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Malls for the masses

Developers are scrambling to meet the needs of Mexico’s growing middle class

By María Bird Picó

Mexico’s retail developers are changing the face of Mexico with their architecturally striking projects, but they are also carrying on a great tradition. After all, present-day Mexico City sits on Tenochtitlán, the capital city of the pre-Columbian Aztec Empire, known for its superb architecture and craftsmanship.

These lavish investments underscore Mexico’s flourishing economy, buoyed by confident investors and consumers, with the latter spending at record levels. During the first eight months of this year, Mexico’s department stores and supermarkets posted a 13.5 percent year-on-year sales increase, according to the Mexico City-based Asociación Nacional de Tiendas de Autoservicio y Departamentales, a trade group representing about 100 department store, supermarket and specialty retailer chains.

“The best evidence that our economy is finally on solid ground is the recent presidential election,” said Roberto Jenkins, general manager of Cinemark Mexico, referring to political unrest over July’s close election. “In the past we would have seen a terrible financial crisis. That did not happen this time around. Mexico’s macro economy today is the most solid throughout its history. The political decisions have been made parallel to the economy, and the economy has stood on its own feet.”

By one estimate, as many as 70 shopping centers are now under construction at a total cost of $6 billion, according to CB Richard Ellis. More than half of these are going up in cities with populations between 80,000 and 400,000.

The market will have no trouble absorbing this additional retail space, sources say. Mexico has nearly 1.5 square feet of retail space per person, a tiny fraction of the U.S.’s 20 square feet per capita.

“There is still plenty of room for more development, particularly in the other states of our republic,” said Edgar Rodríguez Aguilera, director of operations at Mexico City-based Grupo Frisa, which has a portfolio of 24 shopping centers, with two more under construction. “We could develop more in the metropolitan area [of the state of Mexico], but there is no suitable land, and the available lots are too expensive.”

In the affluent Mexico City neighborhood of Santa Fe, for instance, land is selling for about $1,100 a square meter, while in the highly coveted Polanco neighborhood, it goes for as much as $2,000. These prices have encouraged dense, mixed-use developments to maximize land use with retail, office, residential and hotel components.

This thriving market is attracting international retailers. Saks, the U.S. upscale department store chain, will open its first store in Latin America next year, in Mexico City, where it will anchor a 280,000-square-meter (3 million square feet) expansion of Centro Comercial Santa Fe.

Other U.S. retailers on their way include Bed Bath & Beyond and Payless ShoeSource. Already there are the Office Depot and OfficeMax chains, as well as Costco, Home Depot, RadioShack and Wal-Mart. The non-U.S. foreign chains include Spanish apparel chain C&A and almost all the brands of Spain’s Inditex retail group.

Mall development is particularly attractive to foreign retail chains, because it offers them the opportunity to open in several locations at a time, reducing their operating costs and making investment in Mexico viable, executives say. “Gicsa’s 24-mall portfolio gives a new tenant the ability to enter into at least 10 through negotiations with just one mall operator,” said José Luis Quiroz Robles, real estate development manager at Grupo Gicsa, a Mexico City-based mall developer and operator. “That did not exist before.”

Predominant in the new wave of developments are neighborhood shopping centers, generally anchored by a supermarket, that supply basic retailing needs in the emerging residential areas. Organización Soriana, parent company of the 204-store Soriana supermarket chain, is building 15 shopping centers this year to be anchored by Soriana hypermarkets and tenanted by 40 stores each. An additional 23 Soriana stores will go to other sites and malls, says Pedro Mejía Mendoza, an Organización Soriana spokesman. “This mall boom presents a big challenge,” said Mendoza. These centers will be competing for customers and retailers, he says.

Developers and retailers are putting a lot into their projects. Luxury department store operator Palacio de Hierro hired renowned Mexican architect Javier Sordo Madaleno to design its three-level store at the Centro Comercial Paseo San Pedro, in Monterrey, one of Mexico’s main industrial cities. The asymmetrical and translucent glass dome stands out day and night, illuminated from the inside using various colors. Within the store itself, the 30-meter-high atrium sits atop elegant white columns.

Antara Polanco, a ritzy lifestyle center that opened this year in Mexico City’s Polanco neighborhood, is home to Armani, Carolina Herrera, Coach, Donna Karan, Kenneth Cole, Louis Vuitton and Tous, among others. The center, another Sordo Madaleno design, sits on a former General Motors assembly plant. With 37,000 square meters of gross leasable area (GLA, the two-level mall is up and running except for some high-end restaurants and a cinema complex that are still in the works.

The white center, which comprises two parallel S-shaped buildings, is the retail component of an ambitious mixed-use development scheduled to open in 2009. Underneath the $250 million mall is a four-level parking garage.

