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Regional malls: real estate's bright spot.

Regional malls: Real estate's bright spot

While consumer spending was down this holiday season, developers of regional malls are still doing a lot less teeth grinding than their office and apartment building counterparts.

Occupancy in many malls is upwards of 90 percent or better. Some new malls are coming on line and developers are proceeding with multi-million dollar renovations and expansions. Regional malls seem to be part of the "last frontier" - one of the few markets that is not overbuilt. They also remain one of the most popular property investments for institutional investors.

Westfield Inc., operators of the Garden State Plaza, in Paramus, which features anchors Macy's, J.C. Penney and New Jersey's first Nordstrom's, reports its center is 100 percent leased.

In Westbury, Long Island, the Fortunoff family is planning a mall with three major department store anchors and support stores that feature an "upscale" product line.

On 78 acres in Bloomington, Minnesota, Melvin Simon Associates, is building The Mall of America where Bloomingdale's, Macy's Nordstrom, & Sear's have already signed on as anchor tenants. With 2.6 million gross leasable square feet, the anchors account for 70 percent of the occupancy.

This fall, O'Connor cut the ribbon on the 1.3 million-square-foot revamped Menlo Park Mall in Edison Park, New Jersey. The mall, which features Macy's and Nordstrom's, is 90 percent leased and will be 85 percent open in the first quarter of next year.

Experts attribute the relative strength of this property type to a number of factors. Regional malls, they agree, are not as easy to build as the more abundant community or strip centers that were built all over suburbia during the 80's. There is also a monopolistic characteristic to regional malls in that they are generally isolated from other malls and the anchors are careful to space themselves evenly.

These retail properties are large - generally more than 500,000 square feet, centrally located developments that feature, enclosed under one roof, one or more department store tenants or "anchors" and a number of specialty stores.

Regional malls are "relative power houses" and they should continue to be, said Jonathan Miller of Equitable Real Estate Investment Management, Inc. During the last three or four years, Miller said, before a recent trail off, regional malls enjoyed an increase in value.

"Strong regional malls have gone up in value and you're not going to say that about too many properties," said Miller.

Equitable's Emerging Trends in Real Estate 1992 survey predicts regional malls and super malls in 1992 will still be the ideal property investment for institutions because of their long-term performance potential and ability to maintain value. According to many of those surveyed for the report, consumer spending should come back gradually in 1992 and the problems with the department stores are for the most part ironed out.

While the economic downturn has dampened all investment, retail properties recorded the best returns of any property type in 1991, according to the Landauer 1992 Real Estate Market Forecast. Over a 10-year holding period, malls have garnered investors an 11.1 percent return, according to the Russel-NCREIF Index Data cited in the forecast.

Landauer's Retail Matrix, a composite rating of growth and volume characteristics, shows substantial strides in Dallas and Houston, but a drop off in retail volumes for The East Coast and California.

"Prices have softened a little for regional shopping malls but nothing like office buildings," said Kevin Gray, senior vice president at Landauer.

Strip Centers vs. Regional Malls

During the 80's, the construction of smaller strip centers greatly outpaced the building of larger regional malls. In the under 400,000 square feet range, from 1980 to 1989, six times as many centers were built than in the more than 400,000 square feet range (900 million square feet versus 150 million square feet), according to Equitable's report. Most building was done in the 25,000 to 100,000 square feet range. During the 80's, the per year growth for malls 800,000 square feet or greater was 7 or 6.0 million square feet per year.

With the strip centers or community centers, tenanted by local chains and "mom and pop stores", the Equitable report says, there is greater risk and less barriers to competition because of lower construction costs, assemblage costs and lower production cycles.

"It is in that part of retail real estate where most building took place in the last five years," said Miller.

Equitable has 80 regional shopping malls in its portfolio coast-to-coast and, Miller said, they are in general doing well. Equitable's most successful center is Ala Moana in Honolulu where sales per square foot are approaching $1,000. Miller cautioned that Equitable does have a very well-tenanted strip center in Frederick Town Center.

