Things look good for retail developers over the next couple of years, as retailers push for both larger stores and more of them. Investors, on the other hand, need to be wary; for at the same time retailers are building new stores, they are abandoning old ones, leaving owners of many existing properties with big holes to fill and no one to fill them.

"Investors who do a good job of underwriting stand to do very well," says Hessam Nadji, senior vice president of marketing and research for Marcus & Millichap in San Francisco. "You have to look at current tenanting, look at current rents and take a very, very deep look at an area's demographics and how they're changing. If you don't do that, you could be in trouble."

In general, an upbeat mood has returned to retail. "By virtue of the fact that we have a booming economy, there's a lot of optimism with consumers, which has trickled down to retailers and restaurateurs as well," says Kate Coburn, director of retail services for Cushman & Wakefield in New York.

At least to some extent, the optimism is based in reality. According to the Ernst & Young/E&Y Kenneth Leventhal Survey of Retail Real Estate Issues & Trends, demographic changes and population growth will boost per capita retail spending by 3.5% by the year 2000 and continue pushing it upward through 2005.

Wall Street is boosting both the retail and retail real estate industries.

"Wall Street's putting a lot of pressure on retailers to perform. When you have good saturation, there's this pressure to expand," says Christine Jobs, vice president of member services for the National Retail Federation in Washington, D.C. "Consequently, retailers are looking ... for new growth opportunities."

Wall Street, of course, also affects the real estate end of the industry. Few would argue that the single biggest factor driving the market is the aggressive acquisition activities of real estate investment trusts. "REITs are growing rapidly and need to continue growing to support stock prices," says Nadji.

Although Nadji and others worry REITs' hunger for property may lead to overdevelopment, Richard W. Latella, MAI, senior director, retail valuation group for Cushman & Wakefield in New York, believes the involvement of REITs helps stabilize the market.

"REITs are looked at very closely by Wall Street and other analysts, which is a controlling factor if things start getting out of hand," he says. "There's a lot more market scrutiny and, with more and more properties being securitized or going into REITs, the scrutiny will intensify." At the same time, he thinks the market is "pushing toward the upper limits of value" and will top out next year.

Obstacles ahead Despite the optimism, some analysts see signs of serious trouble.

"Even though we have an industry in a state of euphoria, you have to wonder whether it's going to continue," says Howard Makler, chairman and COO of Retail Space Disposition in Huntington Beach, Calif. "I don't know where the growth is going to come from."

Topping the list of concerns is continued overstoring. According to Price Waterhouse's Management Horizons, the United States has more than 19 sq. ft. of retail space for every citizen. Compare this, says Makler, with the United Kingdom's 2 sq. ft. per person.

In addition, retail bankruptcies are on the rise again, following a brief decline from 1992 to '95. Bankruptcies rose from about 13,000 in '95 to 17,000 in '97. Personal bankruptcies are rising even more steeply, climbing from 780,000 in '95 to 1.33 million last year - a 70% jump in only two years. Consumer debt, predictably, is keeping pace, rising steadily from $800 billion in '93 to nearly $1.3 trillion four years later. (All statistics according to Management Horizons.)

Retailer consolidation continues as well. In a December survey by Shopping Center World magazine of 143 retailers representing some 55,000 individual stores, one half indicated they planned to acquire other chains as one means of expansion. While this can open the door to more stores when a large company buys out another to gain entry to a new market, it almost inevitably means store closures when consolidating retailers serve overlapping markets.

In addition, as Makler points out, pressure from alternative shopping options - the Internet, catalogs, television - is growing. Egghead Computers, for example, decided to close most of its stores and shift its emphasis to Internet sales.

Michael N. Hirschfield, senior vice president in the New York office of Chicago-based Equis Corp., a national real estate firm specializing in tenant representation, goes so far as to predict Internet shopping will eventually decimate video, music and book store sales.

Regional regain status A year ago, investment advisers expressed considerable skepticism about the investment potential of regional malls. That skepticism is disappearing.

