Thirty years ago this month, a team of journalists tackled a prodigious task. Their mission was to create an independent trade publication for the shopping center industry, to serve as a forum not just for developers, but for retailers, lenders, architects, contractors, brokers and all the professionals involved in creating a successful shopping center. The fruit of their labors, Shopping Center World, was mailed to readers in February 1972.

During the next three decades, SCW changed with the times and the industry. As the retail realm’s key players, trends and issues evolved, SCW responded in kind, redesigning its pages, tweaking its departments and expanding its coverage. Today, SCW commemorates its 30th anniversary with a look at the trends and personalities that shaped the industry in the 1970s, 1980s and 1990s — and a peek at what’s ahead.

1970s: A reality check
When SCW appeared on the scene in 1972, retail developers were feeling untouchable. The United States was home to 13,174 centers. In those days, the big department-store chains ruled and their expansion plans drove development, especially of large regional malls. Financing was readily available for any developer, costs were stable and interest rates were predictable. Developers were producing a dollar or two for each sq. ft. of gross leasable area (GLA) after all expenses and debt service; vacancy was almost unknown.

But the seeds of a downturn had already been sown. “Developers and retailers alike are staffed, financed and conditioned to a process of continuous growth. It is my thesis that this combination could cause major over-expansion in the industry,” James Selonick, vice president of property development for Federated Department Stores, warned in an April 1972 SCW interview.

By the middle of the decade, inflation stole the punch bowl from the party. Interest rates soared and operating costs — for mall operators and retailers — shot through the roof. Tenants that drove development into a frenzy earlier were in full retreat as sales softened and the equity markets closed off money. Many mall owners responded with an ill-fated strategy — they continued to add GLA, hoping to spread more revenue over fixed costs at individual properties. However, these actions contributed to a rise in unleased space, a liquidity crunch and unscheduled carrying costs — in short, a full-on recession.

In the late 1970s, developers began rethinking the patterns of previous years, when cookie-cutter projects mushroomed in areas with little demographic support. The days of “gorilla” site selection — blindfolding a gorilla and letting it throw darts at a map — were over.

Developers began to view each project as an individual entity and customized each center to suit local consumers. Expansion, renovation and promotion of existing centers took priority — an approach that helped the industry recover and cleared the way for development’s next big upswing. By 1979, SCW reported an industry average of sales per sq. ft. exceeding $100.

EPA on the warpath
One of the decade’s biggest stories was the onset of increased governmental involvement in the industry. The newly created Environmental Protection Agency identified shopping centers as “complex sources” in the Clean Air Acts of 1970. A complex source, as defined by the EPA, is a facility that, though it doesn’t produce great quantities of air pollution itself, attracts motor vehicles that do. “The effect of labeling a shopping center a complex source is to make it possible to prevent most, if not all, new construction,” ICSC executive vice president Al Sussman told SCW in December 1973. At the same time, he warned colleagues at a Houston meeting, “We’re in a war for survival.”

But the EPA faced a formidable foe in the ICSC. By establishing a powerful lobbying presence in Washington, assisting members in contributing to their home states’ plans for compliance with the regulations, and setting up a $600,000 war chest to disprove EPA claims, ICSC managed to minimize the impact of the EPA on the industry. The EPA’s complex source regulations impacting shopping centers were suspended by Congress’s Clean Air Amendments of 1977.

“We spent a lot of time and a lot of money validating that point. They got regulations in the beginning that had no justification, technically or otherwise,” Sussman told SCW in May 1977. “They had not really done their homework properly.”

Promote a promoter
Another important milestone in the 1970s was the introduction of professional marketing by malls. With development stalled in the mid-1970s, operators turned to promotions to derive more revenue from existing projects. Overnight, mall promotions went from the occasional fashion show or beautiful baby contest to the sophisticated, multiple-media ad blitz. Due to the proliferation and rising costs of advertising, promotions people had to master the art of media planning.

“Marketing functions in the last decade have made at least a 180-degree turn,” Doral Chenowith, corporate marketing director for the Don M. Casto Organization, told SCW in February 1979. “Marketing people today have to know something about the serious business of reaching households. They have to know how to get the collective message out there. That’s a switch from a decade or two ago when they simply got Grandma Carver to come in and jump in a wet sponge.”