Lease Structures

Thomas Conoscenti, an economics professor at Brooklyn Polytechnic University attributes the strength of regional malls to the long-term leases mall tenants usually sign and to the fact that leases are tied into the revenue base. Tenants pay a base rent, which usually covers operating costs, he said, and then they pay a percentage of their profits. Banks, Conoscenti said, look more favorably on properties with long leases.

In addition, he said, malls are popular with consumers because they offer convenience by being centrally located and consolidating a large variety of shopping opportunities.

More than Real Estate

Investors who buy shopping centers are getting serious department store sales in a certain trade area, Gray said. "You're really buying a business," said he said. Current levels of cash, however, Gray said, have been thrown off by the recession and the Gulf crisis.

"We are classified as real estate but we are a lot more," said Richard E. Greene, president of Westfield Inc. Regional malls, he said, are a consumer business, a margins business, and a location business. While office space is an overhead consideration for many business tenants, to the retailer, Greene said, location is probably the criteria. Maintaining their location is paramount.

Greene said there is an active market for retailers to get into the better centers with better retailers and locations. Westfield's fully-occupied Garden State Plaza is ideally located at Route 4 and 17 in Paramus.

"There's only one 59th and Fifth (Avenue), and there's only one 4 and 17," he said.

While people seem to be buying less, Greene said, traffic at his centers has not dropped off that much and they are virtually 90 to 95 percent leased. "Just because he's got flat business," Greene said, "doesn't mean he can't pay his rent."

In addition to Garden State Plaza, Westfield operates six other malls - three on the West Coast and three others in the tri-state area. The 1.1 million-square-foot Trumbull Shopping Park in Trumbull Connecticut is 99 percent leased; Connecticut Post Mall at 900,000 square feet is 95 percent leased; South Shore Mall in Bay Shore is 100 percent leased.

New Construction

While all building, especially office, has been curbed, there are mall developers who are still building and planning, confident there are unsatisfied niches for American shoppers.

Melvin Simon & Associates, Inc. who owns 140 regional malls and other centers throughout the country, is one of those companies.

"While there's no question there is a slowdown in start-ups of new construction for shopping malls, there are centers out there that can legitimately fill a need in that market place," said Billy Scott, director of public relations, for Melvin Simon.

The Minneapolis-based developer recently opened regional malls in Omaha and in Scottsdale, Arizona. Next year, they will open the 400-store Mall of America and the Forum Shops next to Caesar's Palace in Las Vegas. And they are pursuing preliminary plans in Florida. Texas, New Mexico, and Colorado.

Melvin Simon & Associates is the developer of Newport Center, the only regional mall in Hudson County, New Jersey, and is a partner, with Zeckendorf and Silverstein, in A&S Plaza in Manhattan.

In 1988, J.W. O'Connor & Co., Inc. purchased the Menlo Park Mall, which re-emerged on the market in September. The mall was originally built as an open air center and was enclosed in the 70's. The company closed down the mall and remodeled, adding a 1,000-seat food court and a 12-screen movie theater, and retenanted. They retained Macy's as an anchor and brought in Nordstrom's. Paul Kastner, vice president of marketing, J.W. O'Connor & Co., said, Menlo Park differs from other centers because the anchors are complimentary making for good in between traffic.

"People do |cross shop' tremendously well," said Kastner. "The stores in the middle benefit."

O'Connor also gotten approvals for an "up-scale fashion" center in White Plains at the site of the former B Altman's. Nordstrom's will occupy the B Altman's site and it will be bridged to an existing Neiman Marcus with a three-level mall.

O'Connor, which owns 13 shopping centers and has a financial interest in others, is also doing a major renovation at the Promenade at Woodland Hills in Los Angeles County, California.

"We select properties in need of enhancement - renovation, renovation, repositioning, and remarketing," said Kastner.

Conoscenti did consulting work for the Fortunoff plan in Westbury, Long Island. While Long Island is not starving for malls, Conoscenti said, this mall will fill a current void in retail on the Island.

