Standing at the corner of Market and 5th in downtown San Francisco, it's easy to see why Forest City and Westfield are excited about their new partnership. The area is jumping with consumer activity. Asian tourists, urban hipsters and suburban day-trippers pass by in prodigious numbers at all times of day. There's a Bay Area Rapid Transit (BART) station and, several times a day, the Powell Street cable car stops at the corner and makes a show of turning around and heading back up the steep hill toward Fisherman's Wharf. The neighborhood has new Four Seasons, W and St. Regis hotels, an expanded convention center, the Yerba Buena Gardens park and new Jewish and Hispanic museums. And the nation's most profitable cinema, Sony Metreon, is right up the street.

But for more than 10 years, the six-level store that brought the crowds to this corner starting in 1896, has stood empty and deserted. The Emporium department store survived the earthquake of 1906 and several decades of changing consumer tastes, but it ultimately fell victim to the suburban stampede that killed off so many other venerable downtown department stores. Federated, which came by the Emporium through acquisition in the 1970s, shuttered the store in the early 1980s, shortly after opening a new Macy's up the hill on Union Square.

Today, the Emporium's turn-of-the-century architecture remains striking, but the landmark building has a derelict air. There's a wooden barricade at the main entrance under a faded “Macy's Furniture” sign. Inside, the abandoned fixtures sit empty amid piles of debris, while piped-in Muzak plays for the ghosts of shoppers who left years ago.

Federated always wanted to redevelop the site and has had a long-term agreement with Forest City to handle the work. Forest City, in turn, has had a plan for a mixed-use adaptation of the building in blueprints since 1997. The city nixed the hotel component that Forest City had originally proposed for the Emporium, citing San Francisco's hotel glut. And the project faced flak from preservationists, who were especially interested in saving the ornate steel-and-glass dome that stretches 102 feet across the top of the building. The project's cost and the sagging economy made it more likely that Forest City would seek out a partner to help shoulder the financial and administrative burdens.

So the Emporium sat empty in the midst of retail plenty — until a series of events put Forest City together with its ideal partner, Westfield America, owner of San Francisco Centre, a 500,000-square-foot vertical mall that butts up against the Emporium's western wall. Now the two REITs are getting together to make the biggest urban retail project in the Western United States by combining the San Francisco Centre and the Emporium.

The story of how this miracle on Market Street came about begins in Cabo San Lucas, Mexico, where trustees of the ICSC held their annual retreat last February. Two of the trustees were James Ratner, executive vice president at Forest City Enterprises, and Richard Green, vice chairman of Westfield America. The mall veterans had known each other for decades as “friendly competitors.” Green and Westfield chairman and co-founder Frank Lowy had been friends of Ratner's cousin, Forest City co-chairman Albert Ratner. Forest City, a $4.7 billion developer, is best known for its successful urban rehab projects, such as New York's Harlem Center and Cleveland's Tower City Center. Los Angeles-based Westfield America Trust, a $10.2 billion division of Australia's Westfield Group, is known for its bold acquisition strategy and its Shoppingtown branding. But the two companies had never crossed markets before in their retail development activities.

On the second night of the Cabo retreat, Green recalls, “My wife and I sat next to Jim at dinner.” Westfield was in the midst of its Rodamco acquisition, which would eventually split the Dutch company's Urban Retail Centers portfolio between Westfield and joint venture partners Simon Property Group and The Rouse Co. One of the projects up for grabs was San Francisco Shopping Centre. “We were talking about a lot of things. Jim may have asked me what's going on and I asked him about Emporium. One of us said, ‘If this deal goes through would you be interested in putting these projects together?’”

“It was such an obvious thing to both of us that it should be seriously considered,” Green says. “When we were doing due diligence on Urban, looking at all the properties, we looked at what's going on next door. We verified everything and checked with the city to see how [Forest City's plan for] Emporium was progressing. We needed a sense of how things were going in the neighborhood.”

And Forest City still needed a partner to make the redevelopment a success. A two-year court battle with three individuals who sued under the California Quality of Air Act, plus the near-collapse of the Bay Area economy had stalled the project. Hooking up with San Francisco Centre was an obvious idea — the 1980s-vintage mall draws 9 million visitors a year and its Nordstrom anchor generates $100 million in annual sales. But efforts to team up with Rodamco's management arm, Urban Retail Centers, had failed.

Even before the dinner in Cabo, Ratner had been following the Rodamco breakup and when he saw that Westfield might wind up with San Francisco Centre, he began to hope the new owner would recognize the potential synergies. “We had for a long time talked about creating a link between these two centers, but past ownership was unresponsive,” he says. “Westfield's purchase presented a tremendous opportunity.”

Neither Ratner nor Green can explain Urban's reluctance to collaborate rather than compete. “They didn't want to do it. They were not receptive,” Green says. “Having this critical mass connecting, interacting, leased with the same philosophy was a huge plus. It made all the sense to offer consumers a way to pass between both properties. Jim connected on it and I connected on it.” Westfield America's CEO Peter Lowy puts it another way, “What were the Urban guys thinking? The vision that Rodamco had for San Francisco Centre was too limited.”

After the ICSC retreat, Ratner and Green agreed to keep in touch and returned to their separate kingdoms. The ultimate goal would be a new San Francisco Centre consisting of the existing center connected to the Emporium building at five levels, creating a 1.5 million-square-foot retail complex. And now, it will happen: The Emporium side will feature the first Bloomingdale's in the city as well as 200 small shops and a cineplex. The 315,000-square-foot Nordstrom will continue to anchor the San Francisco Shopping Centre side.

