Four years ago, Arlington, Va.-based Mills Corp. was fitting a proposed discount megamall in New Jersey's Meadowlands for a casket. The REIT began working on the project in 1994, but environmental groups, federal agencies, residents and nearby competitors had dragged out studies, reviews and hearings for years.

But in 2002, Mills' fortunes quickly reversed when the New Jersey Sports and Exposition Authority asked for bids to develop land adjacent to the Meadowlands Sports Complex. Mills ended up as the winning bidder, and in March the company finally broke ground on Meadowlands Xanadu. No longer a discount mall, the project has morphed into a $1.3 billion, 4.8 million sq. ft. behemoth. It's anchored by a 3.2 million sq. ft. enclosed family entertainment and retail destination in one of the most densely populated areas of the country.

The deal took shape after Mills agreed to a 75-year land lease with the sports authority. The REIT also agreed to sell 587 acres targeted for the original mall to the Meadowlands Conservation Trust in New Jersey for $26.8 million. Mills paid the sports authority $160 million for the lease's first 15 years and is shooting for a late 2007 opening.

“As long as you have imaginative developers, you're going to have large projects,” says Jim Dausch, president of the development division for Mills, which owns and manages 41 retail and entertainment centers in the U.S. and Europe. “There isn't a developer in the world who's not thinking big.”

More on the Way

Indeed, a handful of developers have megamall ambitions. Montreal businessman Rubin Stahl and Greenwich, Conn.-based Gordon Group Holdings are proposing a $500 million, 330-acre mixed-use project known as Lac Mirabel in Quebec. Syracuse, N.Y.-based Pyramid Cos. wants to build an 800-acre resort in Syracuse with a $5 billion first-phase price tag. Also, the Ghermezian family of Edmonton, Alberta, which has controlling interest in the 4.2 million sq. ft. Mall of America in Bloomington, Minn., has a $1 billion plan to double the mall's size.

Yet such projects are risky. It takes years for a development dream to become a reality. Megamalls are financially complex and controversial. And the super-sized monuments to consumerism lack a deep track record — the Mall of America and the 5.3 million sq. ft. West Edmonton Mall in Edmonton, Alberta, which is also controlled by the Ghermezian family, are the only operating megamalls in North America.

But the two in existence are prime examples of grandiose shopping fantasy lands — throwing retailers, restaurants, amusement parks, nightclubs and aquariums under one roof. In short, developers can't resist the challenge to build something bigger or better, or both.

“Developers today are catching onto what we caught onto 15 or 20 years ago. When you combine substantial components of entertainment along with lifestyle and retail, the mix is very successful,” says Don Ghermezian, president of West Edmonton Mall. “As long as it draws a crowd, the crowd inevitably ends up shopping.”

Retail experts suggest the market is ripe for more megamalls. “Except for Las Vegas, the shopping center industry has gone sideways,” says Faith Hope Consolo, chairman of the retail leasing and sales division for Prudential Douglas Elliman in New York. “It really hasn't seen anything off the charts in a long time.”

Megamall mindset

Developers can't satisfy the urge to develop megamalls without significant financing. So, what's in it for investors? The Mall of America, which opened in 1992, and West Edmonton Mall, which opened in 1981, average more than $500 per sq. ft. in sales, Ghermezian says. Regional malls, by comparison, averaged sales of $366 per sq. ft. in 2004, reports the International Council of Shopping Centers. Typically, megamalls generate equity returns of 15% to 18%, or greater, and overall returns of some 10% to 12%, according to real estate experts.

German-based real estate company KanAm, which has invested in several Mills projects, has poured $250 million into Meadowlands Xanadu. Investors in its KanAm USA XXII fund, which has invested $180 million in the project, can expect annual payouts of at least 7.25% in the short term and 12% as the project stabilizes, according to KanAm.

James Braithwaite, president of KanAm U.S. in Atlanta, emphasizes that the predicted distributions are minimums. “We certainly hope they get more,” he says.

Decade of diligence

Reaping returns, of course, can take years. The proposed Lac Mirabel development, for example, has been in the works for a decade. The 330-acre site is in a farming community with a population of about 30,000; it's about 30 miles north of downtown Montreal and 60 miles south of the Mont-Tremblant ski resort area.

Initially, Stahl says, he planned a 100-acre project, but his ideas just kept getting bigger. The decision to expand the project, which is requiring the relocation of major electrical and natural gas lines, was made after the Gordon Group joined the effort about five years ago.

“Development is my passion, and when you're creating something you really want to make a statement,” says Stahl, who was a partner with the Ghermezians in the Mall of America and West Edmonton Mall developments. “It's a blessing in disguise that I didn't start on what I originally wanted to do.”

Lac Mirabel developers hope to start construction in May, and currently they're working out the project's financial details. Gordon Group is investing $350 million into the project, and other financing may include grants from Canada and Quebec, according to Scott Gordon, president and director of development at Gordon Group.

