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Shopping Centers Today -> July 2002
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TAUBMAN: LIFESTYLE CENTERS NO THREAT TO TOP MALLS
By Dave Bodamer
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| William S. Taubman |
Will the lifestyle center replace the mall?
William S. Taubman doesn’t think so. Taubman, executive vice president of Bloomfield Hills, Mich.-based Taubman Centers, joined a mixed panel representing several sides of the shopping center industry — development, design, brokerage and management — to discuss lifestyle centers and other nontraditional formats in a session called “The Business of Value Creation.”
Lifestyle centers are an unproven format and will ultimately not be able to compete head-to-head with the top regional malls, Taubman said. Instead, such centers will find a niche replacing second-tier regional malls in many markets.
To the extent that these highly designed, expensive-to-build centers do succeed, the key will be having the right tenant mix; design ultimately plays little role, Taubman added. He further argued that such centers must not exceed 500,000 square feet and cannot have more than one traditional regional mall anchor.
“With only about 50 tenants, you have to make each one count,” Taubman said. “You don’t get extra chances in each category or price-point like you do in a regional mall.”
Taubman said that lifestyle centers’ added construction and design costs make them unviable.
Where REITs are concerned, Taubman pegged the average cost of capital for building lifestyle centers at between 10.5 percent and 11.5 percent, meaning that a center needs to generate annual returns of at least 11.5 percent to 12 percent to be judged successful.
“I have yet to see one of these projects at even 11 percent,” Taubman said. “Therefore, to me, there’s a real question as to the long-term stability of these assets. … Unless some of the financial risk shifts back to the tenants, I don’t know that you’ll see as many of these things getting built as the architects are coming up with today.”
But design counts for a lot when it comes to financial returns, argued Jim Garland, an architect at Venice, Calif.-based architectural firm Jerde Partnership International. Creating a pleasurable space brings in more customers who stay longer and spend more, he said. Garland pointed to San Diego’s Horton Plaza, which, including land acquisition, design and construction, cost nearly $200 million, but is now worth more than $500 million. He also cited Las Vegas’s Fremont Street Experience, where a $70 million project to enclose the old heart of the city boosted annual sales by about $168 million.
But though Garland’s examples represent some success stories in nontraditional shopping centers, other panelists maintained that lifestyle centers as a class are still unproven.
“It’s impossible to estimate what the cap rate for a lifestyle center is now,” said Robert C. Little, COO of Cincinnati-based brokerage, consulting and management firm Madison Marquette Retail Services. “The challenge for the concept will be market share. Right now we’re seeing a cannibalization off other formats. … Developers are going to need exclusive agreements with tenants. They’ve got to be seen as places with unique content in the marketplace.”
But there are other ways of making these places unique, noted Bruce MacLeod, chief operation officer of the Rye, N.Y.-based Palladium Co., developer of the mixed-use CityPlace, West Palm Beach, Fla.
“We came to some conclusions about a few things that can make a difference,” said MacLeod, an ICSC past trustee, citing attractive public spaces, perception of a project as a “hang out” place, impressive architecture, a diverse tenant mix and some mixed-use.
MacLeod cautioned, however, that it is important not to go overboard on mixed-use projects, especially on the residential side.
“In reality, the number of residential units you can create is not enough to make a difference in the success or failure of a project,” he said. Developers cannot create the markets for their products. The population base must be there first.
Hotels and entertainment, on the other hand, can effectively increase a project’s customer base, he added.
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