The biggest developers, such as General Growth Properties and Homart Development, took control of portfolio-wide marketing initiatives as a management function. And when The Rouse Co. upped the salaries for its marketing directors, an industry-wide upgrade in compensation and expertise followed.

1980s: Swimming with sharks
Between 1980 and 1990, 16,000 new shopping centers were built in the United States — an enormous growth spurt for the industry. But such growth — driven more by available capital than demographic need — came at a high price. The industry, as drunk on the materialism of the “Me” decade as the consumers it served, wouldn’t feel the hangover effect of building too many stores until the early 1990s.

The early 1980s began in a funk when “stagflation” — slow economic growth and runaway inflation — kept consumers on the sidelines. To make ends meet, mall operators talked about downsizing. “Rental costs, energy costs, utility costs and everything that has to do with space is escalating at such a rapid rate that we have simply had to come up with more ways to do business in a smaller space,” Harold Sells, executive vice president at F.W. Woolworth, said in an April 1980 SCW interview.

Department stores were the first to scale back. To cut costs, chains such as Woolworth and Lord & Taylor shrunk stores by as much as 50%. Developers pulled the plug on million-sq.-ft. projects — dismissed as “monster malls” or “Roman baths” — and began to focus on neighborhood, community, specialty and later, power center formats.

During this period the demographic focus shifted to middle markets. Non-metro counties with between 125,000 and 250,000 were sought-after hot spots. “Every middle market is going to have a shopping center of some size eventually,” Herb Simon of Mel Simon & Associates predicted in January 1980.

By mid-decade, the overall development climate improved. Liberal allowances for depreciation and tax credits contained in new laws passed by the Reagan Administration made real estate properties attractive again. There was also a new, deep pool of money for the industry to tap, as pension funds identified retail development as a promising and steady source of income. But there were strings attached: the days of fixed interest rates were over and loan packaging and securitization became a phenomenon.

With no end to inflation in sight, lenders sought more input into how their loans were used and jumpstarted the age of the joint venture. Many of the centers opening in the mid-1980s were the products of 50/50 enterprises between a developer and lender. More large developers began forming joint ventures with smaller, regional developers to tap their localized expertise when entering a new market.

The frenzy begins
Finally, the recession ended. Billions of dollars poured into the industry almost overnight from public real estate sponsors, syndications, pension funds and foreign investors. And the so-called “merchant builders” moved in for the kill.

“When the real estate cycle experiences an oversupply of capital, there is an influx of fringe players into the field,” Equity Properties and Development Co. chairman Sanford Shkolnik complained to SCW in August 1984. “When market conditions create a demand, even a false one, someone will quickly fill that gap. The merchant builder generally is insensitive to market conditions, often building an inferior product that need only last until it is sold. The actions of these fringe players results in overbuilt markets with half-empty centers and disillusioned investors.”

These “merchant builders”, most on their first foray into retail development, gave the industry a bad name. They moved into consumers’ backyards in smaller markets — cranking out vanilla strip centers and escalating anti-development sentiment. “Many developers have been looking too much to that next center and not paying enough attention to the one they built 10 years ago that needs some attention,” Ben Landress, senior vice president at CBL & Associates, said in February 1985.

Toward the end of the decade, changing tax laws affected the industry once again. While the development pipeline continued to churn out new centers, the list of planned projects diminished. The Tax Reform Act of 1986 reduced the positive impact of depreciation allowances and credits. Lenders began focusing on economic investments rather than tax-motivated ones.

The reversal banished the “merchant builders” and many smaller, less-experienced developers from the game. A diminished pool of lenders funded only to developers with a proven track record and longstanding relationships with national tenants. These conditions limited the number of centers, but ensured only the most viable and demographically viable projects were built.

The downward spiral
Developers’ increased involvement in the ownership or management of major department store chains and the rapid pace of retailer consolidation slowed development in the last days of the 1980s and the early 1990s. “Vertical integration between those who can control shopping centers and those who tenant them begins to make more sense,” Charles Froland, vice president and director of research at Grubb & Ellis told SCW in September 1987. “Developers who control a portfolio of shopping centers seek the benefits of synergy by controlling more retailers who can occupy their centers.”