"We are recommending ... that investors take a serious look at the regional mall sector," says Mary K. Ludgin, managing director and director of investment research for Heitman Capital Management in Chicago. "Our feeling is the sector is painted as a declining one and, while that characterization is highly appropriate for certain classes of malls, it's not appropriate for other specific types of centers."

Many concerns about malls have been resolved. Except for Montgomery Ward, the department stores that survived the late '80s and early '90s have returned to strength. There are fewer of them, which leaves landlords in a bind should their centers lose an anchor to a competitor, but new options have appeared. For example, regional operators such as Fresno, Calif.-based Gottschalks and Dillards are venturing into new markets, while power center stalwarts like Target and Home Depot have begun experimenting with mall locations.

While many traditional mall retailers have gone under, new chains such as Babies "R" Us and Old Navy have arisen to take their place. Manufacturers like Swatch, Birkenstock and Timberland have also increased theirpresence in direct retail, and others are following suit. Coburn notes that new European retailers have targeted both malls and high-end shopping districts for penetration into the American market.

In addition, new concepts pop up regularly, though this has negative as well as positive implications. "We're moving through concepts and features at an accelerated pace. We don't seem to be settling down in terms of consumer shopping patterns, and this makes it very difficult to stabilize real estate," cautions Nadji.

On the downside for malls, analysts are wary of the impact from the growing number of super-regionals. According to Harvey M. Levin, MAI, director of appraising for Colliers Lanard &Axilbund Appraising Co. in Philadelphia, the combined King of Prussia Plaza and Court of the King Prussia outside Philadelphia is affecting shopping centers from the Jersey coast to midstate Pennsylvania. The 2 million sq. ft. development has six department store anchors.

"They're drawing from as much as a 150-mile radius. The dynamics are just dramatic, far greater than prognosticated," he says. "The attraction of malls of that size and that many anchors all in one location is immense."

Other categories Analysts routinely pick supermarket-anchored community and neighborhood shopping centers as the most dependable retail investments for the obvious reason that people need food and other basic goods and services whether the economy is up or down. Latella says properties in these categories have increased in value by 10% to 20% in the past two to three years.

Not all centers are created equal, however. Supermarket companies continue to shutter 30,000 sq. ft. stores in favor of larger models, while other retailers relinquish in-line spaces for freestanding sites. These changes create opportunities for developers of new properties but leave owners of existing properties holding the bag. They also exacerbate the excess space problem.

A year ago, opinions on power centers were generally negative. Analysts appear more upbeat this year. Latella sees the beginning of a turnaround in power center values due to the growing demand by REITs.

Retailer consolidation remains a concern, but Makler says creative landlords can find acceptable alternative tenants for shuttered stores either among retailers looking to get into the particular market or by looking beyond the national and regional chains.

"There's a false perception that local businesses are bigger credit risks," he says, "but look at how many national chains have filed bankruptcies. A local businessperson whose livelihood depends on that store is going to work very hard to stay open."

One healthy trend, say analysts, is what might be called the hybridization of power centers. Los Angeles-based J.H. Snyder Co. is developing a 200,000 sq. ft. "powerhood" center in Granada Hills, Calif., that combines an 80,000 sq. ft. Ralph's supermarket and a Long's Drugs with promotional tenants such as OfficeMax, Orchard Supply Hardware and Michael's Crafts. In Goleta, Calif., Santa Barbara-based Wynmark Co. is building a project that pairs a 325,000 sq. ft. power center anchored by Costco, Home Depot, Staples and CompUSA with a 175,000 sq. ft. entertainment-oriented neighborhood center.

As for outlet centers, analysts suggest developers proceed with caution. "It seems to be overdone," says Hirschfield, but he notes good opportunities still exist. He reports Glimcher Corp. is building an outlet center in Elizabeth, N.J. As the only outlet center in the metropolitan New York area, he thinks it will fare well.

Stand-alone retail is a major growth area, according to many analysts. "Certainly category killers want free-standing sites," says Hirschfield. "There are many opportunities to do more along major highways and arteries."

Many are generating enormous sales per sq. ft., says Makler. "Every time CVS closes an in-line store and opens a freestanding one, they can show you how it increases profits substantially," he adds.

