It appears that cyberspace has come down to earth after a series of widely publicized Web launches. Investors, who may have been at least as apprehensive as mall owners about the prospects of skyrocketing online shopping sales diverting some of their revenues from bricks-and-mortar retailing, now seem to have fewer reasons to fret.

That does not mean they will not keep a close watch. "With e-commerce sales projected to be $180 billion by 2004, shopping center investors will naturally question the financial viability of their real estate assets," confirms Kristian D. Bjorson, senior associate of Cleveland-based Staubach REALogistics

According to Bjorson, investors should also realize retailers regard e-commerce as another sales channel - not the only one - necessary to compete in today's marketplace. E-commerce may affect the size and layout of retail space in a shopping center, but it will not replace traditional retailing.

Shopping center investors, much like retail tenants, should regard e-commerce as an opportunity to better understand the borrowers in that maket, evaluate their assets and strive for future profitability, Bjorson believes.

A smaller piece of the pie Wall Street investors' perspective over the past 18 months has been that Internet retailers could leave bricks-and-mortar retailers with a much smaller piece of the pie. However, investors have become more comfortable with online buying.

"The shift to e-commerce will vary by retail segment," says Bill Cornely, CFO and COO of Glimcher Realty Trust in Columbus, Ohio.

"Commodity-oriented retail like books, music and toys will be affected when compared with price-oriented merchandising," explains Cornely. "In special segments, such as high-end jewelry or women's fashions, you probably won't see a lot of people buying over the Internet.

Some segments of retail are simply less vulnerable to e-commerce. Cornely says that the toy business, for example, is basically the same, whether the portal is on the Internet or in a Wal-Mart store. Profit in that business still depends on warehousing and distribution.

Also, grocery-anchored centers are a safe bet because of their stable financial performance. Well-positioned, regional malls with higher-end specialty stores, fashionable merchandise and solid department stores are less susceptible to inroads by e-commerce.

Power centers, on the other hand, are losing favor. "They trade off availability of inventory and at very competitive pricing, so they're most concerned going head-to-head with Internet retailers," says Cornely, adding that entertainment and lifestyle centers are less exposed to the Internet because of their popularity while freestanding retail could be the most vulnerable.

Investors see more sales Stephen A. Walker, vice president and business development officer with Continental Wingate Capital in Needham, Mass., says real estate investors perceive e-commerce as an adjunct to bricks-and-mortar retailing and a way to generate incremental sales.

"E-tailing is in its infancy, so it's hard to be a prognosticator," says Walker. "Nobody can say for certain that it will never take hold and not take over the world. Fifteen years ago people didn't imagine the big-box strategy would be as prevalent as it is today."

>From an investment viewpoint, Walker agrees that grocery-anchored centers >are among the safest retail product, and that Internet grocery shopping >will not have a significant effect on customer traffic. Also, community >centers are a sound investment as long as they are well-anchored and have >a diverse tenant mix, says Walker. Well-located and well-managed regional >malls that have a good tenant mix will not disappear, he adds.

Big-box retailer fallout "The jury is still out on some big-box retailers," according to Walker. "Some real estate professionals think there will be some fall-out in that business, but if the stores are well-sized it won't be too difficult to find replacement tenants. [The success of a retailer] comes down to location - not a fundamental change," adds Walker.

Never underestimate the power of location combined with a strong sales mix, says Walker. "Whether you're dealing with weak or strong credit, pricing and sizing of the loan and cap rate, at the end of the day you do not want to be in a location [as an investor] that can't be re-leased."

Electronic intermediaries Mortgage lenders are cautiously optimistic about shopping centers, says Greg Spevok, director of national marketing for the commercial retail group of Bear, Stearns & Co. Inc. in New York. Moreover, they think the Internet could be a good source of new lending opportunities.

"There are a number of sites designed to make it easier for owners to approach multiple lenders online and for them to discern the best one from among lenders with whom these intermediary sites have agreements," says Spevok.

While "electronic mortgage intermediation" is considered to be an efficient way of reaching multiple lenders, it does not necessarily clinch a deal at the lowest cost, Spevok adds, nor does it replace underwriters who understand the complexities of a loan.

Hal Greene, managing director of Bank of America's real estate banking group in San Francisco, suggests that e-commerce has barely caused a ripple of concern among investors compared with the decline in traditional department and shoe store sales volumes, the overbuilding of big-box retail and the spread of entertainment centers.