Prime example: The Edward J. DeBartolo Co. announced a joint venture with Campeau Corp. — a Canadian conglomerate that gobbled up Federated Department Stores. The two companies planned to develop 50 to 100 regional malls during a span of 12 years. Similarly, Melvin Simon & Associates formed a joint venture with Prudential Insurance Co. to purchase a 50% stake in May Co.’s shopping center properties.

Consolidation of anchors became a Darwinian process in the last days of the 1980s, as department store conglomerates devoured regional players and developers saw the opportunity to reposition centers as the pool of anchor tenants became less varied.

The declining fortunes of the traditional department store left room for discounters such as Wal-Mart and Kmart to gain market share. They announced aggressive expansion plans, driven mostly by their drive for increased market share.

To keep expansion plans full steam ahead, many retailers that previously rented only in regional malls began to lease space in specialty strip centers and the newborn power centers. These free-for-all conditions were a boon to development in the short term, but in the long run they contributed to one of the industry’s greatest downturns in the early 1990s.

The McRevolution
Food courts were one of the decade’s hottest topics for SCW. The industry had long toyed with food as a motivator for keeping consumers in the mall. Old-fashioned department stores included cafés to keep the “ladies who lunch” in the store during mid-day and sit-down restaurants appeared in malls starting in the 1970s. But the sales figures for these venues were lackluster. As the 1980s progressed, and fast food became a staple of harried American life, developers realized the time was ripe to bring McDonald’s, Burger King and other chains under their roofs.

Retailers accepted the eat-and-shop lifestyle too. “We do not put up signs —‘no food, no drink, no people.’ We don’t believe in that,” Barnett Helzburg Jr., president of Helzburg Diamonds, told SCW in February 1980. “We want people in our stores on their terms, not ours. One of our top people says he’s had many people sit Cokes on the counter and buy big diamonds.”

The food court trend did not catch on until The Rouse Co. put successful food courts in its Fanueil Hall, Paramus Park and Plymouth Meeting shopping centers in the late 1970s. Most regional malls opening in the 1980s featured a food court, but not one that was always configured to food tenants’ tastes.

Developers quickly learned the food court could also be used to fill hard-to-lease sections of malls. “You can put 5,000 to 10,000 sq. ft. in a food court in what would be a bad area from the leasing standpoint and it utilizes that area to the fullest,” Aronov Realty vice president Dave Stambaugh told SCW in February 1980.

What was good for the mall owner was not necessarily good for the food retailers. They complained that their identities were watered down by being placed next door to their competition; that food courts destroyed impulse buying; and that inconvenient locations reduced foot traffic. “When we go into a food court, we don’t lose our identity,” Barry Rich, vice president of real estate for Karmelkorn Shoppes Inc. told SCW in February 1980. “What we do lose is the spontaneous flow of the mall’s traffic.”

So developers did a 180 and made the food courts the centers of action. “We have one food court right now that by itself will produce more than $6 million in business,” Jack Mitchell, vice president for leasing at the Edward J. DeBartolo Corp. told SCW in August 1982. “We created it as a destination, to give retailers a central identity. We almost treat it as an anchor.”

Regional mall food courts gradually matured into themed attractions with their own outside entrances, plenty of parking and easy access. Developers instituted large common seating areas to serve the entire food court, rather than having areas for each tenant. Open-air and community centers even got in on the action, incorporating food courts into their design. Leasing agents began to include gourmet food outlets and mom-and-pop restaurants into the mix, giving each food court its own personality and a touch of local flavor.

And the results spoke for themselves. In some urban locations, food courts actually became profit leaders, drawing office workers from surrounding buildings. In suburban areas, food courts helped keep families at the mall longer.

The 1990s: From bust to boom and back again
The 1990s began with 38,966 U.S. shopping centers occupying nearly 4.7 billion sq. ft. and producing retail sales of $717 billion. The industry was hitting overcapacity and planned projects were few as consumers and investors kept a close rein on their cash in the early part of the decade. Institutional owners cut real estate from their portfolios due to low rents, small yields and sliding property values caused by overbuilding.

According to SCW’s 1992 Industry Compensation report, pay increases for shopping center executives averaged less than the rate of inflation. Many of them lost their jobs due to cutbacks and company failures.

