But will technological changes and competitive pressures melt investors' enthusiasm?
Forgive mall owners and retailers if they seem unable to wipe the smiles off their faces. After the brutal recession of the early 1990s that restructured retail real estate operations and unmercifully weeded out weak or mismanaged retail firms, the industry has found itself enjoying a surprisingly strong market.
Since 1992, when retail sales growth dipped to a miniscule 1%, the industry has experienced seven years of healthy growth ranging from 4% to slightly more than 6%. Growth in the fourth quarter of 1999 and first quarter of 2000 surpassed even that splendid performance, posting the strongest year-over-year percentage increase since 1983, according to Northbrook, Ill.-based Grubb & Ellis. Most anecdotal evidence suggests that performance has continued so far this year.
The strong retail sales climate has been equally kind to the retail property market, where vacancy rates are at or near record lows in many markets across the country. Average rental rates in new, anchored centers have increased by 12% for in-line shop space and by 7% for junior anchor space, Grubb & Ellis reports.
By all appearances, the economy is headed for the soft landing the Federal Reserve Board has seemed so determined to realize. (In an effort to keep inflation at bay, the Fed has raised interest rates six times in the past 15 months, including a half percentage point in May, the biggest single increase in five years.)
"The election and potential change of leadership will have some impact, but I honestly believe the economy will have a soft landing and that sales will continue to increase in the malls and other retail segments," says John Millar, executive vice president of-based Jones Lang LaSalle.
Many real estate owners and developers expect retail sales growth to average between 3% and 5% for the next couple of years. But amid those bullish predictions, some see signs for concern. Drew Alexander, president of Houston-based Weingarten Realty Investors, says that while times are generally pretty good, retail remains an inherently competitive industry.
Trouble at major retailers such as Plano, Texas-based J.C. Penney, which recently named a new CEO and warned that it may not meet Wall Street profit projections, and San Francisco-based The Gap Co. - whose stock is off 60% from its 52-week high amid weak sales reports - are just some of the reasons for concern.
Nonetheless, the strong economy will continue to be resilient, many observers predict. While J.C. Penney and The Gap were the high-flyers of yesterday, other companies have quickly assumed the mantle of leadership in today's economy. Firms such as Kohl's Corp., Wal-Mart, Target and Best Buy are just some of the names aggressively seeking new space.
Still, there are other challenges. Retail real estate owners and developers are grappling with serious problems, some borne of technology and some a result of exactly the type of growth which they have overseen and enjoyed. Chief among those concerns is the continued explosion of e-tailers, consolidation among major retailers, a major shakeout among theater owners and new restrictions and hurdles for new development.
Clicks and bricks By 2002, U.S. consumers are expected to spend one-third of their "shopping money" on the Internet, compared with 15% at present, according to an Ernst & Young survey of consumers and retailers in six countries. Furthermore, Forrester Research, Cambridge, Mass., predicts that U.S. business trade on the Internet will approach $1.3 trillion in 2003. In 1998, that figure was $43 billion.
Such numbers have convinced any laggards that the Internet has forever changed the way retail functions. One of the most serious issues retail real estate owners and developers have grappled with has been how to address such a direct challenge. While a couple of years ago the debate was whether the Internet is a friend or foe, discussion these days centers around the best way to use this medium to complement and boost a retailer's operation. Out of this debate, the clicks and bricks approach has emerged.
"People recognize that we will see a convergence of pure e-tailing and pure retailing in the so-called clicks and mortar strategy," says Alexander. "People like going to stores, and the Internet has some benefits, too."
The Internet is yet another medium for distribution, regardless of whether it is used to send a message or a product. Many real estate firms are using the Internet to hype their malls and shopping centers, while at the same time providing another advertising avenue for their retailers.
John Bucksbaum, CEO of Chicago-based General Growth Properties, sees the Internet as an opportunity to more closely follow the fickle and fast-changing habits of consumers. Tracking and compiling a record of how often people visit a Web page provides an important window into consumers' decision-making process, he says.
"One of the things the Internet will bring about is a more personalized relationship between shopper and retailer," he says. "You will be able to get to know your customer better, and that will benefit us as well as the retailer. We will understand where a customer shops, what they like. You can communicate with them directly ... and that will make for far greater efficiencies."
Retailers are recognizing that their two most important assets - a brand name and well-located outlets - can easily be leveraged to take advantage of the Internet. Increasingly, brick-and-mortar retailers are forming joint ventures or launching their own e-tailing operations, using their existing distribution networks to complement rather than compete with the Internet.
For example, Kmart teamed with Yahoo! to launch BlueLight.com, a free Internet service and online store. Similarly, Wal-Mart and venture capital firm Accel Partners, Palo Alto, Calif., earlier this year joined to launch Wal-Mart.com Inc., an independent company, to push and expand the retailer's presence on the Web.
"The whole Internet issue has gotten much more complex, with Internet-based people looking for stores and store people looking for more Internet access and sales," says Ann Sperling, managing director of the Denver office of Dallas-based Trammell Crow Co. "So the lines are blurring as people find new ways to integrate the two mediums."
The Home Depot, Atlanta, has taken the next logical step in that approach. The stores now allow customers in the Las Vegas area to shop online and then choose how they want to take delivery of their purchases. They can either pick up the items at a Home Depot or, for a fee, have them delivered to a specific location. Depending on how the Las Vegas experience goes, the company may expand the service to other markets.
Even if these efforts for some sort of convergence between brick and mortar retailers and e-tailers are only moderately successful, some mall and shopping center owners do not believe they have much to fear.