Greene also says that e-commerce is not making the "tough and tricky" shopping center business more difficult. He says clicks-and mortar fascinates the media and produces a lot of coverage, but thus far it isn't having as much of an impact as Internet business-to-business transactions.

Assessing the exposure Instead, the changing population profile and dynamic nature of retailing, with its ebb and flow of trends, is having much more of an impact.

"Strong retailers will embrace e-commerce, and it will be another channel for sales," he says. "Although a shopping center with three book stores and three travel agencies, for example, should be concerned, because those segments will probably be affected quite heavily."

Terrence Tallen, vice-president and executive director of leasing for Burnham Pacific Properties Inc. in San Francisco is more upbeat. "We as owners and advisers are very excited about what e-commerce can do to develop revenue streams to existing portfolios."

Tallen says the type of tenant mix is important to investors because of the number of retail categories that could be influenced by e-commerce.

"We're working to develop a cap rate because some of these uses are more negatively affected than others," explains Tallen. "Some of the uses that are being underwritten a little more carefully are pet suppliers and drug stores. They have very good credit but the question is: How will e-commerce affect their business?"

"We're more careful in our underwriting, except when retail properties being sold have sales that have been up over the past two years," adds Tallen. "This has a positive effect on percentage rents, one of the additional upsides for investors.

"It's also important to be able to drive ancillary revenue streams through alliances and strategic relationships," says Tallen.

Still a new frontier Alliances and strategic relationships are exactly what Anne Keshen, attorney, investor, banker and managing principal of Retail Enterprise Group in Los Angeles has in mind these days as she works to create bridges between e-commerce and bricks-and-mortar platforms.

"There are any number of synergies that can be captured through this process, whether e-tailing specifically or combining technology more generally, the business model is yet to be proven. [E-commerce is] a mall under development," explains Keshen. "All we have is the infrastructure, not the long-term operating history."

Investors in retail REITs are being penalized somewhat unfairly, Keshen says, by the powerful pull of e-commerce stocks. E-commerce is having a significant impact relative to the REIT structure, because investors are not as attracted to REIT ownership in the public markets as they could be to other high-yield investments. Long-term players are generally driven by the underlying value of bricks-and-mortar.

"While retailers have this wave of e-commerce capitalization going on, they had better get some interesting businesses that have some revenue on the bricks-and-mortar side," urges Keshen.

E-commerce and retail niches How e-commerce will affect some of the individual niches in the shopping center industry is yet to be seen, says Tallen. Food and drug-anchored centers are favorably underwritten for loans, and as long as the consumer needs these products they seem to be a safe retail investment. Investor interest in e-commerce companies associated with those enterprises is lively.

According to Tallen, those at greatest risk from e-commerce are power centers that concentrate on pet stores, office superstores, electronics and computer stores. He believes computer sales are probably better protected than the others because frequent technological advances spur demand for the latest products.

"It's foolish of anybody who is a prudent investor not to think there's going to be consumer dollars lost to e-commerce companies that otherwise would be spent in shopping centers," says David S. Rosen, executive vice-president of Rosen Associates Management Corp. in Jericho, N.Y. "The pie is going to be cut up a bit more."

Rosen is predictably bullish on grocery-anchored centers, not only because of their intrinsic stability, but also because they account for 98% of the company's portfolio. At the same time he does not think consumers are going to abandon shopping at supermarkets in favor of online delivery because of consumers' basic need to handle merchandise.

Freestanding retail is another area investors are watching to evaluate the impact of e-commerce. Rosen's company has developed a number of free-standing drug stores, and he believes that if these drug stores are in the right location, they will serve their communities well. "Some require co-tenants, and some are pure location driven," he says.

Street theater lives Fresh and original is the overriding issue in the industry, says Jeffrey Gunning, vice president and partner of the retail/entertainment group at RTKL Associates Inc.'s Dallas office.

"The emphasis is on the physical environment and architecture and graphic design elements that make a place memorable," he says.

"Together with new types of tenants and live entertainment in regional malls, street theater is being brought back into what has become a pretty predictable retail product," explains Gunning. "When people leave a shopping center, they should leave with more than a few bags of goods. They should leave with memories of a real experience."

Peter Lowy, president of Westfield America Inc. in Los Angeles, says that many investors still perceive shopping centers as stuck in an "old economy groove." They do not want to acknowledge the dramatic changes retailers have made to reach consumers and to bring them into the malls.