The shopping center business was in a malaise. Worried about further declines, lenders insisted on a high percentage of Triple-A national tenants in mall properties. That created a uniformity in tenant mix — dominated by Gap, The Limited and the surviving department stores — promoted a bland sameness from mall to mall, which did little to stir shoppers’ excitement.

The entertainment buzz
One tactic that pulled malls out of their funk was the addition of more entertainment. Inspired by two Melvin Simon & Associates projects that came to fruition in 1992, developers made entertainment anchors, multiplex cinemas, themed food courts and restaurants their weapons of choice.

The big kahuna of this new wave, of course, was the massive Mall of America. Located on the outskirts of Minneapolis, the $625 million, 4.2 million-sq.-ft. megamall became a shopper destination around the world. Attractions included Underwater Adventures (aquarium), LEGO® Imagination Center (four-story LEGO showplace), Cereal Adventure (entertainment and education focused on cereal), NASCAR Silicon Motor Speedway (simulated racing machines), Café Odyssey (international foods) and America Live (four nightclubs in one) to mention a few.

Mall of America succeeded despite some major obstacles, including a weak economy and two anchor department stores involved in bankruptcy proceedings. “They said we wouldn’t get financing; they said we wouldn’t build it; they said it would never lease; and they said it would never open. We proved them all wrong,” Bob Horn, vice president, development, Melvin Simon & Associates told SCW in October 1992.

Mall of America featured a lot of firsts for American retail — the biggest of which was the $70 million Knott’s Camp Snoopy, the largest indoor theme park in the United States. It was the first time a shopping center successfully integrated an entertainment venue other than a movie theater into its tenant mix. As traffic counts held steady at 100,000 visitors per day, developers began to investigate ways to make other centers “destinations” as well.

Another influential Simon project, The Forum Shops at Caesar’s in Las Vegas, debuted in 1992. With animatronic statues, a painted-sky ceiling with moving clouds and Italian-inspired architecture, the 500,000-sq.-ft. project was the first center in the United States to take a theme and go all the way with it, from the waste receptacles to the individual storefronts. Retail on the Strip would never look the same. And once Simon touted the center’s $1,000 per sq. ft. sales figures, developers and investors in several major markets lined up to try their luck with “entertainment” retail.

But the concept didn’t work for long elsewhere. Often consumers went once for the novelty, paid the steep prices and didn’t go back. To draw the repeat crowds the theme had to stay new and fresh. This came with a high price tag. “If people are coming to the mall to play miniature golf, that might not represent much of an opportunity for other tenants,” Dane Smith, senior vice president, director of leasing, The Macerich Co., told SCW in August 1992. In the late 1990s failure came for such themed restaurant chains as Planet Hollywood and Rainforest Café and the closing of more than 100 Disney Stores in 2001.

The REIT brigade
In 1993, numerous large- and medium-sized developers tapped much-needed capital by becoming equity REITs. The list of converts read like a who’s who of the industry, with DeBartolo Realty Corp., Simon Property Group Inc., Taubman Centers Inc. and Urban Shopping Centers Inc. leading the pack and raising a total of $15 billion for new developments. As REITs, these companies could avoid paying corporate income taxes and distribute quarterly dividends to stockholders.

The Tax Reform Act of 1986 created a boom for REITs. By limiting the deductability of interest, lengthening depreciation periods and restricting passive losses, the act ensured that such investments be income-oriented transactions rather than tax shelters. Congress also allowed REITs to operate and manage properties as well as own them — merging the economic interests of the REIT’s owners with those of the REIT’s operators and managers.

Yet another reason for the tremendous growth experienced by REITs was the sharp decline of interest rates. As interest rates started to head down in 1993, REITs attracted the interest of income-starved investors seeking better returns than CDs and money-market funds. Not only were amateur investors interested, but so were their professional counterparts. Growth and utility funds, which previously ignored REIT investments, began to give the trusts a second look. All this attention generated a flurry of REIT initial public offerings (IPOs).

But a small cadre of developers — including Homart, Hahn, Cafaro and Konover & Associates, chose to remain private. Some were reluctant to give up the autonomy they enjoyed as private concerns, even if they could boost revenues with public money.