Plans call for saving the Emporium's historic dome, as well as its old escalators, handrails and bathroom fixtures. Though the final price tag will be significantly higher than the construction costs of a new building, Ratner says renovation will pay off. “The value the building will have as a piece of architecture will more than offset the incremental cost for the preservation.”

By May 2002, the Rodamco deal finally closed, and San Francisco Shopping Centre officially landed in Westfield's lap. The companies declined to mention the particulars of negotiations leading up to February 2002, when they went public with the news of their partnership.

To ensure continued community support for the project, the developers have promised to pay $43.3 million to the city over the next 30 years for building affordable housing; $4 million for improvements to Hallidie Plaza, the MUNI/BART Powell Street Station and other public amenities; and $2 million to a community improvement fund and the Filipino Cultural Center and the South of Market Health Center.

City redevelopment officials also say linking Market Street to Mission Street will stimulate more retail development along Mission. “The new project will make a difference on Mission Street,” says William Carney, senior project manager for the Yerba Buena Center Redevelopment Project Area. “Right now the intersection of 6th and Mission is one of the city's more blighted areas. There's a new Federal building going up two blocks away, so we're creating two anchors for Mission Street. We're hopeful that will create more retail opportunities.”

STRUCTURING THE DEAL

The structure of the deal is unique in that it consists of two separate entities operating under a common name. The deal is not a joint venture. Neither will disclose their exact financial commitments to the partnership outside of the $380 million total. Nor will they reveal their expected return on investment. “For the two centers, Westfield will provide leasing and management. And on the development itself, Westfield will be responsible for construction and implementation of the plan. Technically, the commitment is the same for both companies,” Ratner says. “Forest City is investing in San Francisco Centre and vice versa. Westfield will be an owner.”

Neither firm is a stranger to teamwork. Forest City collaborates with developers often, most recently with Toronto-based Cadillac-Fairview on Atlanta's Mall at Stonecrest. Westfield has teamed up with Simon Property Group in an attempt to take over Taubman Centers.

In an industry where developers put their egos into their projects, the Westfield-Forest City collaboration seems to be running smoothly. “It has been very enjoyable and I've been in some joint ventures in the past that have not been very enjoyable,” Ratner says. “Both of us are looking at this as a business, not as an ego issue. We want to do the best job and it's not a matter of who does what,” he says. “It was clear to us that Westfield has an enormous presence in California. They have an incredibly capable development, leasing and management group, they're already operating San Francisco Centre. Why would we reinvent the wheel?”

The profits, however divided, will most likely be plentiful, brokers say. The new San Francisco Centre is expected to attract more than 25 million shoppers annually and is expected to generate $500 million in annual retail sales. “The Bay Area lost a significant amount of jobs in 2001, but net migration has stabilized. We probably won't see any kind of large rebound for another couple of years,” says investment advisor Joe Caputo, of Marcus & Millichap's National Retail Group. “The project is expected to be completed in the summer of 2006, which works well with these projections.” Sperry Van Ness senior investment advisor Kevin Chin adds that rents on Union Square area are currently topping $100 per square foot, with adjacent areas commanding $90.

Federated could come out of the deal a big winner. The retailer has approval of all development plans, and will also retain ownership of the new 360,000-square-foot department store to be built at the developers' expense. “When everything is done, Federated's going to be in an enviable position,” Green says. Though it will only own the Bloomingdale's portion of the project, the value of that completed space alone will be higher than that of the entire building in its current condition. Ratner says the existing building does not meet seismic codes and could never be re-used as a single department store due to its size.

With the grand opening of the expanded San Francisco Centre two and a half years away, the partners are busily filling in the blanks. The project will be financed by both equity and borrowed funds, Ratner says. “We won't select the lenders for a while. But there's a huge amount of interest in this project as an urban redevelopment. We've been bombarded with people interested in financing.”

Meanwhile, on a recent visit to Westfield's Los Angeles headquarters, the office was abuzz with the San Francisco project. In the lobby, one executive chatted up a retailer on his cell phone while another set up a walk-through with the executive architect, KA Inc. In an office down the hall, site plans are laid out for Green and Ratner to inspect. “We met a year ago. The Urban thing got sorted out in May, now it's February and we've already got the deal structured and are ready to move along,” Green says.

The team is confident it will lease up the new center quickly. “The success of San Francisco Centre tells people this is not pie-in-the-sky, this is where it is,” Ratner says. The existing mall averages annual sales per square foot topping $525, according to Westfield. “Rent rates are only a function of what everybody thinks performance will be and that's why the performance of the existing center is so critical right now. You don't have someone wondering, Well if I built right there, what would I do?”

Union Square is ripe for more middle-of-the-road retailers, Chin says. The new center will feature medium and upscale shops for BART travelers, luxury goods retailers, a food hall and a variety of additional convenience goods for commuters. Some of San Francisco Centre's existing small shops will move to accommodate the renovations. Others will have duplicate stores on opposite sides of the center. Green even hints that it's possible some of the chains currently located “up the street” will join the new project in order to get a larger footprint.

One step closer to the planned 2006 opening of the new San Francisco Shopping Centre, Green and Ratner gather their notes and head toward the conference room. On any other day, they could meet as adversaries. “It's all about the opportunity,” Green says. “We are competitors. We're both bidding and there are a number of properties on the market right now and I'm sure we're both looking at them.”