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Shopping Centers Today -> October 2001
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CALIF. POWER CRISIS NO DETERRENT TO LEASING
By Debra Hazel
Developers and brokers say that retailers in California, dealing for months now with energy rate increases passed on through their already significant CAM charges, are not abandoning ship and continue to seek opportunities in the growing market.
“At this point, I don’t see it [retailers leaving],” said Joseph Tagliola, executive vice president and director of leasing for Los Angeles-based Westfield America, referring to whether retailers are leaving the state.
Retailers generally are expressing concern about energy costs during the negotiation period, “but the costs aren’t so great that they are chasing the tenants away,” said Marcia Agatucci, vice president of leasing for San Francisco-based developer and broker GMS Realty. The company owns and/or manages 23 grocery-anchored centers around the state.
For many retailers, the opportunity is simply too great, and justifies the higher costs of doing business.
“Any business has to look at [occupancy costs]. But retailers also have to look at a state growing by 10 million people in the next 10 years,” said Rex Hime, president of the California Business Properties Association, Sacramento.
Tenants may also be encouraged to stay because they have seen shopping center managers working hard to minimize the effects of the soaring energy costs.
“For us, a focus has been on conservation,” said Scott Reinstein, vice president of national operations of Westfield America, which dominates the San Diego region, probably the hardest hit in terms of cost increases. In some areas, energy costs have risen 46%. In response, the firm has reduced light levels by cutting back on decorative illumination, and raised the thermostats from 72 to 78 degrees at some of its Southern California projects.
The Macerich Co., Santa Monica, Calif., signed a long-term contract with Enron Energy Services (SCT, April 2001) to analyze energy use and control energy costs at nine centers, and those projects have been unaffected by the increases, said Jim Ackles, vice president of energy management. Conservation methods have worked well at other projects.
“A $200,000 lighting retrofit at The Mall at Northgate in San Rafael [Calif.] has reduced our electrical load there,” Ackles said. “We’re trying to do the things that make sense without impacting the shopper.”
Open-air centers also have made adjustments. Developers Diversified Realty has installed time clocks that turn lights off earlier after sunrise, while tenants have reduced their HVAC usage and turned off unneeded light fixtures at its California projects.
Elsewhere on the West Coast, the energy problem is less severe, and leasing is unaffected, noted Kemper Freeman Jr., president of Bellevue Square Managers, Bellevue, Wash.
“The best thing our legislature did was not what California did. Deregulation was the worst thing I ever heard of,” Freeman said. “It’s inevitable that what happened, would.”
Still, the rest of the West Coast is on the same power grid as California, with surpluses and shortages shared, so managers in Washington also are conserving as well, checking lights, economizing on air-conditioning and the like.
“We’ve talked to our utility provider, and they understand the fix we’re in. It’s an orange light, not a red light,” Freeman said.
The problem does not seem to be affecting real estate investment decisions in the state. While the crisis hit after the transaction was done, Developers Diversified Realty would still have acquired 15 projects in California from San Diego-based Burnham Pacific Properties last year, said Richard E. Brown, senior vice president of operations and management for the Cleveland-based company. Even the $355 million price of the deal likely would not have been adjusted.
“The high-tech issues and general economic problems overshadow the energy issues,” Brown said. “We still believe in the California market, and we still have long-term optimism.”
The government is helping as well. California Gov. Gray Davis has instituted a program that will give companies that reduce energy costs by 20% an additional 20% discount, he said. Westfield has been saving 20% and getting the discount; therefore, energy increases thus far have been minimal.
In late August, the newly created California Consumer Power and Conservation and Financing Authority, similar to the Tennessee Valley Authority, held its first meeting. By law, the agency has the power to offer tax incentives, issue bonds and even build power plants. At press time, the Authority was planning to select an adviser to help prioritize projects and programs.
Shoppers themselves haven’t seemed too worried. As of late July, a cooler summer than normal on the West Coast had resulted in lower energy demand, and by mid-July, the blackouts of the early spring had become a memory. Prices have dropped and stabilized, though they remain high compared with just two years ago.
“What’s interesting is that people in California see this as a short-term political problem, and that they will see increased capacity,” DDR’s Brown said.
That may in fact be happening. In recent months, Davis ordered the Department of Water Resources to buy power, and has been working to save financially troubled utilities Pacific Gas & Electric and Southern California Edison. In mid-July, The New York Times reported that the combination of favorable weather and conservation had led to an energy surplus, with the Department of Water Resources actually selling some power back to the market at a substantial loss.
But at press time, the surplus was not expected to last long if August temperatures rose, and energy shortages remain a long-term threat.
“We’re praying [for] businesses to continue their efforts to minimize energy use, for new plants, and that the legislature won’t pass legislation that will negatively affect us,” Hime said.
No one believes that the state is out of the woods yet, and several wonder if other areas will be affected later on.
“California is just the beginning,” Ackles said. “It ain’t the end.”
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