“As a REIT, there is tremendous pressure to please stockholders,” Michael Konover, president and CEO of Konover & Associates Inc., told SCW in February 1995. “We just didn’t want the push for rapid growth that public companies experience. If you take your company’s stock from $20 to $40 in a year, they don’t care about the fact that you’ve already doubled the stock in 12 months; they want to know what you’re going to do to make the stock go to $80. In this business, you have to think long-term, not quarter-to-quarter.”

Super powers
As the new REITs grew in size and influence, a new shopping center format began to flourish. The evolution from community center into supersized power center reached its apex in the mid-1990s. "Category killers" were the top U.S. retailers. Lead by Wal-Mart, Best Buy and Home Depot, these chains specialized in one retail segment but offered a wide breadth of inventory. Able to leverage their impressive drawing power, these chains called the shots. They could buy their own property and decide on a location-by-location basis whether they wanted to stand alone or be part of a complex. Power centers emerged as developers attempted to woo the category killers with a format especially suited to their needs.

Initially regarded as high-risk investments, power centers began springing up near interstate highways. "There's no question they're the darling of retail development right now," Richard Hulina, president of the retail division of Hiffman Shaffer Associates told SCW in August 1994. "There were only five regional malls built last year, but there were a lot of power centers built, a lot."

Major tenants in most power centers usually owned their own facilities, but small shop rents in power centers were running 50% to 200% less than comparable mall space. Common area maintenance, heating and air-conditioning and electricity charges stayed at a minimum, offering mom-and-pop shops and franchises a chance to flourish. Although initial prototypes ranged in the 250,000 sq. ft. range, over the years power centers grew to be larger than some regional malls.

The big get bigger
Two record-breaking transactions altered the landscape in 1995 and 1996. First, General Growth Properties spent $1.85 billion to purchase the Homart (Holding Co. of Delaware Inc., wholly owned by Sears Roebuck & Co. of Chicago) shopping center portfolio. The acquisition made General Growth the industry’s largest owner/developer.

Prior to the Homart deal, General Growth owned 24 malls. After, its portfolio numbered 50 centers. Including General Growth’s recently-annexed third-party management arm, the company had ownership or management interest in more than 100 regional malls. “This is not a story about ‘big’,” General Growth senior vice president of asset management Randy Richardson told SCW in January 1986. “If our desire to be better also means bigger, then we will be big.”

Seven months later, General Growth Properties would be knocked down to second place on the largest owner/developer list by the union of two of the regional mall business’ founding families — Simon and DeBartolo. The new entity, dubbed Simon DeBartolo, owned or had interest in 184 properties, including regional centers, community centers and specialty and mixed-use properties. Its aggregate portfolio encompassed 110 million sq. ft. in 33 states, plus another 17 million sq. ft. managed.

“We have redefined size in this industry,” Rick Sokolov, former head of DeBartolo and COO of the new company, told SCW in October 1996. “Companies that formerly were considered dominant are no longer considered large. Our merger has made it essential for other companies to get to a size level where they can compete on as efficient a basis as we can.”

The Simon DeBartolo and General Growth transactions benefited the industry, putting retail real estate back on the radar screen for big-money investors. While the average REIT at the time had less than 750 million shares of common stock, the new retail behemoths had even more to offer — a major attraction for large lenders looking for mid-size cap companies in which to invest.

Cutting out the middle man
The impact of the power center format on development in the 1990s was rivaled only by the outset of the outlet mall. "Conventional retail and department stores will always remain strong. Nevertheless, the factory outlet and off-price niche is recession proof and inflation proof," Belz Enterprises senior vice president Andrew Groveman told SCW in May 1995. His statement may have seemed bold at the time, but the impressive growth of the outlet industry has proven him correct.

What began in the early 1980s with shirt manufacturer Stanley Tanger's first chain of five small outlet stores has blossomed into a thriving retail subsector. Tanger used his space to dispose of factory overruns, overstocks and irregulars to consumers at savings of 30% to 70%. Other manufacturers followed suit setting the tone for todays’ popular outlets such as Factory Stores of America and Prime Outlets. Developers began convincing manufacturers and traditional retailers to develop off-price concepts.

