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BACK TO BUILDING

With centers too pricey to buy, landlords build them instead

By Curt Hazlett

Steven J. Kieras’ schedule is a meeting hater’s nightmare. His 8 a.m. to 10 a.m. meeting blends into another that runs to noon, and his afternoon is a tightly scripted series of one-hour meetings that extends past the time when most people would be pulling out of the parking garage and heading home.

“That’s not unusual,” said Kieras, The Taubman Co.’s senior vice president for development, in the middle of one typical morning. “It’s indicative of the fact that we have a lot going on. We’re trying to close a lot of deals that will fill our pipeline for the next several years, and we have a lot of fish on the line.”

Plenty of REIT executives are fishing from the same boat these days. Filling the pipeline with the right properties is job No. 1 for shopping center developers everywhere, and most have their hands filled with new projects and redevelopments of existing properties. In terms of total projects, in fact, this may be the busiest time ever for the industry.

“There has never been a higher level of redevelopment than there is right now, and our development program has never been larger,” said Richard S. Sokolov, president of Simon Property Group, the country’s largest mall developer.

Much the same is true at General Growth Properties. “We probably have close to 30 projects in some form of development or other,” said CEO John L. Bucksbaum, SCSM. “We’re very busy.”

Contrast this to the years 1998-2001, when General Growth “opened one new mall a year in terms of ground-up development,” Bucksbaum said. “Then I think we skipped two years. This year we’ve opened two ground-up developments in a month, we’ve had a major redevelopment in San Jose [Calif.], and ground-breakings in places like Macon, Georgia; and Toledo, Ohio.”

Why so much building? The simple fact is that it makes more sense than acquiring properties, which are expensive and in short supply.

Of course, acquisitions are still taking place, and sometimes they make big news. That was the case in October, when Developers Diversified Realty Corp. announced that it would buy Inland Retail Real Estate Trust for nearly $6.2 billion, in the process acquiring roughly 300 shopping centers, mostly in the Southeast.

“We felt this was one of the last opportunities to acquire a meaningfully sized portfolio of high quality,” said Daniel B. Hurwitz, Developers Diversified’s chief investment officer. “Market-dominant community centers make up about 70 percent of the value of this portfolio, so this was a unique opportunity based on its quality and the locations.”

Yet even with this addition of so many properties, Developers Diversified keeps pushing its program of ground-up development, Hurwitz says. “In fact, we’ve accelerated our pace,” he said. “External growth through acquisition is only one component of our growth strategy. We have a $3.5 billion development pipeline, and it’s an important part of our future business model. So they are not mutually exclusive.”

For most companies, the push for development began in earnest three years ago.

“Around 2000 and 2001 we felt the risk-reward ratio of acquiring product as opposed to developing was out of balance,” said Simon’s Sokolov. “We basically continued to pursue predevelopment activities, but didn’t initial new development.” But in 2003 the ratio began shifting in favor of development. “We felt it was a better use of our capital to accelerate our development and redevelopment program as opposed to acquiring malls,” he said.

In Simon’s case, that means working across five business platforms: community lifestyle centers, regional malls, its Chelsea Premium Outlet centers, its international program and what it calls its “asset intensification initiative,” in which mixed-use components are added to existing centers. In all, Simon expects to spend nearly $5 billion on development over the next four years, Sokolov says.

At the same time, acquisitions and dispositions have nearly dried up. Simon has not acquired more than a few properties in the past several years and has sold only a handful. “Where we have a well-located property, we’re going to dedicate time and capital to allow it to maximize market share,” Sokolov said.

Just as noteworthy as the number of development and redevelopment projects are their characteristics. Although developers still build traditional regional shopping centers, the market is changing in ways that demand novel approaches to retail development. “You have to recognize that you can’t throw away the many years of experience, knowledge and brand equity you’ve built up,” said Kieras. “You have to parlay that into what the market is demanding and what communities want, and that results in projects like we have never seen as an industry.”

Kieras says projects now increasingly integrate retail with residential and office, sometimes in vertical city settings. Yet-to-be-announced projects may be a hybrid of retail types, from big box to in-line fashion tenants to department stores. “We’re morphing as dictated by the market into products that retain what we do best, yet add on different elements that complement what we do,” Kieras said.

He points to The Pier at Caesars, in Atlantic City, N.J., as an example. The center, a venture of Taubman and Gordon Group Holdings, is built on a pier and connected to the Caesars Atlantic City Hotel and Casino. “It’s a project where we don’t have a traditional department store anchor,” Kieras said. “It’s very high-end stores and shops anchored by Caesars and all of the casinos on the Boardwalk. We expect it to do phenomenally well.”

Simon’s pipeline is crowded with properties coming on line in the next year. Among them are Coconut Point, a 1.2 million-square-foot, open-air center that opened in Estero, Fla., in November; Domain, a master-planned center with residential and hotel components that is set to open in Austin, Texas, in March; and The Shops at Arbor Walk, an open-air center next to Domain that will be anchored by a Home Depot and a Whole Foods and is slated to be fully open in March.

Simon’s redevelopment program, like those of most owners of regional malls, is driven in part by changes in the department store world. Nordstrom, for instance, is slated to open next fall at Aventura Mall, near Miami, to replace a Lord & Taylor, and in early 2008 at Burlington (Mass.) Mall as a replacement for Filene’s. Other centers that lost Federated Department Stores names will get lifestyle additions.

General Growth’s new developments include the Otay Ranch Town Center, which opened in October near San Diego, the Pinnacle Hills Promenade, in Rogers, Ark., and Summerlin Centre, the retail component of the massive Summerlin development just outside Las Vegas. The firm’s 20 expansion and redevelopment projects range from simple renovations to the addition of hundreds of thousands of square feet.

Bucksbaum says a different approach is necessary today from a decade ago. “We have to rethink things, from merchandising to architectural,” he said. Back then growth came through acquisitions, he says. “The focus now is very much back to how you grow the business internally, and that creates challenges. It creates a tremendous demand on development and construction staffs and on construction accounting. It changes the emphasis, and that requires changing the mind-set of people within the organization. The growth is occurring in different areas than it used to.”

And it is requiring entirely new concepts. Kieras says Taubman is interested in forming more alliances with nonretail developers with like-minded sensibilities, whether they specialize in casinos, residential properties or office buildings.

The result may be developments like Project CityCenter, the massive casino-hotel-residential-retail enterprise costing $7 billion and scheduled to open in Las Vegas in 2009. “It’s the largest and most expensive project that we know of this type ever built in the United States,” Kieras said. Taubman is handling the retail, which will total 500,000 square feet. “That’s been a real challenge, to integrate the retail uses and all the other uses and still make all of them function optimally.”

Whatever the style, though, the underlying task remains the same. “We’re trying to do what we do best, and we want to be sure anything we do will stand the test of time,” said Kieras. “If we’re going to do a project, at the end of the day, it’ll be one we want to hold for a long, long time.”

All of this, of course, guarantees that Kieras will be working long, long days for the foreseeable future.