PRINT THIS STORY:

CHANGE TEXT SIZE:

BALANCING THE MIX BETWEEN GOODS AND SERVICES

Goods. Services. How much should a shopping center have of each?

Today's retail news continues to be filled with consolidations, Chapter 11s and downsizing, even as some chains expand new and exciting concepts. In their search to be all things to all customers, many shopping center developers are broadening their definition of effective tenanting to include service-type tenants.

The previous pages spotlight some of the retail chains that developer/ managers are seeking for their centers. The pages that follow will profile a few of the service-oriented tenants that many landlords hope will round out their offerings.

By Debra Hazel

Not that long ago, a strip center leasing space to a karate school or a mall leasing to a medical office was a sign of failure, an indication that the owner/manager couldn't find or retain a retailer for a given location.

Today, the two often are considered smart leasing to appeal to time-pressed customers looking for one-stop shopping, whether in a regional mall or neighborhood center.

Service-oriented tenants were standard in the shopping centers of the 1970s, then abandoned as both malls and strip centers rushed to lease to apparel retailers in the 1980s. Now, as the 1990s wind to a close, many of those services are looking awfully good again, as managers seek to bring customers into their centers more often and keep them there longer.

But achieving the proper balance between the retail goods that pay the rent and the services that can draw the customer is a challenge that each center must face on its own, developers say. And adding nontraditional service tenants could give the impression that retail alone cannot carry a center.

The trend toward service tenants derives largely from the current retail reality. Plainly put, most customers today have all the material items they need, other calls upon their resources (children's tuitions, retirement planning, etc.), and desires to travel and use their funds differently.

Sales of service-oriented items such as spa gift certificates have risen as more traditional apparel and other "goods" sellers have struggled. Expenditures on recreational products and services have risen to 9.5% of national spending over the last 10 years,according to the U.S. Department of Commerce. It isn't surprising that the nation's shopping center managers would look to include these categories in their centers.

"The main thing that's happening is that shopping centers continue to be an evolving business. We can't just have shoe stores, record stores, clothing stores. To survive, the shopping center has to be all things to all people," said David Contis, senior vice president/COO of Santa Monica, Calif.-based regional mall developer Macerich Co.

That means finding tenants that will allow customers to pay bills and/or renew a driver's license, get a facial or a manicure, and buy shoes all in the same facility.

Perhaps the chief architects of the new shopping center tenant mix are the retailers themselves. Bankruptcies and consolidations have reduced the number of tenants available to malls and strips.

"Our clients have recognized for a long time that though they may be looking for a national chain to take space, that is not reality. They are seeing that they have to turn to services," said Howard Makler, vice president of Huntington Beach, Calif.-based Stuart Makler & Associates.

The overstoring of the United States also is a factor, many say.

"You also have the reality that the number of retail bankruptcies is at an all-time high. Personal bankruptcies are at an all-time high. Sales per square foot is at an all-time low. Services are something you can't replace," Mr. Makler said.

And many retailers are looking at alternative locations, such as downtowns or life-style centers.

"Because of the selectivity and the availability of selectivity, the Gaps and Ann Taylors are going into the upscale centers. There's no anchor in these projects, they don't need a supermarket," explained Alan Smith, CLS, executive vice president of West Hartford, Conn.-based Konover & Associates.

With fewer viable apparel tenants taking retail center spaces, more opportunity is available to provide local, service-oriented tenants, even including insurance offices. Services being added to neighborhood centers include fitness centers, health and nutrition facilities, temporary employment offices, and attorney and accountant offices.

"You can use everything that typically can apply to repeat destinations," Mr. Smith said.

Some malls have leased space to outpatient clinics of local medical facilities (see accompanying story). Others have provided government services such as motor vehicle bureaus and city hall annexes that allow residents to meet with elected officials. Still others are joining forces with cyberspace (see accompanying story.)

Not all centers need to diversify, many observe. Larger trade areas are likely already to have service tenants in good locations, so they won't need to take space in a mall or strip center.

"It probably depends on where the centers are located. If a center is urban, that has a lot to do with it," said Nancy McCann, vice president, marketing at Cleveland-based Forest City Management.

"I'm looking at middle-market malls vs. a metropolitan mall. Our customer is so time-strapped, just by the nature of these constraints, they need one-stop shopping," said Barbara Ivankovich, SCMD, director of corporate marketing for Chattanooga-based CBL & Associates Properties.

But where some developers believe that urban centers may not need the "help" of service tenants, Ms. McCann believes that a city location, such as at the firm's flagship Tower City Center in Cleveland, may actually be predisposed to services.

"University Hospital has a satellite area near the center," Ms. McCann explained. The center officers a pharmacy where customers can pick up a prescription, serving in a sense as a service tenant for a regional mall.