Consumer response was enthusiastic. "Where you buy is no longer a big deal," Clothestime president and COO Norman Abramson told SCW in December 1992. "The whole cultural shift is toward what kind of smart shopper you are, not just what label is on your clothes or your bag." Augmented by the infusion of capital brought in by the REIT revolution, the outlet industry grew from 183 centers in 1990 to more than 320 by decade's end.

The Mills Corp contributed immeasurably to the success of the format. With its 1985 opening of Potomac Mills, the company pioneered the concept of banding together off-price merchants and nontraditional retailers and offering them the same critical mass and advertising advantages the regional mall tenants enjoyed.

"The concept gave the shopper two things," Mills Chairman and CEO Larry Siegel told SCW in May 1996. "First, it offered more selection due to the number of value oriented stores. And second, it offered the shopper a point of price comparison for the same reason." By 1996, Mills was investing more than $600 million in four new megamalls at once.

The outside threat
The Internet became a topic of concern in the last years of the 1990s. Traditional retailers feared the Internet would be the ultimate threat to their livelihood — a direct sales format that could succeed far more than mail-order and home shopping via TV in breaking the bricks-and-mortar shopping habit.

"The hypothesis, which we all shared, was that home shoppers were these strange people living in trailer parks who had nothing else to do with their lives but sit around all day and watch TV," consultant Wendy Liebmann of WSL Marketing Inc. told SCW in October 1994. "Well, they're not. They are us. They shop everywhere, and TV is simply another viable 'place' to shop."

The shopping center industry may have been caught off guard by TV shopping, which by 1993 with two networks, the Home Shopping Network and QVC, accounted for $2.5 billion in sales, translating into 10 million sq. ft. of unused retail space. But the industry took the offensive when it came to the Internet and on-line shopping reared its head in the early 1990s via pre-Internet computer networks.

In 1999, SCW’s 2000 Industry Forecast survey reported that 80% of respondents believed e-commerce posed a serious threat to traditional retail, with books and electronics being most vulnerable. But sales figures showed e-commerce sites acted as augmentation for bricks-and-mortar retail than as competition. By 2000, the industry began to recognize and capitalize on this by modifying marketing efforts and using the Internet to drive in-store traffic. In SCW’s 2001 Industry Forecast report, only 19% of respondents believed e-commerce would result in lower traffic counts at bricks-and-mortar stores.

As 2000 settled in, retail and theater bankruptcies became the trend, and surplus space abounded. Analysts argued the failure of weak chains such as Montgomery Ward would be good for the industry, as space would be freed up for stronger retailers to expand. Nonetheless, a struggling stock market and low sales figures drove an industry-wide slowdown in retail expansion and new development toward the end of the decade. Developers and retailers prepared to wait out another downturn, with plans for quick action at the first sign of recovery.

2002 and beyond
Thirty years after the first Shopping Center World hit the in-baskets of industry executives, the business is once more facing a transition. Once again, an economic boom has been followed by a precipitous downturn that has produced a glut of overcapacity that experts say will take a decade to work off. Once-reliable retail-development formulas no longer ad up. And seemingly invincible retail dynasties are in retreat.

So what will be the story of the next chapter of the shopping-center industry? As always, it’s good to start looking for answers among the consumers whose lifestyle needs and economic condition shape the business.

The tastes of Baby Boomers and Generation-Y groups will continue to the biggest influence on consumer trends, says Mark Herbkersman, senior design architect at the Washington D.C. office of Dorsky Hodgson + Partners Inc. The former, though passing out of their prime consuming years, are still the biggest generation of Americans. OK? “Although these groups have different consumer tastes and needs, their buying patterns in regards to volume of goods purchased will be similar.”

Generation Y, which includes people born between 1980 and 2000, is currently 72 million strong, according to Northbrook, Ill.-based Teenage Research Unlimited. These tech-savvy teenagers spent $153 billion in 1999. The research firm expects those figures to balloon until 2010 as they establish families and furnish their nests. The long-sought-after Baby Boomers, currently numbering 76 million, will approach retirement and a whole new set of consumer needs.

The prognosis is not healthy: After 2010, neither group will be buying in the volumes that will keep traditional retailers thriving. “The Boomers will buy less and less as they grow older and need less, and Generation Y will be more selective about buying only the quality merchandise they need or want, but not everything imaginable like the Boomers have always done,” Herbkersman says.

