The nation's top shopping center owners continue to grow ever larger. Nineteen of the Top 25 Shopping Center Owners that have consistently appeared in NREI's rankings since 2003 now collectively own 288.4 million sq. ft. more than they did back then. And of that total, nearly 220 million sq. ft. was acquired since the beginning of 2004.

Plenty of this growth has involved big-ticket mergers, such as Simon Property Group's acquisition of Chelsea Property Group, General Growth Properties' purchase of Rouse Co., and Macerich Co.'s acquisition of Wilmorite Properties, just to name three of 2004's signature deals, but other examples of growth have been incremental and steady over the last three years. The portfolio of CBL & Associates has risen from 56.1 million sq. ft. to 71.4 million sq. ft. during that time.

“It's inevitable that consolidation will continue. There's more economies of scale in the retail real estate business than any other, except maybe hotels,” says Scott Wolstein, chairman and CEO of Beachwood, Ohio-based Developers Diversified Realty, which owns 107 million sq. ft. “It's getting more expensive to operate a small company.”

The retail climate is favorable for the big to get bigger. According to Reis Inc., which tracks 62 different metro retail markets nationwide, effective rents were up or stable in 52 of those markets in the first quarter of 2005, with increases of more than 1% in 13 markets. Reis also puts the U.S. vacancy rate for retail properties at 6.9% at the close of the first quarter, a decrease of 21 basis points over the same period a year ago.

A number of markets report vacancy rates lower than the national average, such as Long Island at 3.8%, northern New Jersey at 3.6% and Orange County at 2.2%. What's the common denominator? All three are crowded markets with little open space for new development. These markets also benefit by relatively strong demographics and strong job growth.

Capital is still willing and able to fund shopping center purchases, despite relatively low cap rates. Reis reports the average retail cap rate nationally is 7.9%, down 40 basis points from the last quarter of 2004. It helps that in-line shopping center tenants generated $366 in sales per sq. ft. in 2004, one of the strongest years since 1999, according to the International Council of Shopping Centers (ICSC).

Bellwether redevelopment

Besides raw growth, the largest owners also are focusing on redevelopment. The nation's largest shopping center REIT, Simon Property Group, committed to redevelopment this spring when it kicked off a program of “asset-intensification” that evaluates the Indianapolis-based REIT's 200 million-plus sq. ft. portfolio in terms of adding non-retail space, such as condos, to its properties.

No. 2 General Growth Properties is redeveloping properties across its 180 million sq. ft. portfolio as fast as it can to take advantage of the popularity of open-air shopping centers. “Most of the redevelopment incorporates outward-facing elements to the properties,” says chairman and CEO John Bucksbaum, adding that most of company's new developments will be of the open-air variety as well.

Does a move toward open-air represent a permanent shift in retail development? Bucksbaum isn't so sure. “There's a risk that too many open-air malls will be built, especially those called lifestyle,” he says. “One reason we're redeveloping as fast as we can is to deflect other open-air centers from our trade areas. If all the retailers are represented already, that should prevent similar centers from being developed.”

Competing against Wal-Mart

In the grocery-anchored sector, there's still a lot of room for consolidation. Only 10% of grocery-anchored centers are currently owned by REITs, according to ICSC. One of the largest specialists in grocery-anchored centers, Jacksonville, Fla.-based Regency Centers, continues to grow. Regency recently acquired a 35% interest in 101 grocery-anchored centers in a joint venture with Australian Macquarie Countrywide Trust in a deal valued at $2.7 billion.

Since most of the acquired grocery-anchored properties cater to a relatively affluent customer, the deal fit with Regency's strategy for competing with Wal-Mart. “When a Wal-Mart Supercenter opens, you'll see the No. 4 and No. 3 grocer in that area fail for the most part,” notes May Lou Fiala, president and COO. “The No. 1 and No. 2 grocers [based on market share] pick up sales; the remainder goes to Wal-Mart.”

Regency's strategy is to pursue the No. 1 and No. 2 grocers in each market, while at the same time being aggressive at disposing of grocery-anchored centers that aren't up to snuff. “Of our 400 centers, 57 compete within three miles of a Wal-Mart Supercenter,” Fiala says. “You can do that with market leaders and strong demographics. Our grocers in those 57 centers are producing [sales] slightly over $400 per sq. ft.”