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Survey: reconstruction outnumbers new projects

By Jon Springer

Shopping center reconstruction continues to outpace new construction, while the number and sizes of new centers dipped from 1996 to 1997, according to results of an ICSC/F.W. Dodge survey.

A total of 568 shopping centers were initiated in 1997, 37 fewer than in 1996 and seven more than in 1995, according to the survey. The majority of those groundbreakings -- around 80% -- were for centers of less than 100,000 square feet, while just three new superregional malls were begun in 1997, half the number that broke ground in 1996.

Projects were not only fewer, but smaller. The new centers have 22% less space than those started in 1996 -- the average building area dropped from 100,000 square feet to 78,000 square feet. The center starts in 1997 were valued at $2.6 billion, down 21% from the previous year. Average contract value was estimated at $4.6 million, the survey said.

According to shopping center experts, those numbers reflect a construction climate driven by the needs of retailers, while developers have become more conservative and selective before starting new projects. Deals are also taking longer to complete than ever before, which is slowing the flow of new projects.

However, few experts believe that the building slowdown is a trend. With real estate investment trusts hungry for earnings growth and the country experiencing a healthy economy, more new projects, not fewer, are on the way, they say.

"We've seen tremendous residential growth, and a great inflow of people and income," said Larry J. Leon, president of Leon & Associates, a Dallas-based developer. "The economy is strong, and retail is responding. We all pray and hope this will continue, because we've been through the downturn, and it wasn't the least bit fun."

In areas where construction remains brisk, such as the South, development is fueled by emerging second- and third-tier markets. Moreover, doing business in the South is less hampered by costly and time-consuming approval processes.

"I think developers have gotten themselves in trouble before by developer-driven construction. Right now, retailers are what's driving the construction activity," said Milton M. "Bubba" Smith, president of AIG Baker Shopping Center Development LLC, a private owner-development firm based in Birmingham, Ala.

Mr. Smith pointed to several retailer-driven reasons for new projects, including the upgrading of older stores, the creation of new formats and ambitious expansion plans.

On the developer side, a new interest in second- and third-tier markets, as well as a rediscovery of infill locations in first-tier markets, is also spurring new building, Mr. Smith added.

New construction is rampant in several "hot" markets around the country, such as Las Vegas; Phoenix, Orlando, Fla.; and Atlanta.

"The growth of suburbs has continued, but we're now seeing a greater growth in even smaller, widely scattered villages and towns," added James McDonald, vice president of development for Konover & Associates, a West Hartford, Conn.-based developer. "Percentage-wise, growth in small towns is greater than in suburbs."

Mr. McDonald said developers can find larger pieces of land in smaller markets than they can in suburban or urban locations. Fast-growing southeastern Connecticut is one such area, he said.

The South was by far the busiest region for new construction in 1997, with 259 of the 568 new starts, according to the survey. Mr. Smith attributed this to a combination of well-heeled local developers, growing markets and retailers who are zeroing in on that growth.

"The South is outpacing the rest of the country in growth -- even some third-tier markets are experiencing pretty staggering growth. If you look at small cities in the Carolinas -- the Greenvilles and the Andersons -- and small markets in Georgia, you're seeing some tremendous growth," Mr. Smith said.

"There are also a number of national retailers focusing on particular markets they skipped around," he added. "A good example of that is Target, which kind of skipped around the Southeast. They went to Florida and are making a move into Georgia. There have to be other opportunities there, too, maybe Mississippi and Alabama. You're seeing retailers with national programs who never before focused on the South are doing that now."

Fierce competition between those retailers also is making things happen.

"I see Lowe's and The Home Depot really going head-to-head in some markets in the South," Mr. Smith said. "When you have those two 100,000-125,000-square-footers in a battle, that's going to create opportunity for additional boxes to follow. That's going on not only in the South, but in other areas of the country."

The Midwest ranked behind the South with 142 new starts, followed by 112 in the West and 55 in the Northeast. The South and Midwest are outpacing the others partly because the cost of doing business there -- and the speed at which it can be done -- makes building significantly easier for developers.

"Generally speaking, project approvals and entitlements, and government participation and cooperation are a lot less expensive and less time consuming in the South," Mr. Smith said. "As developers, we're looking at areas of the country where we can get our business done expeditiously. The South offers that over the West and Northeast, especially."

Another difference between the South and other parts of the country is a willingness there to grow, explained Mr. McDonald of Konover.

"Communities down South have less of the burden of the older, obsolete and disadvantaged properties of the Northeast and Midwest, and they have more of a perceived desire to grow," he said. "There's less desire to maintain the status quo, which you find in larger urban areas of the Northeast and Midwest."

The shrinking of the average footprint is a result of brisk activity by grocery stores, as well as developers' efforts to build in infill locations in large markets, which generally do not have the luxury of elbow room, experts say.

Many of the new grocery-anchored centers are "defensive moves," spurred by the chains to fend off competition, Mr. Smith said.

Grocery-anchored centers also tend to be a safer bet than larger power centers for developers these days, especially after many builders were burned by retail consolidations and bankruptcies among the big boxes over the last several years.

"We like neighborhood grocery stores," Mr. Smith said. "We're doing several and we wish we had more, because they're steady-eddie, cash-flow projects. You tend to be a little more nervous about big boxes."

Mr.. Leon said big box retailers have penetrated most markets already, resulting in fewer new power centers.

"Most power centers are already near the regional [malls],and you're almost maxing out of sites around the malls," he said. "In most regional pockets, the tenants are pretty well penetrated."

Some retailers have also appeared to desire more intimate settings. Midsize boxes such as Goody's Family Clothing and Circuit City are now anchoring 100,000-square-foot centers rather than being just one of many in a 700,000-square-foot project. Meanwhile, mall-based retailers are branching out of their traditional bases into community centers in areas with desirable demographics.

"We're seeing mall anchors like Sears and JC Penney, which are still expansion-minded, becoming more flexible," said Stephen Lebovitz, executive vice president of CBL & Associates Properties, a Chattanooga, Tenn.-based developer of regional malls and large community centers. "Also, supermarkets and drug stores are anxious to move in their new formats. Drug stores want to get out of the in-line spaces and onto pads. That's driving construction as well."

Most experts expect renovations to continue their brisk pace, especially as REITs feel pressure to increase values of their properties.

"The existing mall structures will continue to prosper and renovate, and may well constitute the largest market for future leasing and construction opportunities in the retail real estate sector," said Mr. McDonald.

"The Northeast can benefit from this movement of renovations more than any region," added Mr. Smith. "It's a difficult region to develop ground-up, so it's an advantage to existing centers."

While the pattern of building smaller centers may continue, the trend toward fewer centers will not, experts say.

"I'm working markets across the United States, and in my travels I am seeing a tremendous number of proposed centers on the drawing board," Mr. Smith said. "That's going to run contrary to these [survey] numbers. When you compare 1997 to 1998, you'll see an increase of shopping centers. There's still a lot of activity."

Large centers will arise wherever there's sufficient growth for them, added Mr. Lebovitz. New Mills-type centers will also continue to add significant square footage to future yearly totals.

Mr. McDonald agreed. "It's a mistake to look at anything from January to December," he said. "We'll see fewer and fewer large centers in the future because of the difficulties in getting them built and the availability of anchor tenants. Hand-in-hand with that, I think we'll see more and more smaller centers."