Paseo Interlomas, a 78,113-square-meter retail-entertainment center Grupo Gicsa plans to open in nearby Interlomas in 2008, will contain 180 stores, a skating rink, a hotel, a gym, two department stores, a 16-screen cinema and 12 restaurants.

Grupo Gicsa is also behind the 10,000-square-meter City Walk, in Santa Fe, a 1-kilometer-long, retail-entertainment pedestrian thoroughfare scheduled to open next year with 95 tenants. Gicsa has no fewer than 12 additional retail projects under way, along with two mall expansions.

The boom has attracted an increasing number of international investors over the past five years. U.S. players include Sam Zell’s Equity International Properties, GE Capital, Hines, Kimco Realty Corp., Morgan Stanley and Prudential Real Estate Investors. “We get two to three calls a week from pension funds inquiring about the local market,” said Luis Llaca, Cushman & Wakefield’s Mexico City-based director of retail services. “The great motivators are the returns rates in retail investments. In Mexico City, for instance, the investment returns are between 12 and 16 percent, higher than those of the industrial and office sectors.”

Hines is investing $200 million to build three shopping centers in Mexico that are to operate under the City Center name. The company seeks to build at least seven other shopping centers, says Josué González, retail manager at the Mexico City office of Dallas-based Staubach, which Hines hired to lease the malls in Hermosillo, Los Cabos and Mérida.

Mexico Retail Properties, founded in 2001 by the Denver, Colo.-based Black Creek Group, one of four institutional partners, has built 10 malls and says it plans to open about a dozen more per year. The company started out investing in power centers but has since shifted to what it calls a lifestyle-neighborhood center hybrid. One of these is Plaza Cortijo, with a GLA of 54,947 square meters, going up in the city of Ixtapaluca, state of Mexico. The 136-tenant lifestyle center will contain both a Wal-Mart and a Suburbia (a Wal-Mart-owned fashion department store), a gym, a food court and even an ecumenical chapel.

But not everyone is comfortable about this explosion of development. Some voice fears that overdevelopment could result from overzealous foreign investors looking for short-term gains. Others are concerned about an emerging group of landowners with prime land but little shopping center know-how. Some of these neophytes have engaged in practices that could be detrimental to the industry, such as giving away land to an anchor or building too close to an existing mall to oblige a particular retailer.

“We are more worried about this group than [about] the investment funds,” said a mall executive who requested anonymity. “Investment funds at least know the industry, or partner up with a local group.”

But fear of foreign investors, at least, is misplaced, some say. “Retail real estate is a long-term project, because you have to stabilize the asset by building the portfolio,” said Roberto Charvel, director of portfolio management at Mexico City-based Prudential Real Estate Investors Latin America, which has teamed up with the Monterrey-based Grupo Acosta Verde to build several malls. “It is not only building, and that’s it.”

Far from eroding industry standards, the proliferation of malls has raised them and opened up new markets for retailers, proponents say. Some of the new malls are not charging the hefty key-money fee to secure a space (as high as $10,000 per square meter for a premium locale at the most successful Mexico City malls). In the absence of competitive long-term financing, this was one way developers raised capital in the past. Another was to sell off mall spaces to tenants, relinquishing control over maintenance, operating hours and other issues important for running a mall well. Increasingly across Latin America, landlords are retaining ownership, adopting the U.S. leasing model.

“We have shaken things up,” said José María Zetuche, chief investment officer at Mexico Retail Properties. “This is helping not only to grow the industry but to professionalize all the players.”

Many expect leasing rates to decline with the opening of more malls, which in turn will enable retailers to lower prices. Until that happens, though, prices remain high, even for domestically produced goods. This puts them beyond the means of many in a country where per capita yearly gross income averages $7,310.

“One reason why merchandise prices have gone up is because retailers have had to move to malls to retain their market share, and the leases and costs there can be exorbitant,” said one executive at a leading fashion retail chain, who asked not to be identified.

But for those who can afford it, malls offer security, shopping and entertainment under one roof. They are equally important to retailers. “Unlike the U.S. market, the malls are very important in our local branding of Starbucks,” said Oscar Ocampo, real estate manager at Mexico City-based Alsea, which owns the Starbucks franchise in Mexico. “Security concerns prompt many consumers in Mexico to head to a mall.”

“We are growing, thanks to the mall boom,” said Felipe Fierro, manager of Toks, a chain of 54 casual restaurants owned by Grupo Gigante, which also owns Gigante Supermarkets and operates Office Depot and RadioShack in Mexico. “People are going more and more to the malls, so we want to be there.”

Evidently, mall developers have heard the message, and are obliging.