Urban retailing If there is a single development and leasing trend that has caught the attention of retail analysts, it is the revival of urban and street retailing.

"Downtown retailing is hot as a pistol," declares Hirschfield. "It's almost as if the national chains just discovered there are a lot of people in cities."

The trend, says Steven Guttman, president and CEO of Federal Realty Investment Trust in Baltimore, also reflects changing consumer patterns. "We start on the premise that, all things being equal, customers would prefer shopping on a street to shopping in shopping centers. It feels more natural. It's more fun," he says, noting his company invested some $200 million in urban streetfront properties last year through its wholly owned subsidiary Street Retail Inc.

Brad Hutensky, president of the Hutensky Group, a shopping center developer based in Hartford, Conn., calls cities the "last great opportunity for shopping center development today." While most suburban areas are well saturated, he says, many urban locations remain seriously understored.

For example, Hutensky's company has joined with local church and nonprofit organizations to develop supermarket-anchored centers in Harlem and the Bronx. The former has seen no new supermarkets opened in 20 years, the latter even longer, Hutensky reports, adding that what these neighborhoods lack in income they make up for in density. "For the Bronx project, there are 120,000 people in a one-mile radius and virtually no competition," he remarks.

The urban renaissance encompasses upper economic levels as well. According to Julie Taylor, an account executive in the San Francisco office of Santa Monica-based retail brokers Epsteen & Associates, interest by Emporio Armani, Ralph Lauren, Gucci and other designer-owned stores have pushed annual rents in San Francisco's Union Square district to $300 per sq. ft., while rents in many Bay Area neighborhoods and suburban downtowns can exceed $50 per sq. ft., thanks to demand by Ann Taylor, Banana Republic, Williams-Sonoma and other mid- to high-end retailers.

The tenants seeking streetfront sites are generally the same ones looking for space in shopping centers. These include both higher end stores, as noted above, and discounters. Equis vice president Peter Haback says promotional tenants have completely transformed Chicago's North Street, converting numerous abandoned factory and warehouse sites into big-box retail.

Let them entertain you A major factor in the urban renaissance is the growing popularity of entertainment and entertainment-oriented retail. By adding entertainment to the retail mix, says Haback, a center or a downtown district can generate traffic from early morning until late night.

Entertainment has taken hold at both the development and the retail level. At the retail end, says Haback, conventional merchandisers have to make their spaces and presentation more exciting to hold customer interest, while other retailers are developing and expanding concepts expressly designed to satisfy people's demand for diversion.

At the development end, landlords are adding multiplex cinemas by the thousands, as well as bringing in bookstores, music stores, cafes, nightclubs and other entertainment and quasi-entertainment venues. Many projects are almost exclusively entertainment driven, with few or no conventional hard- or soft-goods retailers.

Movie theaters, now with 16, 20 and even 30 screens, have effectively achieved anchor status because of their ability to draw thousands of people a day. At least one theater chain, Pacific Theatres of Los Angeles, has formed its own development company, Pacific Theatres Realty Corp., to build centers anchored by its own complexes. Pacific is building both entertainment centers such as the 245,000 sq. ft. Cinerama Dome Entertainment Center in Hollywood and community centers that pair the theaters with retailers such as Eagle Hardware & Garden, Kmart, various restaurants and even car dealerships. So far, all the projects are in Southern California.

The number of entertainment-specific projects appears to be growing geometrically. Almost every city with more than 500,000 people has at least one significant entertainment project open, in construction or planned. Among them are E Walk in New York, The Pavilions in Denver, Meridian I & II in Seattle, Sony Metreon in San Francisco, Bayou Place in Houston and Coco Walk and Sunset Place in Miami.

A clear sign of investors' confidence in the category is the formation of a REIT devoted exclusively to cinema megaplexes and themed retail centers. According to founders David Brain and Chip Harris, Entertainment Properties Trust of Kansas City, Mo., which started last fall with $276 million, hopes to acquire a sizable share of the $9 billion worth of megaplexes and several times that amount worth of entertainment complexes slated to open through the year 2000.