"What Long Island needs and still doesn't have is a mall that serves an up-scale market group," he said.

Long Islanders who want up-scale goods, Conoscenti said, will either order by mail or go to New York City.

Keeping up

with the Jones

Discussion of a new mall on Long Island, Conoscenti said, seems to have been a stimulus for the area. Renovations are also underway in Long Island at the Smith Haven Mall, Middle Island Mall and the Roosevelt Field Mall.

Located in Garden City, the 2.1 million-square-foot Roosevelt Field Mall, the largest mall in New York State, is undergoing a $71 million renovation and expansion. The mall's owners, Corporate Property Investors, (CPI), are adding a second, 275,000-square-foot level and a food court and upgrading the current space. Anchor Alexander's will be converted into an Abraham & Strauss. Other anchors include Macy's, J.C. Penny's & Stern's.

The secret to successful mall ownership, Miller said, is to keep up with market trends by keeping the tenant mix up, and enhancing and expanding.


Financing prospects are good for the solid regional malls, said Merrie Frankel, a director in Cushman & Wakefield's Finance Group, which arranges land and construction loans.

But, while malls are doing better than office properties, Frankel said, there is still a liquidity crisis and lenders remain "skiddish". Shopping malls seeking refinancing, she said, need to have strong anchor tenants, be 90 to 100 percent leased, and have long-term leases.

"If you're trying to get a loan for seven years," she said, "you better have leases beyond that."

Lenders, Frankel added, are also scrutinizing the potency of lead tenants.

Though all lenders have their own "hit list", Frankel said, her group is finding, strong retail properties, actually rank third in a list of four property types that pension funds and insurance companies will lend to.

"Apartments are the |in' item for pension funds and insurance companies," said Frankel.

Lenders, she said, favor apartment buildings with 100 to 200 units. Second, she said, are industrial and warehouse properties. Next would be retail properties with major anchors and, finally office properties. With office properties, she said, you must differentiate between urban and suburban - urban being the stronger.

The Landauer report predicts regional malls will maintain their favor with domestic and off-shore pension funds and the their will be capital available.

Good regional malls, however, Gray said, do not come on the market that often. There are few regionals up for sale right now, he said, and few takers because cash flow is down and the prices are still so "big".

"There are few institutional investors with large amounts of cash," he said.

Few Troubled Malls

Workout pros and bankers report few regional malls are in distress and those that are suffering are doing so to a smaller degree.

According to one banker, there are more checks and balances in the development of a regional mall. Getting credit is more difficult to obtain for mall properties, the zoning approval process is more complex and the anchors do their own due diligence.

Ron Bruder of the Brookhill Group, a troubled property specialist, concurs that regional malls have not fallen prey to some of the woes that other properties have.

"But those that have gotten into trouble with anchors moving out are not as resilient," Bruder said.

The Campeu crisis, Bruder said, caused problems for a number of major retailers.

If the mall's anchors or "the spokes" are doing poorly, Bruder said, they are not providing the traffic that is needed by the smaller local chains or "the hub" of the mall. Local chains, Bruder said, pay between $5 and $25 per square foot and anchors pay between $2 and $6 per square foot.

"The locals are you're gravy," he said. "Depending on how many you have, it's you're life blood."

Bruder thinks the strongest investments are the strip centers with discount anchors, for example, Walmart, K-Mart, and Filene's.

"If the recession continues to take hold," he said, "the upscale regionals are going to suffer as people discover the joys of shopping in K-Mart."

The Landauer report says the "shakeout" in retail has led to fewer but stronger surviving chains and larger holding companies. The larger parent companies are exerting greater influence over mall investors and developers in the way of tenant concessions. But, still, Gray said, stronger tenants are a plus for the malls.

"The shakeout in retail is probably the best thing that happened to owners of shopping centers," said Gray.
COPYRIGHT 1992 Hagedorn Publication
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Fitzgerald, Therese
Publication:Real Estate Weekly
Article Type:Industry Overview
Date:Jan 1, 1992
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