll be frozen out.

Still, the potential is fast overtaking the obstacles.

“There is clearly more competition among retail developers for the properties we’re doing,” said John W. Graham, president of Sunbelt Holdings, Scottsdale, Ariz., which has developed more than two dozen master-planned communities in the Southwest.

Scores of planned communities are being built in high-growth areas, especially in the western, southwestern and southeastern U.S. Some are on huge tracts, such as Estrella Mountain Ranch or Summerlin, which Howard Hughes Corp. is building on 23,000 acres west of Las Vegas. (Howard Hughes Corp. was acquired in 2004 by General Growth Properties as part of its purchase of The Rouse Co.) Usually, though, they are built on smaller parcels, sometimes as small as 1,000 acres, on the edges of urban centers.

“Master-planned communities offer so much,” said John L. Bucksbaum, SCSM, the CEO of General Growth. “It’s smart development. People want more than a two-hour commute in each direction. As lives become more hectic, this is a way to bring more order to them.”

Terry W. McEwen, president of Memphis, Tenn.-based Poag & McEwen, said: “People are interested in combining where they live, work and play into one location. There’s a sense of community that’s created by these types of developments. Another thing is that governments are under pressure to rein in their budgets and not build as many schools and roads.” In other words, these governments want to reduce sprawl while at the same time accommodating growth, he suggests.

The popularity of planned residential development is not just an American phenomenon. “Most of our work right now in China is master-planned communities, and there’s a big appetite for them in South America,” said Paris Rutherford, a vice president of Dallas-based architectural and planning firm RTKL Associates, which helps community developers with retail planning and design.

Poag & McEwen is among the retail developers that see potential in the market. The firm is a pioneer in the creation of lifestyle centers and built the retail component of Centerra, a 3,000-acre master-planned community that opened this past November in Loveland, Colo., that will eventually contain 5 million square feet of office space, a hospital, four hotels and 10,000 homes.

Poag & McEwen is also developing retail for the Dos Lagos master-planned community in Corona, Calif., and the Shadow Creek community near Houston. The Promenade Shops at Shadow Creek will feature 700,000 square feet of retail anchored by a Bass Pro Shops store on a 120-acre site.

The Promenade at Centerra is northern Colorado’s largest shopping center. At 700,000 square feet, the design mirrors Centerra itself: active and oriented toward the outdoors. It has bike racks for shoppers who prefer pedaling to driving; a walking trail links the center to a 27-acre sculpture park. A rink will allow winter skating, and an amphitheater will provide a space for outdoor entertainment in the summer.

“The value of retail to a master-planned community is substantial and critical,” said Chad McWhinney, CEO of McWhinney Enterprises, which is developing the Centerra master project. “The lifestyle center is the downtown of the community. It’s the one thing that really connects everything and gives it energy.”

McWhinney says he approached Poag & McEwen and other developers at an ICSC meeting a few years ago to gauge interest in his project. “They were all interested, given that we are one of the fastest-growing regions of the country,” he said. “A lot of the developers said they do lifestyle centers, but when we visited their projects, they were glorified power centers. Poag & McEwen paid attention to the details and to making it unique.”

Centerra’s retail component is bigger than average for a master-planned community. Most communities’ retail sites are grocery-anchored centers, and they are usually built by local developers familiar with the market.

“We’ve talked to a lot of national retail developers, and we really haven’t completed anything with them,” said Sunbelt Holdings’ Graham. The big retail REITs may be interested in a deal, “but they’re hardly ever the first guy to the table. Frankly, they don’t know us, and we don’t know them very well.”

That is not always the case. Newland is currently working with Regency Centers, a Florida-based developer of grocery-anchored centers, on retail in Maryland and California. Regency is involved in about a dozen master-planned communities across the country. Three years ago Newland sold a large parcel at its Teravista community in Round Rock, Texas, to Simon Property Group, which broke ground in July for a 430,000-square-foot Chelsea Premium Outlets center.

“What we like about master-planned communities is that the supply-demand relationship is typically very favorable for retail,” said Brian Smith, Regency’s chief investment officer. “Master-planned communities, especially in California, can take as long as 25 to 30 years to entitle, and it’s mostly residential with one retail center. So they’re really a good investment for us long-term, since we don’t have to worry about overbuilding.”

Another player is Forest City Enterprises, which builds planned communities on its own and develops retail for others. Forest City’s biggest master-planned project is the redevelopment of Denver’s former Stapleton International Airport, a 4,700-acre site on which 1,500 single-family homes have already been built. Included is a 1.2 million-square-foot lifestyle center called NorthField at Stapleton, also by Forest City. In Florida Forest City and The Goodman Co. are partners on the 700,000-square-foot Shops at Wiregrass, part of the 5,000-acre Wiregrass Ranch community going up outside Tampa.

At Estrella Mountain Ranch, the retail development process is in the interview stage. The first phase will contain 110,000-120,000 square feet of retail, which Pagliuso says will include a relatively modest 50,000 or 60,000 square feet for a grocery. He is upfront about size limitations.

“That’s a challenge,” he said. “Grocery stores want bigger — sometimes 100,000 square feet. But we’re always cognizant of creating not just another place to drive to and shop, but more of a sense of place where people can interact.”

Why should a developer accept size limits? “This is an opportunity for a developer to prove their worth and build a relationship with us,” Pagliuso said. Once the residential side grows, he says, Newland will move forward with larger retail sites. “The challenge is planning it and phasing it appropriately,” he said. “You can’t have a Target until there’s demand for it.”

How much retail a master-planned community can support depends on the community’s characteristics. Leonard Bogorad, managing director of Washington, D.C.-based real estate consulting firm Robert Charles Lesser & Co., says his own back-of-the-envelope assessment is that one household in a master-planned community, assuming an average household income of $80,000 yearly, can support 96 square feet of retail. If a town center’s retail component can garner 33 percent of the residents’ retail spending, he says, a community of 3,750 households can support 120,000 square feet of town center retail.

Richard J. Kuhle, the president of Phoenix-based Vestar Development Co., says the return on investment of retail in master-planned communities “isn’t initially any better or any worse than a typical project, but I think long-term it probably is higher, because it’s a better product for both parties.”

Kuhle says Vestar has developed seven or eight retail projects in master-planned communities over the past two years, including some for Sunbelt Holdings. Typically, he says, the parcels are sold outright to the retail developer, although there are occasional joint ventures.

“For us it’s a great opportunity,” he said. “If you’re able to work with the master-plan developer early and understand what the desires are, whether it’s a small neighborhood center or a destination retail center, it can work for both parties.”

RTKL’s Rutherford says master-planned communities sometimes have inherent drawbacks for retail. “Often the location is such that it’s not a very good site,” he said. “Some of the big developers don’t have much interest because it’s off the highway or way out on the edge, so you wind up having just a small amount of retail.”

But Regency’s Smith dismisses such concerns. “We’ve got everything from 85,000 to 500,000 square feet in these properties,” he said, “and we like the architectural restraints. It’s the ones that really fight you on the architecture that are in the best residential areas and have the highest barriers to entry.”

Smith is optimistic about the future of master-planned communities. “They offer a very, very captive audience,” he said. “We would do that all day long.” n

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