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Center developers seeking ways to profit from cyberspace

By Kevin Kenyon

Contrary to popular opinion, shopping center developers say they don't necessarily have to be left behind in the rush for e-commerce dollars; in fact, many are exploring ways they can ultimately prosper from it.

Much of what is written about the emergence of e-commerce is accompanied by tales documenting the demise of the modern-day shopping center, but to borrow a line from Mark Twain -- this wouldn't be the first time that reports of the mall's death have been greatly exaggerated.

The Rouse Co., Columbia, Md., is one of many firms thinking about creative ways to use the Internet.

That said, the same creative thinkers who turned their common areas into profit zones 25 years ago, and who are looking to benefit from sponsorship dollars today, may be in for their biggest challenge yet.

A report issued in March by Merrill Lynch & Co. estimates that Internet sales will rise from $8 billion in 1998 to $100 billion by 2003, and those dollars will have to come from somewhere.

Developers, rather than shying away from the issue, are finally realizing they must find ways to make their properties Internet-friendly.

Possibilities include creating Internet zones, where virtual stores could be clustered together; developing cybermalls that can be linked to existing centers; capturing a percentage of sales from store-based kiosks; and even using the Internet as a leasing tool to sell vacant spaces electronically.

"We certainly recognize that a powerful paradigm shift is under way, and the way I look at it, we can either be afraid of it or we can embrace it," said John Bucksbaum, executive vice president of Chicago-based General Growth Properties.

"It's a shift that's occurring at all levels of industry, not just ours, and we recognize that we have to change with it -- it's forced change, but I like to think it's forced change for the better."

Thankfully, Bucksbaum added, e-commerce is still in its infancy, which will afford developers time to determine the role they will eventually play on the Internet.

"It's not going to happen overnight, so we're going to have a transition period that's going to allow us to sort through all of this."

Bucksbaum noted that businesses that sell their wares over the Internet typically spend about 65 cents of each dollar earned on marketing, indicating a dire need for exposure.

Developers could create Internet courts, much like food courts, where cybertenants hawk their products in a common area, Bucksbaum said.

"Some of them could be businesses that are retail-related, others might just be Internet businesses that are looking for exposure to customers," he said. "The fact that our malls generate 1.2 billion visits a year has to be appealing to them."

As for existing merchants, developers could receive a percentage of sales from store-based kiosks, which retailers like Eddie Bauer and The Gap have already installed in select locations, Bucksbaum said.

"And what if a Gap store could expand its reach by say, adding a Banana Republic kiosk? There are numerous applications."

Then there's the possibility of developing virtual malls where developers would serve as "portals," much like the Internet search-engine Yahoo, to various retailers and manufacturers.

"That's an arrangement we've discussed over the past several years -- to create a Website that services many retailers, just like our physical properties service many retailers," said Kurt Sullivan, SCSM, vice president of management resources for San Diego-based TrizecHahn Development Corp.

Such an arrangement, however, poses many questions, including why a worldwide chain like The Gap would need to be on a group site instead of using its own.

"That works fine if you're a retailer with a lot of franchise name value, but if you happen to be a more unique retailer that doesn't have national or even regional recognition, you could really benefit from that," Sullivan explained. He added that just as is the case with brick-and-mortar shopping centers, smaller tenants would rely on the drawing power of larger ones.

The same cybermalls could also be linked with existing shopping centers, allowing customers to save time by making purchases from their homes and then visit stores to try on merchandise, he added.

From a leasing standpoint, financial information could also be exchanged between developers and merchants via the Internet, he said.

"You could actually post spaces that are available in a Website where someone could just dial right in," he said. "Basically, it's an opportunity to have a sales tool at work for you just about any time somebody might like to access it."

Another factor to keep in mind, Sullivan believes, is that because the Internet industry is moving so quickly, it's difficult for developers to get a grasp on exactly what direction to take.

"Just as you think you're onto something, the technology changes so dramatically that what you've been looking at is almost rendered obsolete."

Paul Latta Jr., senior vice president and director of retail operations for The Rouse Co., a Columbia, Md.-based developer, said it's going to take time before developers can put many of these ideas to work.

"My sense is that everybody out there is thinking about it, but it's going to take a lot more people being online than there are presently," he explained.

One idea Latta's been thinking about, however, is for mall-based stores to eventually handle delivery for e-commerce sales. For example, a customer would place an order on the Internet and pick up products at the mall.

Instead of building warehouses across the country, national retailers may opt to use their numerous brick-and-mortar operations, and have employees ship orders out during slow periods, he explained.

"If they're going to set up a whole separate operation for the delivery system, there's huge costs involved in that. The retailers are going to have to figure out how to make that work."

In that way, he added, developers could still profit from those sales, instead of being left in the cold.

"My sense is that if a sale was consummated in a mall location, even if it was ordered from somewhere else, we would benefit from that through percentage rent or some other type of arrangement," he explained. "It's no different from a mall restaurant which delivers off-site."

While only time will tell what role developers will eventually play in e-commerce, retailers, for the most part, still view the shopping center as their primary distribution channel going into the future, according to real estate consultant Fritz Schindelbeck, a senior manager at Deloitte & Touche, a real estate consulting firm based in Costa Mesa, Calif.

"We've questioned many of the retailers that we work with quite directly about the issue, and the response we often hear is that they don't really see it affecting their brick-and-mortar businesses," he explained. "They see it more as something that will dramatically affect what they're doing in terms of catalog sales."

Just as developers are exploring their options, retailers are looking at ways to blend their e-commerce strategy with their brick-and-mortar strategy, he said, noting in-store kiosks are one possibility.

As for cybermall portals, Schindelbeck said the opportunity is there, but believes only of handful of developers could truly take advantage, because of the traffic that would be needed to sustain such sites.

An interesting development, however, is that some manufacturers are reserving the right to develop their own sites.

"Levi Strauss just came out and said none of their resellers are allowed to sell Levi pants over their Internet sites -- not even JC Penney, the largest re-seller of Levi pants, is allowed to sell Levis on their site," he said, adding that developers could benefit by developing relationships with manufacturers.

"The whole e-commerce phenomenon is a brand-new issue for many developers, a brand new way of thinking, and many are looking at how they can take part."

As far as TrizecHahn's Sullivan is concerned, developers, as they always have, will respond to the challenge.

"There's no reason why developers have to be left behind," he said. This is an opportunity for creative thinking, and I have to believe that the same creative types who came up with the suburban retail center 40 years ago will come up with an appropriate response today."