Generation Y, in particular, will drive a future shakeout among specialty retailers, according to a recent report released by Minneapolis-based U.S. Bancorp Piper Jaffray. Teens aren’t spending money at their traditional haunts anymore. Instead they’re drawn to a new breed of youth niche shops. “Industry bellwethers such as Gap and Limited may have ceded growth leadership to smaller companies such as Abercrombie & Fitch, American Eagle Outfitters, Pacific Sunwear, Charlotte Russe, etc.,” says Piper Jaffray retail analyst Jeff Klinefelter. The report also speculates that the growing number of small private retailers — including chains such as Forever 21 and Aeropostale, will continue to gain market share in the specialty sector.

In the new millennium, successful marketers will have to follow racial demographics as well as age-related demographics. Minority marketing will become a necessity as ethnic consumers continue to gain clout. The U.S. Census Bureau reports that the 2000 median income for Hispanic and black households was the highest ever recorded. Hispanic households had a median income of $33,447, up 5.3% from 1999, while black households had a median income of $30,439, up 5.5% from 1999.

“The big thing with the Hispanic population is that it’s a youth issue,” says Lois Huff, vice president of Columbus, Ohio-based Retail Forward Inc., formerly PriceWaterhouseCoopers Retail Intelligence Systems. “It’s not that minorities don’t exist in all age segments, but the younger you go, the more non-white the population gets, particularly on the Latino side.”

Attack of the value chains
There’s another demographic trend at work that will also change the landscape for retailers. The gap between affluent and non-affluent consumers will continue to widen, increasing market share for value-oriented retailers in the years from 2002 to 2010, according to Troy Peple, president of Vienna, Va.-based Chainlinks Retail Advisors. Though U.S. Census Bureau figures show some gains toward the end of the recent expansion, nearly 25 years of stagnating or falling real income has left many Americans on the fringes of middle-class life. Peple attributes this gap to the dawn of the Internet age. Access to technology and the world wide web drives the rich to accumulate more wealth while the poor, who remain computer-illiterate, gain nothing, Peple says.

“The shrinking of the middle class is significant. Look at the retailing segments that were struggling prior to Sept. 11,” he says. “They were the moderate value, moderate selection, moderate price segments targeted at the moderate-income middle class, including Sears, Penneys and the department stores. Now look at the explosive growth segments — they are the cost-focused value retailers such as Kohl’s and Target.”

Mower agrees. “We’re seeing huge growth with TJMaxx, Marshall’s and Kohl’s. Look back three to five years and you’ll see that was not always the case,” she says. “Once consumers become more value-oriented and become accustomed to shopping that way, that loyalty is going to be hard to break by the high-end retailers.”

Huff says value chains will have to tweak their merchandise strategy to sustain the boom. “It won’t be enough just to have everyday discount prices and brands. The value retailers are going to have to develop a much stronger brand image and increase their fashion credibility, especially in women’s apparel,” she says.

“You may even see more value-oriented retailers carrying high-end product because it will become available at a discounted price,” Mower adds. “If shoppers feel they’re getting a good value from the discounters, they might spend an extra $70 with them.”

The rise of the value retailer means tough times for the already-challenged department stores. “Department stores are going to have to find a new niche,” says David Larcher, executive vice president at Phoenix-based Vestar Development Co. “Continued strong growth of the so-called discounters and the proliferation of specialty stores will force department stores to find their identity.”

James West, vice president of real estate for Fort Myers, Fla.-based specialty chain Chico’s FAS Inc., says the department stores must differentiate to survive. “Most are boringly similar. In the future, one particular chain will come along and stand out, differentiating itself from the others for a while,” he says. But, West warns, the waning fortunes of many department stores could leave mall owners with big empty shells where their anchor tenants used to be. “New concepts will evolve to fill these spots,” he says. “They may be subdivided with health club, spa, restaurant and retail mixes and possibly even hotels.”

Such dire predictions for department stores do not bode well for regional malls. Misfortunes at Atlanta’s first regional center, 38-year-old Avondale Mall, reflect those of similar older regionals across the United States. Once a draw for the city’s southern suburbanites, the mall suffered when the demographics moved to the north side of the city. Today, Avondale is shutting its doors, unable to stop hemmorhaging sales after the exodus of anchors Sears and Macy’s and the bankruptcy filing of cinema anchor O’Neil Theatres Inc. Because of cases such as Avondale’s, lenders are already inclined to avoid regionals in times of recession, instead choosing grocery-anchored centers as safer investments.

