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Shopping Centers Today -> September 2007
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CLOGGED ARTERIES MAY CHOKE RETAIL
CRITICS SAY TRANSPORT AND POWER DECAY HURTS DEVELOPMENT
What many are calling a U.S. infrastructure crisis is getting harder to ignore, not least by developers and retailers, who pay dearly when transportation is hindered or the lights go out. Two headline-grabbing incidents took place this summer alone. First, in New York City an 83-year-old steam pipe exploded just south of Grand Central Station in midtown Manhattan. That July 18 blast, which sent plumes of asbestos into the air and for a while sparked fears of a terrorist attack, killed one person and injured dozens.
Then, two weeks later, an eight-lane, 1960s-era bridge in downtown Minneapolis collapsed during rush hour, plunging drivers into the Mississippi River. At press time news reports were saying a half dozen people had been killed and about 100 injured. In the aftermath, a number of states raced to double-check the safety of their own aging spans.
Like the electrical crash that knocked out power for some 50 million people in parts of Canada and the U.S. in 2003, or the failure of the levees in New Orleans after Hurricane Katrina in 2005, these most recent events led to calls for more spending on America’s bridges, dams, roadways, railroads and utility networks. By some estimates, the U.S. must spend at least $1.6 trillion over the next five years to stave off further infrastructural decay.
Whether the country gets a handle on the problem is no academic matter for shopping center developers. After all, the survival of any center hinges upon a smooth and reliable flow of consumers and goods. Clogged ports, chronically congested railways, gridlock and other projected infrastructure problems can choke off retail sales. Hard bargains driven by cash-strapped governments — We’ll need you to pay for a couple of interchanges before we can approve your lifestyle center — could force developers to nix otherwise-viable projects, sources say. “Infrastructure, for retail development more so probably than any other type of commercial development, is absolutely critical,” said Michael Dee, senior vice president and national retail director at Chicago-based Grubb & Ellis. “It has always been a hot topic, but it is even more so today, because of the amount of retail development that we have seen and also the population growth in some of the major centers.”
Indeed, infrastructure shapes where and how retail development happens, says Jeff Zeigler, executive vice president of retail at Continental Retail Development, Columbus, Ohio. A highway bypass that skirts drivers around an urban core they once drove through, for example, can turn a formerly thriving downtown into a netherworld. “It’s truly incredible,” Zeigler said. “Instead of retail and urban development and restaurants happening downtown, they happen on the outskirts of town.” Likewise, smart infrastructure investments like mass transit can bring an urban mixed-use district to life, Zeigler says.
The connection between shopping centers and infrastructure dates back to a federal initiative that literally paved the way for the modern American shopping center industry, says Dale Anne Reiss, global director of real estate, hospitality and construction services at Ernst & Young. “When the federal highway system was put in place in the 1950s, retail sprang up where the roads came together,” she said. “These were natural places for shopping centers.”
Today, however, America’s once-gleaming infrastructure is in a sorry state, says Patrick J. Natale, executive director of the Washington-based American Society of Civil Engineers, which lobbies for increased infrastructure spending. In its most recent Report Card for America’s Infrastructure, the association gave U.S. infrastructure efforts a D. The report cited a litany of failures, such as the 120-ton concrete beam that collapsed onto Interstate 70 in Washington County, Pa., in December 2005, nearly flattening the passing cars. Or the dam that burst in Kauai, Hawaii, in March 2006, unleashing 300 million gallons of water that washed away homes and killed seven people. “There are 10,000 dams considered high-hazard in the United States,” Natale said.
The report, which calls for that $1.6 trillion in spending over the next five years, details massive funding shortfalls in aviation, dams and levees, bridges, roads and transit, inland waterways, drinking water and wastewater. Because it fails to take population growth into account, however, even this 13-digit price tag could be a lowball estimate of what it will take to fix today’s problems.
How did it come to this? The country has simply not spent enough to cover the cost of keeping these networks in good shape, even as the population has skyrocketed to over 300 million, says Paul Bingham, a principal in the trade and transportation practice of Global Insight, a Washington-based forecast firm. “There is maintenance and replacement required at a certain stage, and the cost of doing that today, as opposed to when [U.S. infrastructure projects] were originally built, 40 or 50 years ago, is substantial,” Bingham said. “If you start to think about doing this across the entire country, it is just an enormous, daunting amount of money.”
Even as it strains the existing infrastructure, a robust population growth must be met with massive spending on new projects, says Bingham. Transportation officials in such growth hotspots as Contra Costa County, Calif., where Bay Area commuters clog the streets and highways, struggle to keep up. “The cost of building things has become astronomical,” said Robert McCleary, executive director of the Contra Costa Transportation Authority, a planning agency that handles sales taxes earmarked for transportation. “The numbers are just astounding.”
The Caldecott Tunnel Improvement Project is a good example. The mile-long tunnel, which consists of two bores dating from 1937 and a third that was built in 1964, links Alameda and Contra Costa counties via state Route 24. To relieve congestion where the eight-lane Route 24 narrows to six, officials aim to add a two-lane bore through the East Bay Hills. “That fourth bore is estimated to cost between $385 million and $420 million,” McCleary said.
