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WHO GOES FIRST?

Center managers employed by big portfolio owners want their centers fixed first

By Steve McLinden

Mirror, mirror on the wall, which of my centers needs an overhaul?

Chances are many of them do, but no owner can fix up an entire portfolio at once. How, then, do they pick which ones to renovate now and which to put on the waiting list? That question is on the minds of an increasing number of shopping center owners these days as they direct more and more dollars to expansion and renovation of existing properties.

“We have such a broad array of centers from mature markets to mid markets to dynamic-growth markets, and we’re not prejudiced in our thinking about [redeveloping] any of them,” said John L. Bucksbaum, SCSM, chief executive of General Growth Properties. “All of these centers are moneymakers, and we don’t want to discourage anyone. What we’re trying to determine is where the most return can be found.”

At ICSC’s fall Southeast Conference, in Atlanta, Mario Mireles, General Growth’s director of asset management, said regional competition for such monies has been especially intense. “Out of the 13 centers in our Southeast group, 10 are being considered for or are under renovation,” Mireles said. William Sullivan, a senior leasing representative at Simon Property Group’s Atlanta regional office, said Simon is seeing a similar trend in which the focus has shifted to redevelopment.

Among the factors behind all of this are the general saturation of enclosed malls, a scarcity of prime retail parcels and the highly publicized vacancies created by department store closures. Only one traditional regional mall is slated for construction this year, according to ICSC.

Complicating such decisions for shopping center REITs, however, are ongoing shareholder obligations. “If there ever was a time in history where factors dictated that a lot of money be reinvested in redevelopment projects, that time is now,” said Kenneth Leonard, owner of Leonard Associates, a Chicago retail consulting firm. “REITs could easily justify [redevelopment spending] instead of distributing all that depreciation money back to stockholders. But the vast majority of such decisions are still driven by an urgent need to do something with a department store that is closing.”

Increasingly, center owners are apt to spend development dollars on projects that combine expansion with wholesale renovation, says Wally Naylor, vice president of San Francisco-based Pankow Special Projects, a design and construction company. But malls will not give the go-ahead on such projects “unless they think their investments can add obvious value for their customers,” Naylor said. “And a lot of that value comes from visual elements: new paint, new landscaping, new facing. They go a long way in improving public perception and keeping the property on the cutting edge.”

With a lot of imagination and a little luck, anchor pullouts can sometimes help landlords transform excellent malls into extraordinary ones, says Douglas H. Morrow, Eastern zone vice president of real estate at The Macerich Co., which operates 80 U.S. malls. Macerich viewed the closing of an underperforming JCPenney at its popular Tysons Corner Center, in McLean, Va., as an opportunity to not only re-tenant the 260,000-square-foot mall, but to build 300,000 square feet of adjacent space which is now anchored by a third-floor AMC movie theater. “When you are 95 percent leased as we were, you really have to look creatively at ways to expand,” said Morrow, speaking of the center, which is now fully leased. “It was a dominant mall but it had a few weaknesses that we were able to remedy with the expansion.”

At General Growth headquarters, individual presentations are made by each requesting center, and each presentation must then work its way through the company’s asset management and redevelopment groups, says Bucksbaum. From there the proposal moves on to the capital committee. “With the input of the mall teams and the asset management team, we try to make the right decision.”

Sometimes local retail competition will help trigger a funding decision. “You try to be proactive in your thinking, but there are also situations where other projects in the marketplace are coming on-line,” Bucksbaum said. At other times decisions are based on the needs of department store chains, he says.

General Growth spends about $350 million annually in redevelopment work, a figure that is destined to grow through the next decade, says Bucksbaum. The company has learned how to phase its developments over a 12-month cycle so it can distribute more capital to more properties.

“We are making these types of decisions for 185 malls, and there is obviously a tremendous amount of capital being requested and spent,” Bucksbaum said. “I wish I could say there is an unlimited amount of resources for this.”

Some centers get a face-lift every decade, while others may wait as long as 20 years, say industry experts. Michael I. Lebovitz, senior vice president of mall projects at CBL & Associates Properties, says the firm believes strongly in keeping properties refreshed, “but we don’t use an exact time frame. The truth is, those decisions are very project-specific.” CBL, the largest owner of malls and shopping centers in the Southeast, will announce several renovation projects this year, says Lebovitz.

Mimms Enterprises’ 35-year-old Exchange at Hammond open-air center in the Atlanta market was half empty when the private firm, which owns and manages 8 million square feet of commercial property, took a calculated leap in allocating resources to its remodeling.

“It was old and tired, and we didn’t have any [new] tenants in our pocket, so we were really taking a risk,” said Michele Del Monaco, senior vice president of leasing at the Roswell, Ga.-based firm. “But it was in a good location … and we were lucky enough to have a portfolio that allowed us to take that risk, and it really paid off.” Mimms made more than $1 million worth of improvements and added a Whole Foods store in a vacant Service Merchandise space, and now the center is fully leased (story, Atlanta ‘problem property’ becomes a powerhouse).

Centers in urban areas often have the advantage of population density, a factor that can tip the balance in renovation and re-tenanting decisions, says David Palmer, executive vice president of Cencor Realty Services, a Dallas-based retail specialist. “But whether it’s turning a mall inside out to attract former power center anchors or junior anchors, or refacing an old open-air center whose trade area has passed it by, the decision always has to be based on economic and what revenue streams you’re going to achieve to manage it down the value slope,” he said.

So then, mirror, mirror on the wall, it seems not to be just about a pretty face after all.