"To combat other forms of selling, such as the Internet, we put a big emphasis on the customer experience," explains Lowy. "It isn't Disneyland, but we focus on services, tenant mix, entertainment, ease of getting in and out [of the mall] and other ways of making a visit as easy and pleasant as possible."

Also, retail space that becomes vacant because of online shopping will quickly be re-leased, Lowy says, because of the diversity of merchandise.

Lowy believes that e-commerce will change quickly. "E-tailing in five years will be totally different from today," he says. "Investors do not know what to think about those changes, because the retail industry is always defending itself against the Internet and isn't able to articulate a position about shopping from home, or about consumers getting information on certain items and coming to the mall to buy them," adds Lowy.

Lowy describes the Internet as a "spectacular vehicle for the dissemination of information. The more information customers can get about products, the more they will come and shop," he says. "The convergence of the physical retailer and the Internet retailer is very good for the consumer" - and implicitly for investors.

Real estate brokerage firms representing retailers and shopping center owners historically have tended to be reticent, even secretive, about who their clients are and what market and price range the client is interested in.

No longer. Coldwell Banker Commercial (CBC) in Parsippany, N.J., has gone public by putting its deals in cyberspace for the whole world to browse.

"Our industry has always kept information close to its vest," says CBC President Jerry D. Anderson. "That forced people looking for commercial space to go to a developer or a broker and talk to them about the demographics of their markets. They would gather their own information, do their own due-diligence and generally sort it all out themselves."

What's more, brokerages that conducted that market research would typically charge a consulting fee, adds Anderson. "The Internet has changed all that and increased our efficiency, although it now takes away [market intelligence] what some brokers think is the key to the treasure chest," he says.

CBC's Website www.coldwellbankercommercial.com, launched in early March, makes information previously considered sensitive, free and instantaneously accessible. But the Website has some restrictions. Retailers seeking fewer than 5,000 sq. ft. aren't included because the initial thrust of the program is to attract tenants looking for larger spaces. However, Anderson says, CBC is considering extending the Website to bring them into the online fold.

Customized searches According to Anderson, popular applications on the new site include one which anticipates questions such as, "Are stores in the shopping center compatible with your retail operation?" and another which delivers 360-degree virtual views of properties.

Another application allows visitors to perform customized searches. Some of Anderson's staff said he was "giving away the store," by providing valuable market information, but he persisted.

"Retail tenants want to know where they should be tomorrow as well as today," he says. "Retailers want advice from us beyond our being a high-paid chauffeur who shows them space they've been unable to find."

CBC also uses software to streamline its administrative operations. According to Anderson, CBC has the critical mass and resources, including the company's Information Technology group and consultant support, to produce its own proprietary operational software.

This software includes Instant Client Access (ICA), a Web-based system that allows clients to look over CBC's shoulder to track specific activity and monitor overall progress on site search, building disposition and relocation. The software gives clients some control over keeping projects on track.

The paperless transaction management and reporting software disperses thorough, consistent property information on each client's project to all team members by e-mail.

"It's revolutionized the way we're doing business by giving an access password to certain people on a project," says Anderson. "Where we used to send letters and wait days for an answer, now documents are e-mailed. Today, clients want you to react in about 30 minutes."

Using CBC's Affiliate Information Management software, the company's 3,000 offices can report property information and listings, and sales and leases to its main office over the Internet. They can also run customized production reports and make real-time updates to the database so that each new transaction or update is immediately confirmed.

Shopping center developers and owners have also developed operational systems. Ken Bernstein, president of New York-based Acadia Realty Trust, points out that his company's Website provides several important operating efficiencies. "All of our leasing plans and first-tier leasing information is on it," says Bernstein. "Information to determine the viability of a location and availability of space is available with a few clicks."

He says there is enough information about Acadia on the Web to satisfy the curiosity of lenders and equity investors. "A fourth-quarter filing includes an analysis of our net-asset value range and other qualitative analyses of our portfolio," says Bernstein.

When R.D. Capital Inc. and Mark Centers Trust merged to form Acadia about 18 months ago, one of the first orders of business was to develop an operating system and database to disseminate information more efficiently. The result, he says, is that "We are able to more easily track and analyze the performance of our regional and national propertties, so that tenants can see how their sales compare with their competitors."

Similarly, retail marketing by postal code is hardly new, but it keeps surprising users with its increasing sophistication. For example, Staubach Retail Services in Cleveland uses a Geographic Information System (GIS), which is harnessed to Informark software, to facilitate clients' merchandising, marketing, advertising and direct mail initiatives.