In the more affordable eastern part of the county, where residential growth far outpaces existing infrastructure, officials plan to pour about $600 million in state, federal and local funds into the Route 4 East corridor alone, McCleary says. Parts of these projects, which include building a new bypass as well as adding two more lanes and a median wide enough for a commuter rail line, will be under construction until 2015. Helpful as such upgrades may seem, though, California’s infrastructure overall is in trouble, McCleary says.
“These are all what I would call Band-Aids,” he said. “The core problem is, there simply is not enough money. Not only is there not enough money to build new projects, but local streets and roads in California are in bad shape. There are a lot of underlying problems, and many states are facing these same issues.”
One way that officials have responded to such pressures is to try to pass off infrastructure costs to shopping center developers. “Cities and municipalities have gotten much more sophisticated over the years and therefore are requiring more of the cost to be associated with the developers,” Dee said. “When you’re talking about a large-scale development like a regional mall or even some of the lifestyle centers that substantially increase vehicular and pedestrian traffic, there is no way a retail developer can get around the burden of having to widen roads, create interchanges, make sewage improvements, those kinds of things.”
This complicates the calculus of whether a project is viable and also translates into higher rent burdens for tenants, says Dee. But even when infrastructure costs are shifted to the private sector more generally, shopping center owners can wind up feeling the pain. What landlord would want a $4 toll road as the main route to his mall, for example? And yet, according to Infrastructure 2007: A Global Perspective, a 69-page report by Ernst & Young and The Urban Land Institute, most new U.S. highways in coming years will in fact be toll roads.
When the demographics are good enough, of course, developers can and do take infrastructure hurdles in stride. The potential for gridlock was a concern when Atco Properties & Management was planning The Shops at Atlas Park, a 350,000-square-foot lifestyle center and office complex that opened in April 2006 on a 12-acre site in New York City’s Queens borough. About 5,000 people had once worked in the former industrial complex during its heyday in the 1950s, says Damon Hemmerdinger, development director for Atlas Park and a senior vice president at New York City-based Atco. This former high-capacity use made adapting the infrastructure in and around the site, once served by a steady stream of trains and trucks, conceivable. “The challenge we had was to work with the community to smooth the reabsorption of this site into the city’s infrastructure,” Hemmerdinger said. Toward that end, Atco built its own bus station and worked with the Metropolitan Transportation Authority to reroute buses to Atlas Park, where tenants include Borders, Chico’s, Coldwater Creek and Stein Mart. The developer is still waiting for the city to make good on its promise to make off-site traffic improvements, however. “Those haven’t made it high enough in the city’s priority list,” Hemmerdinger said.
However deft shopping center developers may be at finessing infrastructure challenges, the prospect of rapidly fraying roads, collapsing bridges and the like should give them pause, says Natale. Infrastructure failures can bring shopping to a standstill in a variety of ways. A blackout could translate into a day or two of empty cash registers. But a major infrastructure calamity could have devastating effects on retail lasting for months or years. “If you look at the loss of infrastructure as happened in New Orleans, all controls left and they had chaos,” Natale said.
Moreover, harried shoppers faced with worsening gridlock and rising gas prices will have less time and money for shopping, says Bingham. “More congestion takes more time out of your day,” Bingham said. “That is less time to spend shopping. Shoppers might feel: ‘I got here later than I would have liked. I have to leave earlier now to allow more time for traffic.’ They might spend less time actually in-store.”
Efficient transportation is also vital for keeping stores stocked as retailers strive to shorten the time it takes for fashions to go from drawing board to store shelf.
Will federal, state and local governments spend roughly $2 trillion or more in coming years to arrest the infrastructure decline? Natale says he doubts it, even as he champions the cause. Bingham, for his part, says one of the clear solutions to the problem — a stiff increase in the gas tax that pays for the U.S. government’s Highway Trust Fund — seems politically impossible. (A few state and federal lawmakers, emboldened by the Minnesota bridge collapse, have started pushing for infrastructure-related tax increases.)
A note of skepticism also runs through the chapter on U.S. infrastructure in an Ernst & Young and Urban Land Institute report titled Infrastructure 2007: A Global Perspective. “Looming Crisis,” “Deterioration, Congestion, Unreliability” and “Approaching Train Wreck” are among the report’s subheadings. “A broad consensus exists: the United States is on the cusp of a crisis,” writes report author Jonathan D. Miller. “If we don’t face up to our future infrastructure requirements, our economy and way of life could be affected, maybe severely.”
GLOBAL GROWTH SPURT COULD SPUR INFRASTRUCTURE CRISIS
Construction cranes may be tall enough to tower over the horizon, but finding one these days can be tough — unless you happen to be in China.
“China has cornered the world market for high cranes,” said Patrick J. Natale, executive director of the Washington-based American Society of Civil Engineers. “Most of them are in China for the development of their infrastructure.”