And the sprawling, aging regional malls—unlike most other retail formats — could feel the direct affects of the 9-11 attacks because they are seen as more likely targets of terrorism. Operators suddenly have to think about a new kind of liability, for which they can’t get insurance. Even if Congress passes legislation to create a government “backstop” mechanism that would offer limited support for insurers in the event of terrorist acts, Mower says costs could be prohibitive for malls. “There won’t be a terrorist insurance requirement at all on smaller centers, but underwriters will require it up front for the larger malls. It’s going to affect costs for developers at a time when high-end retailers are suffering like never before.”

All regional malls are not created equal, of course. Moody Investors’ Services vice president and senior credit officer Arlene Isaacs-Lowe offers a ray of hope for well-positioned regional malls, especially those that are the top draws in their market. During NAREIT’s November retail sector conference call, she predicted that mall REITs with dominant properties and strong tenant bonds could end up with stronger rent rolls once the dust settles.

Back to basics
So what developments and which retailers are the safest bets for the 21st century? The most prosperous tenants will be the ones that rein in expansion plans and focus on core competencies, Huff says. “As a result of this search for growth in hard times, retailers are going to place more emphasis on getting more out of what they have already: out of the existing stores, existing merchandise, existing offers, existing customers.”

“At the same time you’re going to see the total opposite occur in the search for growth vehicles: new concepts, maybe going after new customer groups, and for some retailers, going into new markets,” she says.

And globalization will play a role. Bob Welanetz, president and CEO of Atlanta-based Jones Lang LaSalle Retail Americas, predicts that imported retailers will fill the gaps left by downsizing tenants. “The window of opportunity for international retail concepts to arrive in the United States will expand because U.S. retailers have been shaken while international retailers continue to do reasonably well,” he says.

The top shopping centers will be those that fulfill the essential consumer needs: Socialization, selection and convenience, Herbkersman says. “Appearances change, but the fundamentals remain. Retail-based, mixed-use developments will continue to evolve in the coming years. Retail goes best with people in close proximity, so quality housing will continue to play an important role in successful mixed-use centers.”

Lifestyle centers will also maintain their popularity with consumers seeking a selection of high-end stores and convenient access, Welanetz says. Case in point, Memphis, Tenn.-based lifestyle center maven Poag & McEwen reported sales increases of 2.14% for September 2001 and 3.06% for October 2001 at its centers in spite of consumer fears resulting from the events of Sept.11, which damaged sales figures for most other shopping center formats.

Lessons learned in the past three decades will prove useful to developers, lenders and retailers bent on weathering the uncertain present and catching the next wave. “One of the age-old axioms of real estate investment will be reinforced in the next 10 years,” says Terry Tallen, president and CEO of Los Angeles-based Retail Enterprise Group. “You make money when you purchase a property not when you sell it. Purchasing improved or unimproved property at a reduced basis will ensure that you can make a handsome profit once the value is created and it’s time to dispose of the asset.”

For now, the most value is in grocery-anchored centers, which are holding up relatively well during this recession. A recent poll of investment advisors at Northbrook, Ill.-based Grubb & Ellis revealed 50% of respondents are advising their clients that now is the time to sell well-located community and neighborhood centers. Twenty percent of respondents are advising owners of profitable regional malls, lifestyle and entertainment centers to hold those assets until the economy revives.

Values will also be determined by geography: Secondary markets, many dominated by private buyers and sellers, stand to benefit from the prevalence of low interest rates, while saturated top-tier markets will bear the brunt of the recession. “Capital sources have learned they can’t continue to enter overbuilt markets,” Larcher says. “The capital players have controlled the supply of funds well in the past to avoid overbuilt markets, and they’ll need to keep governing that for the next 10 years.”

But the most potent route to success remains the most timeless — track the demographics and give the people what they want, Welanetz says. “We’ve learned that consumption tracks the health of the economy and that economic cycles are inevitable,” Welanetz says. “It is crucial to search for direction from consumers and let their needs, wants and habits guide decisions.”