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Lifestyle centers look good, but are they earning their keep?

BY DEBRA HAZEL

Lifestyle centers are the hot new thing in the shopping center industry, promising their customers upscale retail and fine dining in a convenient, open-air layout. But as their numbers and size have grown, so have questions about the format. What is a lifestyle center? Are they successful? Are too many being built?

General Growth’s Park Place, Tucson, Ariz.		Poag & McEwen-DDR’s Deer Park (Ill) Town Center.

Cousins Properties’ The Avenue Peachtree City.		Bayer Properties’ The Summit Birmingham.

What should actually be one of the easiest questions to answer — just what constitutes a lifestyle center — becomes more difficult as more such centers are built and the format evolves.

The earliest of these projects — such as The Shops at Saddle Creek, Germantown, Tenn., which opened in 1987 — were anchorless and had a strip center layout, with well under 200,000 square feet of gross leasable area. Instead of having department stores to draw shoppers, they relied on “the finest of national specialty shops and restaurants,” said Terry McEwen, president of Memphis, Tenn.-based Poag & McEwen, which developed Shops at Saddle Creek. (The company says it not only invented lifestyle centers, but coined the term, too.)

But later projects, such as The Summit Birmingham (Ala.), which opened in 1997, have grown to regional mall size — 800,000 square feet — and sometimes include department store anchors. Nordstrom, Parisian and Saks Fifth Avenue are among the stores that have moved into lifestyle centers.

“We’ll go to either place,” said Brian Martin, director of real estate at Saks Fifth Avenue, referring to malls and lifestyle centers.

And not only the size, but also the design of lifestyle centers has changed.

“Poag & McEwen had developed a traditional strip center look, with covered canopies all the way through and great tenants,” said Everett Hatcher, founder and managing principal of Birmingham-based architect firm Crawford McWilliams Hatcher, which designed the Summit Birmingham and other lifestyle centers. “We were trying to do something more villagelike, where retailers had more of an identity.” The buildings housing the stores are more varied in height, for instance, giving the impression of a settlement built over time.

The format has evolved to the point where the “lifestyle” moniker could describe some open-air projects usually considered malls, including Taubman Centers’ Stony Point Fashion Park, Richmond, Va., due to open in September, says Courtney Lord, CLS, Taubman’s senior vice president of leasing.

“We have a beautiful, open-air center, then [we] added Dillard’s, Galyan’s and Saks Fifth Avenue,” said Lord. “Why isn’t my open-air, fully decorated center a lifestyle center?”

By the same token, there are those who adamantly reject the lifestyle label for their projects. Some note that the 1.5 million-square-foot Easton Town Center, Columbus, Ohio, has lifestyle center elements. But don’t call it a lifestyle center within earshot of its developer, Yaromir Steiner.

“What I call a lifestyle center is a nonanchored strip center, but with mall tenants,” Steiner said. “So when I look at Easton, with its large department stores and a cinema, that doesn’t make much sense. Easton, maybe, is a hybrid of a lifestyle center and a mall.”

The number of these projects has more than doubled since 1997, and there are now nearly 60, according to ICSC’s Research Department (see table).

And there are more on the way, fueled in large measure by the resurgence of such branded specialty retailers as Chico’s, Pottery Barn, Talbots and Williams-Sonoma, which are now among the mainstays of such centers.

But, definitions aside, how well do lifestyle centers work? While malls tout their higher customer counts, lifestyle centers pride themselves on higher sales productivity.

“We found that while our foot traffic was not as good, our sales are higher,” McEwen said. Poag & McEwen’s centers post average sales of between $400 and $500 per square foot, healthy by any measure. The Summit Birmingham boasts sales of more than $400 per square foot, while sales at its 375,000-square-foot sister center in Louisville, Ky., exceeds $300 per square foot. Regional malls, on the other hand, average $330 per square foot for nonanchor tenants, according to ICSC’s Research Department.

Shoppers spend less time at lifestyle centers than at malls (57 minutes versus 78 minutes, according to a late-2002 ICSC research study), but the time they do spend there is more productive. Dividing the average sales — $79.80 per visit at lifestyle centers, including food and drink, similar to the amount spent at malls — by the amount of time spent at a lifestyle center and multiplying that by 60 minutes, shopper productivity totaled $84 spent per hour at lifestyle centers, far ahead of the $57.70 per hour that mall shoppers spent.

Financing used to be challenging, but has gotten easier, developers say. In the early days, private companies relied largely on banks. (Publicly held Cousins Properties, which has four lifestyle centers branded under the “Avenue” name, self-finances its projects.)

Even today there are only a few major funding sources investing in lifestyle centers. For decades the conventional wisdom in the financial community has been that shopping centers need anchors to attract customers. It is the anchors, after all, that spend all the money on advertising. Anchors, of course, also sign longer deals with malls and therefore are considered to bring stability.

New York City-based TIAA-CREF, the large pension fund, is among the institutions that invest in lifestyle centers.

“We tend to look at these as very similar to regional malls,” said Julie F. Merkelson, director of new investments and national accounts at TIAA-CREF. “We look at kick-out clauses, co-tenancies, sales, expected sales, average household income.”