Not everyone is confident entertainment provides a solid foundation for investment. Nina Gruen, a partner with San Francisco real estate and economic consultants Gruen & Gruen, considers entertainment-oriented projects risky. "The public's taste for entertainment is so short. How can you take the Nike Towns, Planet Hollywoods and so forth and expect them to last for 10 years?" she asks. "I don't see them as reliable."

Nadji partly disagrees, saying entertainment has become a more or less permanent component of retailing, but not all entertainment projects will do well. "There is a risk of too much saturation and competition. There will be some fallout," he predicts.

Food, glorious food Food is a critical component of entertainment centers. In fact, it's somewhat difficult to separate food from entertainment today. The two categories overlap in many respects.

"The restaurateur has become more of a competitor for space with the retailer because dining out has become entertainment," says Coburn. "You used to go out to eat, then go to a movie. Now it's an either/or proposition."

"The restaurant world is absolutely booming," she continues. "We're seeing regional restaurant chains going national and national chains expanding, including going into markets they formerly wouldn't have thought about. We're also seeing a lot of independent ventures."

Quick-serve food is especially popular, and names such as Starbucks, World Wraps, Jamba Juice and Papa John's Pizza are popping up everywhere. Landlords tend to love quick-serve food tenants because they often will pay above-market rents. As Rick Martinez, a broker with Colliers International in Sacramento, Calif., comments: "Food users are very aggressive. I've seen them offer as much as 30% and 40% over market to get a prime location."

The category seems likely to grow in importance, as harried parents and busy children find little time to make, or even eat, traditional home-cooked family meals. Jamba Juice, with about 60 outlets now, envisions 1,000 by the year 2000. Papa John's expects to jump from 1,460 to 2,500 outlets in the same period. Even Chevron is getting into the act. The San Francisco-based oil company will open a dozen Foodini's restaurants adjacent to existing Chevron stations this year, with expectations of adding thousands more.

Other trends Ironically, while people apparently don't have time to cook, their appetite for cooking- and home-related merchandise appears to be getting bigger. Eddie Bauer and Banana Republic have added home furnishings departments, Crate & Barrel introduced a larger prototype store with a complete furniture department and regional chains such as Z Gallerie and Restoration Hardware have begun national rollouts.

Stores such as Sears Home Life/Orchard Supply Hardware, Lowe's and Home Depot, all of which have major expansion programs in progress, have become much sought anchors. Home Depot plans to open 61 new stores in California alone. Another entrant in this category, IKEA, is building the largest stores in the nation. The Scandinavian company has a 236,000 sq. ft. facility under construction in Oakland, with plans for a subsequent 90,000 sq. ft. expansion. Even department stores don't build 300,000+ sq. ft. facilities these days.

High-end retail is also experiencing strong growth, according to Haback and Coburn. With good reason, says Keith Ackerman, executive vice president of Price Waterhouse Publications. "Aggregate consumer debt levels for middle-class households ... are at record highs. Conversely, high-income households have actually paid down their debt loads," he notes.

Many developers are targeting the high end with projects like Atlanta-based Cousins MarketCenters' Avenue of the Peninsula in Rolling Hills Estates, Calif., and Avenue East Cobb in Cobb County, Ga., upscale retail centers targeted to communities with average household incomes in the top 10% of the nation.

The three 'Rs' For developers it's not "reading, 'riting and 'rithmetic," but "repositioning, renovation and redevelopment" that matter most today.

"While there are still some fill-in opportunities, we believe the real opportunity is turning around centers with problems," says Hutensky, whose company is aggressively seeking troubled properties in sound locations. "It's better to take a center that needs a lot of work on a great site than to take a lesser site, if one is even available, for new development."

"Contrarian investors who move in on properties that can be rehabilitated and retenanted are finding great deals," Nadji agrees. "In two years, you can flip them and make a sizable profit."

Taller and tighter Other trends to watch include more intense use of space. Partly this reflects the shift of new retail opportunities to denser urban areas, but it also reflects the increased urbanization of the suburbs and rising land prices in most prime areas.

In big cities, two-level stores have become commonplace and multistory projects are appearing with increasing regularity. And along with them have come multistory parking garages, as developers discover land is too precious to use as parking lots.