Other Tower City "service tenants" include a Federal Express office, plus a ticket sales booth for local cultural events.

"The point is that we are creating a one-stop shopping atmosphere. Perhaps that is an idea from the past, with a few ideas added," Ms. McCann said.

In some ways, the industry actually is returning to the full-service facilities it built more than two decades ago.

In many respects, the industry is going "back to basics," Mr. Makler said.

"We're going back to the old downtown, the old Main Street. And that's a good thing," Mr. Makler said.

"We kind of got away from what made us so good. South Towne Center in Sandy, Utah, is a classic example. Not only do you have a mall, you have a 400,000-square-foot power center with Target. Plus, City Hall and the county courthouse are here. And across from the center is a 15-car automall," Mr. Contis said.

"It happened haphazardly before, but communities like Sandy have planned for this. It depends on the market," he added.

Above all, managers say, the balance between service and goods providers must be tailored to the individual market and center. The idea that a shopping center has to have a "perfect" mix is a myth, Mr. Makler said.

"There is no formula. In a case with a neighborhood or community center, you really have to have tenants where you will have a destination user," Mr. Smith said.

A formula in an industry that must cater to varied demographics is impossible, some say.

"If you have one, you're kidding yourself. What we have to get away from is formula," Mr. Contis said.

Developer/managers will not totally eliminate many categories from consideration. Common sense eliminates the illegal and quasi-legal, and others question the taste of including funeral services, for example, in a mall.

The deals themselves also must be restructured. Service tenants will not offer percentage rent, meaning that base rents usually are adjusted upward if possible. Even so, odds are that the rents from a service tenant will not equal that of a retail user. >"Like it or not, ownership has to take a big gulp and swallow the value. After all, what return on investment do you get from zero rent? All we're talking about is mitigating damages," Mr. Makler said.

Generally, services can be places in hard-to-lease locations, such as relatively dark corners, well off the center court, where retailers are reluctant to locate. In one example, Penn State University will add a facility to Johnstown, Pa.-based Crown American Realty's Chambersburg (Pa.) Mall.

"Their branch campus system mirrors our malls. They'll be going into a 3,000-square-foot facility in a space difficult to lease to conventional retail," explained Mark Pasquerilla, Crown American's president. The firm also has added a medical facility to its Francis Scott Key Mall in Frederick, Md.

This may in fact be the wave of the future, Mr. Pasquerilla said.

"Malls can go even further with the service industry: health, education, financial services, malls can attract all three. This is going to be a growing part of our business," Mr. Pasquerilla said.

But no one should get the impression that the addition of services means that retail centers are no longer viable. On the contrary, shopping centers will remain just that, developers said.

"I don't know if it's the idea that retail can't cut it as much as it is an acknowledgement that we can't rely alone on retail. You can't limit yourself to just stores," Mr. Contis said.

"It's basically done to complement the retail, not because there are fewer retailers," Mr. Pasquerilla said.

The main goal of any developer/manager today, he added, is to keep people in the center longer. Allowing shoppers to run errands without leaving a project may result in higher retail sales.

"Malls have to get back to being the centers of their community. In the 1980s, malls went too far overboard in being the centers of women's apparel. This came back to haunt the industry," Mr. Pasquerilla said, noting that Crown American has reduced its leasing to women's apparel by about 3%.

Not all developers have fallen in love with the idea of adding clinics, city halls or bill-paying offices to their centers, fearing that adding nonrelated uses could dilute the identity of their retail projects. And some are doing just fine without adding more service-related tenants.

"This issue is a very profound one. ... But at the end of the day, if you have a mall product where you can rely on goods, you're better off. If you have to go to a dental clinic [to fill space], it means you're not in an area where you can support goods," said Lee Wagman, president of San Diego-based TrizecHahn Development.

TrizecHahn is looking more toward adding entertainment uses to round out the mix at its centers around the United States.

"We're fortunate with a portfolio occupancy in excess of 92%," Mr. Wagman acknowledged. "You can then mix in services that are strategic, rather than opportunistic."

But given an environment of retail consolidation and weary customers just looking to get their errands done, it looks as though developers will be facing the goods/services question for quite some time.

"As long as something is a positive complement to the retail, it works. Retail is still the heart of the mall," Mr. Pasquerilla said.

But few can resist the call of a nonretail use that will draw and keep shoppers coming back regularly. The only question is how much of these tenants to add.

"Everything is balance. What you have is the steak. Now you have to add the sizzle to go with it," Ms. McCann said.

And odds are, the tide may turn again at some point in the not-too-distant future.

"We've gone through a lot of cycles, with department stores strong, then weak, now strong again," Mr. Wagman observed. "But you have a lot of fundamentals that remain the same. As long as we base our projects on a combination of goods and services, we will serve the customer."