TIAA-CREF, whose investment in lifestyle centers began with Mizner Park, Boca Raton, Fla., in the early 1990s, has money in six lifestyle projects.

“We’re being very selective, trying not to get caught up in the craziness that could potentially occur,” Merkelson said.

They’re not the only ones concerned about craziness. With fewer than five new regional malls set to open around the United States over the next two years, specialty tenants are looking to the lifestyle format to feed their own growth objectives, and some say they fear this will lead to overbuilding.

“There’s definitely a risk,” said Stephen D. Lebovitz, president of Chattanooga, Tenn.-based CBL & Associates Properties, which builds both malls and community centers, but so far no lifestyle centers. “One of the risks of these types of projects is that you don’t have some of the checks and balances of regional malls.”

Malls need not only a huge piece of land, but also agreement on the part of several anchors that a market exists.

Even the lifestyle developers themselves are concerned that tenants will drive too much growth.

“They’ll overbuild as long as retailers find this a profit center,” said Curtis Furgason, a senior vice president of property management at Birmingham-based Bayer Properties.

More developers are getting into the format, sometimes building in smaller niche markets to fill retailer demand. But though such locations may satisfy retailer demand, they may lack consumer demand, warns Raymond Brunt, a former Gap executive who now directs leasing for three-year-old Stanbery Development, Columbus, Ohio.

“Finding financing hasn’t been a big issue,” said Brunt. “Finding sites is tough.” Stanbery’s first projects, the 88,000-square-foot Shoppes at Union Hill, Denville, N.J., and The Shoppes at English Village, Montgomeryville, Pa., open this month and October, respectively.

But economics could preclude overbuilding and benefit existing lifestyle centers, according to one analyst.

“The ones already built are here to stay,” said David Fick, a REIT analyst at Baltimore-based Legg Mason Wood Walker. “But there will be fewer built going forward, as the costs have turned out to be much higher than anticipated, particularly for those with other elements, such as Santana Row,” which includes housing.

And regional malls continue to be strong, he adds, as the weaker ones close.

Other pitfalls remain, however, including design issues. Critics say that streetscape-formatted projects, which sport streets that are accessible only to pedestrians, negate the lifestyle format’s main advantage: the ability to park close to the stores.

“One of the huge successes of the lifestyle center is that you can drive to where you want to shop, feel extremely safe, and it’s a great place to be,” said architect Hatcher. “When you get to a situation where you’re doing themed streets that aren’t streets, without parking you wonder if it will work.”

It is especially important for cars to get as close to the stores as possible in colder climes, says David Kass, president of Continental Retail Development. The firm is a subsidiary of Columbus, Ohio-based Continental Real Estate Cos., whose first project, The Streets of Marlton Square, opened in 1999 in Marlton, N.J. (Continental has since sold the center.)

And there are other compromises that could come back to haunt the format, Kass said.

“There are people who are not building the highest-quality architecture,” he said, noting that this could dilute the high-end appeal of these properties.

But despite these concerns, the centers continue to proliferate. About 20 more will open over the next two years, according to ICSC’s Research Department. And the format’s supporters say there is good reason for this. From some retailers’ point of view, lifestyle centers offer huge advantages. While Talbots’ sales per square foot are about the same at both its mall and nonmall units, says Richard O’Connell, a senior vice president of real estate at the Hingham, Mass.-based apparel retailer, occupancy costs are lower (see story). O’Connell declined to specify what those sales figures are.

CAM charges at Bayer Properties’ two lifestyle centers average $6 per square foot, versus $15 per square foot or more at regional malls in general, the company says.

“We give good value for the money,” said Jeffrey Bayer, the firm’s president.

And consumers love lifestyle centers too, both for their convenience and their attractiveness.

“I don’t think it’s a fad,” said David Marks, owner of Orlando, Fla.-based real estate consulting firm Marketplace Advisors. “But you really have to start off with what a community needs.”

Taubman’s Lord questions whether the projects will be able to fill vacancies when leases at the newer projects begin to turn over, opining that the deals offered by landlords may not be as attractive then.

Lifestyle center developers insist that’s not a problem, at least so far. They cite their ability to expand as proof. Both the Summit Birmingham and the Shops at Saddle Creek have expanded twice, and the Summit is leasing its fourth phase.

Talbots recently completed a major upgrade at the Summit Birmingham, while Gap doubled the size of its stores there, even as it was slowing its growth, Bayer reports. The format is long past having to prove its value.

“Five years ago, when we first started in this, we had to convince people about the format,” said Joel Murphy, president of the retail division of Atlanta-based Cousins Properties. “That has declined almost to zero.”

Communities, too, like the format, which blends in better than fortresslike malls. And lifestyle centers — unlike regional malls, with their traffic problems, and neighborhood centers, whose often generic architecture adds little to their communities — are probably the only retail format that actually increases the property values of nearby homes.

As Mark F. Fallon, director of leasing for Cincinnati lifestyle center builder Jeffrey R. Anderson Real Estate put it, “That never happens with a mall.”

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