A psychographic profile Janie French, a vice president in Staubach's Dallas office, says that beyond targeting customers by address and zip code, the company creates a "psychographic" profile of a client's customers from responses to questions about their social life such as "where they are in the life cycle, what they like to buy or read, the radio stations they listen to, the beer they drink and car they drive, as well as other details," says French.

"We can apply the answers to questions in one city to the rest of the country and then use our GIS system to map out a marketing program," says French. "We also build site models for [clients], including signage, access to the site, lighting and even carpet color. We can apply the lessons of that model to markets across the country."

$1 million high-tech center New York-based Garrick-Aug Associates Store Leasing Inc. is a major player in the shopping center leasing and tenant representation business in New York, New Jersey and Connecticut, and leans heavily on presentation technologies.

Chairman Charles Aug says the company has developed interactive, computerized programs that help tenants evaluate space and promote the advantages of leasing space in shopping centers for the owners.

The cornerstone of the company's business is a $1 million technology center, which opened about a year ago. The center includes five monitors carrying computerized audio-visual presentations of images, floor plans, layouts and supporting data, and includes information on 330 markets with thousands of tenants and locations.

"If retail tenants are looking for 25,000 sq. ft. locations in 50 upscale metropolitan markets in any or all of those three states, for example, we can give them an accurate picture of what the different centers would be like, the demographics in each marketplace, layouts, aerial views of surrounding areas, proximity of the competition and traffic counts," says Aug.

This technology can take images and data on the media wall in Aug's New York office and project them onto computer monitors anywhere. Tenants looking for shopping center space outside New York, can find it by plugging into Garrick-Aug's presentation.

Aug says the company's technology also allows it to do a helicopter fly-by 300 ft. above a retail site to give select tenants a real-time aerial view, without ever leaving the comfort of their seats in Aug's conference room.

Since its inception, Irvine Spectrum Center has broken new ground with each phase of its development. As one of the first entertainment centers in the country, the 496,000 sq. ft. center in Irvine, Calif., opened in the fall of 1995, featuring one of the first-ever megaplex theaters, the Edwards 21 Cinemas (shown on our cover).

The center boasts popular restaurants including P.F. Chang's China Bistro, Wolfgang Puck Cafe, Bertolini's Authentic Trattoria and Chammps Americana. Other key elements included Barnes & Noble, Gameworks, a variety of retail stores and a food court.

In 1997, Irvine Spectrum Center attracted five million visitors, which makes its attendance higher than all but six North American amusement and theme parks, four of those sites being Disney locations, and two Universal Studios locations.

In July of 1998, Irvine Spectrum Center opened a second phase, almost doubling the center in size from 250,000 sq. ft. to 496,000 sq. ft., adding Dave & Buster's, Cheesecake Factory, NASCAR Silicon Speedway and the Sing-Sing dueling piano bar. With the opening of this second phase, Edwards 21 Cinemas at Irvine Spectrum Center has become one of the most attended theaters in the nation.

In January, Irvine Spectrum Center once again broke ground by bringing additional entertainment venues to the center, including the legendary Crazy Horse Steakhouse and The Improv Comedy Club.

The addition of these venues has increased traffic by 25%, and projections indicate that 11 million people will visit Irvine Spectrum Center in 2000. Driven by the increased traffic due to the live entertainment, retail sales have increased by more than 15% year-to-date. Same-store sales from 1999 to 2000 are up by more than 50% for some of the retailers.

"Since we expanded Irvine Spectrum Center's entertainment offerings to movies, dining and a wide array of live entertainment options, there have been dramatic results," says Frederick O. Evans, president of Irvine Retail Properties. "We've increased foot traffic, retail sales and movie attendance. By doing this, we've filled a void in the market for top quality entertainment, which brings people together, and this directly translates into retail sales growth."

What's next? Irvine Spectrum Center will break ground on a new "retail village," designed as the fashion extension of this exciting and vibrant town center. The Irvine Co., Newport Beach, Calif., intends to fill the next phase with high-quality, unique retail tenants who will bring as much traffic and sales to the daytime hours as the live entertainment brings to evenings and weekends. Managed by Minneapolis-based Madison Marquette, Irvine Spectrum Center is located at the confluence of the Santa Ana and San Diego Freeways. Irvine Spectrum Center is owned and developed by The Irvine Co., under the direction of The Irvine Cos. Investment Properties Group.