Indeed, the Chinese government is scrambling to make sure the infrastructure of this country of 1.3 billion grows at the same dizzying pace as its economy. The government aims to finish by 2020 a 53,000-mile National Expressway System, an infrastructure project comparable to the now-overburdened, 47,000-mile U.S. interstate network launched in 1956. The U.S. project all but created the modern American shopping center industry, and the same kinds of development opportunities are present today in China, says Dale Anne Reiss, Ernst & Young’s global director of real estate, hospitality and construction services.
Just as Italian dictator Benito Mussolini made “the trains run on time,” as the saying went in the 1940s, the authoritarian Chinese government has a certain advantage when it comes to laying down expensive new infrastructure: Its politicians need not fear any anti-tax backlash. “China says, ‘We want it here and it is going to go there,’ ” Reiss said.
India is poorer and moves at a slower pace than China, which has already put down some 25,000 miles of highway, but it is nonetheless making big strides — and creating major retail opportunities — of its own, says Reiss. The so-called Golden Quadrilateral, a $12 billion national ring road linking Chennai, Delhi, Kolkata and Mumbai, is nearing completion. But India clearly faces major infrastructure challenges, including spotty utility services and nightmarish, potholed roads that put it at a disadvantage in the competition for foreign development dollars.
“China spends 9 percent of its gross domestic product on infrastructure and India budgets 3.5 percent ($25.5 billion) while aiming to increase its allocation to 8 percent,” wrote Jonathan D. Miller, author of Infrastructure 2007: A Global Perspective, a report by Ernst & Young and The Urban Land Institute. “By comparison, the United States budgets $112.9 billion, or just 0.93 percent of its GDP, and sidesteps the reality of a ballooning $1.6 trillion deficit for necessary upgrades over the next five years.” Not that big infrastructure projects are totally lacking in the U.S. Atlanta, Denver, Washington and several other American cities are in various stages of planning and construction for rail projects that are creating retail opportunities. The whir of construction equipment is loudest elsewhere in the world, though, as fast-developing nations build airports, bullet trains, highways and railroads. Globalization is so rapid, in fact, that some question whether the world’s infrastructure can keep up.
In a May 2007 speech before European trade officials, Ron D. Widdows, CEO of APL, a giant in the international container shipping industry, warned of an impending global infrastructure crisis. A mushrooming trade volume that now stands at an estimated $117 trillion annually could overwhelm the world’s ports, roadways and railroads, he said. “The gist of the problem is this: The global economy is growing rapidly, fueled by unprecedented growth in containerized trade centered around Asia,” Widdows said. “But in most of the world’s key markets, and in some of its sourcing hotspots, transportation infrastructure can’t keep up with the pace of trade growth.”
HIGHWAY TRUST FUND IS A ROADBLOCK
If U.S. transportation bureaucrats could travel backward in time, they would probably like to drop in on a 1956 session of Congress to pressure lawmakers to alter the wording of a critical funding mechanism then being written.
When those lawmakers set up President Eisenhower’s federal highway system, they had the foresight to make sure the Highway Trust Fund could not be “raided” for other uses; revenues collected by the federal gas tax, which then stood at 2 cents per gallon (gas cost 23 cents a gallon), would go straight into the fund, where they could not be touched. The legislators could have gone a step further, however, and made sure the tax itself was collected as a fixed percentage of the total price of gasoline, rather than as a set number of cents per gallon. Much to the chagrin of future generations of transportation officials, they failed to do so.
Thus the funding mechanism, as codified that year, kept revenues for the Highway Trust Fund, the biggest source of state and federal money for highway building and maintenance, from rising along with the price of gas. Historically, in fact, the tax itself has stayed flat for decades at a time — it went unchanged, for example, from 1959 to 1982. Today it stands at 18.4 cents per gallon, a level set back in 1993.
In fact, a federal highway aid program within this massive fund could actually be $4 billion in the red by 2009, according to the U.S. Chamber of Commerce. It all depends on whether Congress actually spends the $286.5 billion it approved for a raft of highway safety and other transportation programs in 2005. “The assumptions made by Congress during the last reauthorization — that revenues were just going to go up and up — turned out not to be true,” said Jennifer Gavin, deputy director of communications for the American Association of State Highway and Transportation Officials.
The situation is analogous to that faced by the Social Security Trust Fund. And politicians are about as eager to talk about that simplest solution — raising the national gas tax that feeds the fund (and perhaps changing it to a percentage of price per gallon) — as they are to stump for lower social security benefits. This same anti-tax sentiment is the reason the federal portion of the tax has stayed at 18.4 cents per gallon since 1993, Gavin says. States set their own contribution levels. “We suggested five years ago increasing the gas tax by 6 cents a gallon,” said Patrick J. Natale, executive director of the Washington-based American Society of Civil Engineers. “You would have thought we were trying to take people’s firstborn.”
In the face of white-hot demand for infrastructure dollars, the fund’s overall revenues are inadequate, Gavin says. “There is a lot of driving out there,” she said. “But we have not been building roads to get out in front of it, because we don’t have the money to do it.”
It is too early to tell whether the Minneapolis bridge collapse, in the end, will change this dynamic. If Congress does fail to deal with the shortfall in the federal-aid highway account, meanwhile, states will lose an estimated $16.5 billion in transportation aid in 2009.
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