Lac Mirabel marks something of a departure for Gordon Group. Of late, the firm has focused on developing retail centers adjacent to casinos. The company developed The Forum Shops at Caesars in Las Vegas, for example, and is currently developing the 575,000 sq. ft. Pier at Caesars retail project in Atlantic City. But company officers think Lac Mirabel's entertainment amenities will attract people to the shops just as casinos do. “Rubin brought us the site,” he says, “and we liked it and jumped for it.”

About 4.5 million people live within 60 miles of the Lac Mirabel location, and average household income is nearly $59,000. The bottom line: Lac Mirabel will attract 25 million to 30 million visitors a year and average sales of at least $600 per sq. ft., projects Stahl, who adds that tenants have signed letters of intent to occupy about half of the project. Moreover, he says, Quebec has gone some 25 years without a major regional mall development.

Ken Jones, director of the Centre for the Study of Commercial Activity at Ryerson University in Toronto, suggests Lac Mirabel may be too far from Montreal to draw enough traffic, however. Like others questioning the project, he points out that Montreal isn't growing as fast as other parts of Canada, and that Quebec's retail base generally comprises homegrown companies. Retailers from the U.S. and abroad have found it a tough market to crack.

But there's little doubt that the province is underserved by shopping centers. In fact, until Mills and Canadian developer Ivanhoe Cambridge opened the 1.2 million sq. ft. Vaughn Mills mall near Toronto in November, there hadn't been a major mall built in all of Canada since 1989, he says.

“I think the Lac Mirabel concept would appeal because the Quebec culture likes new and hi-tech glitzy stuff,” Jones says. “My concern would be the market and sustainability.” Then again, developers built West Edmonton Mall in a community with a population of some 600,000 in the 1980s — it's up to 937,000 now. “Edmonton wouldn't be a first choice of mine for a Canadian growth center,” he says.

In Limbo

More uncertainty surrounds two other megamall projects. One of them is Pyramid's far-flung Destiny USA proposal to build an enclosed resort that would stretch from Syracuse's Inner Harbor to Carousel Center mall less than a mile away. Pyramid owns the mall and plans to expand it to 2.4 million sq. ft. from 1.6 million sq. ft.

The project faces several challenges, however, including stalled negotiations between Destiny USA officials and New York's Canal Corp. over the development agreement for the 42-acre Inner Harbor. In March, a Canal Corp. official suggested the state might put the development rights back up for bid. New York also is considering tax breaks valued at $630 million to help fund the project, and Destiny USA intends to seek $100 million in bonds from the Syracuse Industrial Development Agency.

In Minnesota, meanwhile, the Ghermezian family wants to add more shops, restaurants and entertainment venues to Mall of America. The linchpin to the expansion: Minnesota's approval of a 200,000 sq. ft. casino that has sparked a statewide debate.

A court fight is another potential drag on the effort. Last year, Indianapolis-based Simon Property Group, which owned the mall with the Ghermezians and Teachers Insurance and Annuity Association, was forced to sell the Ghermezians its 27.5% stake in the property under a federal court order.

Simon purchased half of Teachers' 55% interest in 1999 for $84.5 million, giving the retail REIT and related affiliates a 50% controlling interest in the mall. But the Ghermezians sued, claiming they were cut out of the deal, and prevailed. Simon has appealed the ruling, though the parties appear to be pushing the expansion forward.

The fact that a handful of new and proposed megamall projects are surfacing now simply reflects a cycle that even large but rare projects follow, says Mills Corp.'s Jim Dausch. Thirteen years ago, developers waited to see if Mall of America would work, he says. It did, and so developers started planning similar concepts that, like Meadowlands Xanadu, are under construction, or like Lac Mirabel, are on the cusp of development.

But the industry is still full of skeptics betting that the current planned projects will never happen. Dausch is certainly familiar with the talk. “People also said that about Mills and the Meadowlands.”

Joe Gose is a freelance writer based in Kansas City.

TRACKING FIVE MEGAMALLS

Project Location Size Project Cost Developer Completion Date
Lac Mirabel Mirabel, Quebec 2 million sq. ft. $500 million Rubin Stahl/Gordon Group 2007
Destiny USA Syracuse, N.Y. 7.5 million sq. ft. $12 billion Pyramid Cos. Phase I, 2007
Meadowlands Xanadu Meadowlands, N.J. 4.76 million sq. ft. $1.3 billion The Mills Corp./Mack-Cali Realty Corp. 2007
Mall of America Bloomington, Minn. 4 million sq. ft. $1 billion Ghermezian family/TIAA Simon Property Group 1992
West Edmonton Mall Edmonton, Alberta 5.2 million sq. ft. $1.2 billion Ghermezian family 1981
Source: Company data