Even when parking garages are not built, parking lots are shrinking to accommodate profit-making uses. In San Francisco, the owner of a Safeway site expanded the store nearly 30,000 sq. ft. and built space for Starbucks, Jamba Juice, World Wraps and a fourth tenant by encroaching on the parking lot.

Large-scale, mixed-use projects became an urban fixture in the '80s, but now the concept is showing up at the neighborhood level. Federated received approval for a Safeway-anchored project in San Jose, Calif., that will include housing on upper levels. In San Francisco, the locally based Emerald Fund paid $13 million, $5 million above the asking price, for a 40-year-old neighborhood market hall site on which to build a mixed residential/retail project

Retailers are also intensifying their use of space. In California, Wells Fargo Bank remodeled seven neighborhood branches into largely undemised, multitenant spaces, combining banking with a Starbucks cafe, Briazz sandwich shop, Pressing Business dry cleaners and Wells Fargo Copy & Postal Center. If these succeed, the bank plans to do the same with other neighborhood facilities. South Umpqua Bank in Roseburg, Ore., opened cafes and personal computer stations in 11 branches.

For a total sales price of approximately US$2.55 billion, Los Angeles-based Westfield America Inc. and Columbia, Md.-based The Rouse Co. have entered into a binding agreement to purchase TrizecHahn's interest in substantially all its retail centers. The total number of centers being considered is 20, and Westfield intends to purchase 13 of those 20.

"Basically we already have four centers in Los Angeles and 4 11/42 centers in San Diego," says Lowy. "One of our investment strategies is that we, in essence, invest in more than one mall in a market so that if we have multiple assets within the one market, we can then penetrate that market from a retail point of view. It gives us a much stronger presence than having one center or one regional mall in a marketplace."

Typically when Westfield America acquires a center, it goes through the process of renovating and branding the center as a Westfield America mall. This is also the plan for the 13 TrizecHahn centers.

"The centers are branded Westfield Shopping Town," says Lowy. "So if you bought Horton Plaza, it would be Westfield Shopping Town Horton Plaza, and we will use that brand to advertise and penetrate the market in those multiple-center markets."

Although Westfield's retail portfolio includes all types of tenants, this purchase has added seven centers to its portfolio that include Nordstrom as a tenant.

"We are also now Nordstrom's largest landlord, and we are the largest regional mall owner in California," Lowy says.

The Rouse Co. will own the remaining seven retail centers, which are located in Las Vegas, Salt Lake City, Denver, Baltimore, New Jersey and Iowa, says Lowy.

Bringing the United States its first ever movie theater complex with an on-site child care facility, Muvico Paradise 24 Theaters is developing a 24-screen theater in southwestern Broward County, Fla. The theater will anchor Paradise Entertainment Park, a 30-acre project which will also include several restaurants and sidewalk cafes as well as an array of related shopping.

Muvico Paradise Park will provide an Egypt-themed environment for moviegoers, while the "Children's Playroom" will provide them with a solution to the ever-present babysitting problem.

Upon completion, Muvico Paradise 24 Theaters will accommodate approximately 4,200 patrons. Paradise Entertainment Park is scheduled to open late this year.

Marking General Growth's third major portfolio acquisition in four years, the Chicago-based shopping center owner, developer and manager has begun execution of an agreement to acquire the entire portfolio of eight U.S. retail shopping centers from MEPC plc, the London-based parent of Dallas-based MEPC American Properties. General Growth will acquire 100% of MEPC subsidiaries and affiliates that own the centers. In return, MEPC will receive $871 million in cash less adjustments at closing for certain tenant allowances and construction costs at three of the malls currently under expansion and redevelopment.

Containing 7.7 million sq. ft. of retail space, the portfolio is currently 87% occupied, and the net operating income from the properties as of the year ending September 1997 was $56.3 million.

General Growth will fund the acquisition through short-term unsecured loans and new long-term fixed rate secured loans. The properties will be delivered at closing debt free and are expected to produce approximately $68 million of EBITDA between June 1998 and May 1999.