"I don't think people are going to quit shopping or going out," says Bucksbaum. "Shopping malls are as much a part of the social fabric as they are a commercial (enterprise). There's entertainment at shopping malls, there are people to interact with and there's food. It's not just utilitarian shopping."
The big get bigger Another challenge facing mall and shopping center owners is the dwindling number of dominant stores. Increasingly, various retail categories are becoming the domain of one or two big chains. In electronics, it's Best Buy and Circuit City. In office supplies, it's Office Depot, Staples and Office Max. In power center retailing, it's Marshalls and Ross Stores. That shrinkage in potential tenants makes it paramount that real estate owners properly plan, build and market their centers.
"It's certainly something everyone is concerned about, and I think it makes it even more paramount that you need to have the best locations because if you have the third or fourth (best location in a market) and there are only three major players in a category, you have a problem," Alexander says. "The strong will get stronger, and the weak will be in trouble."
Yet for all the concern about that trend, Pittsburgh-based Zamias Retail Group CEO Damian Zamias remains quite confident that there will be new retailers to take up available space. "What makes (this business) interesting for me is it's very dynamic," Zamias says. "There are always new retail concepts, service concept, etc., that emerge that make it interesting for us."
Movie theaters, the main anchors for the entertainment centers, are themselves in the midst of a serious pullback that could see as many as 600 movie houses shuttered. Unlike traditional retail spaces, the prospects for renovating and reopening those outlets will be decidedly more difficult and expensive. Surround sound, sloped floors, stadium seating and high ceilings all make renovating and re-leasing prospects a challenge.
Additionally, some retailers have found that their prospects for domestic future growth are shrinking fast. Accordingly, those retailers are eyeing major international markets as the next logical step in their continued search for healthy growth and profits.
"Look at [retailers] like The Gap," says Millar of Jones Lang LaSalle. "The Gap has pretty much put its presence everywhere in the U.S. that it can go. In order to achieve the growth rates it has had in the past, it's seeking international solutions." In fact, The Gap has opened stores in Canada, the United Kingdom, France, Germany and Japan.
In August, General Growth Properties opened Stonebriar Centre just outside of Dallas. The 1.6 million sq. ft., two-level mall features about 150 retailers, 100,000 sq. ft. of theater space, a National Hockey League regulation-sized ice rink and a carousel. Similarly, The Mills Corp., Arlington, Va., opened its newest entertainment center, the 1.2 million sq. ft. Opry Mills complex in Nashville, Tenn. Opry Mills includes 200 retailers and a food court that features a "Picnic in the Park" environment.
Located near the Grand Ole Opry, the Mills Corp.'s latest project is expected to attract 17 million visitors annually, according to the company.
Opry Mills and Stonebriar Centre incorporate many of the latest trends in retail development. In continuing the push away from traditional shopping venues to "shoppertainment" experiences, developers are creating destinations.
Mark Rivers, senior vice president and chief strategic officer with Mills Corp., says the response from the public easily confirms the company's strategy. While positioning Opry Mills as a tourist destination, Mills Corp. officials have found that "it's performing like a pretty remarkable shopping center," Rivers says. "We've had tremendous success. We think it will be in the top handful of sales productivity [centers] in our portfolio, even in our first year."
A greatof this success can be attributed to the strong demographics of the Nashville marketplace. But the company's marketing efforts also have contributed nicely.
"To our credit, we've been able to establish the balance between a dominant local retail presentation and an intriguing tourist destination," Rivers says.
The trend toward bigger and splashier entertainment centers has not crested and will continue. "You're either evolving the malls or the mall [concept] dies," says Millar. "If you look at the new malls that just opened - Flat Iron Crossing outside of Denver and Stonebriar in Dallas - they have an indoor and outdoor component to it. I think this is the next evolution of the mall, and one that is well received by the customer."
Indeed, in planning those new centers, developers have and should continue to seek and understand the messages that shoppers deliver daily with their feet. The most popular centers are those that feel like a social scene.
"That's just part of the constant refinement and the evolving nature of shopping malls," says Bucksbaum. "Customers tell you what they like and what they don't like, and you can play off of the cues they give you" to design your next center.
The NIMBY factor But planning and building that next center is itself becoming more of a challenge. The building boom of the past few years has again brought out the NIMBY (not in my backyard) contingent.
"Across the country, it's become more and more difficult to get entitlements," Zamias says. "The amount of regulation - local, county, state and federal - just continues to expand. It's as tough today, probably tougher, than it's ever been to get the right to build in most places."
During the recession and in its immediate aftermath, the hunger for jobs and sales tax dollars essentially marginalized the voice of those seeking to minimize retail and other forms of construction. But given the explosion in new development, growth control proponents are again gaining influence.
"In our case, it's very much our No. 1 concern," says Michael Goman, president of Farmington, Conn.-based Konover & Associates. "Unlike other concerns like Internet retailing, which is a little more abstract and harder to put your hands around, this issue of slow growth or no growth hits us when we go in to apply for a building permit or a zoning change. It's a real-world problem. The value of retail development is getting almost completely overlooked in a lot of situations."
The problem becomes especially acute in areas where land supply available for development is diminished. In the New England area, for example, the NIMBY attitude is exacerbated by the fact that a lot of the land is hilly or needs to be drained properly. "Sites are hard to find, but mainly it's because of topography, not because of density," Goman says.
Of course, the restriction on new development in some areas only enhances the value of existing retail developments, a point Alexander knows well. "As somebody who owns 20 million sq. ft. of retail space, I don't get too worried when they talk about restricting supply because it makes our existing properties more profitable," he says. "It also weeds out badly planned projects or badly run or financed companies."
This last point is especially comforting to investors. The restructuring of ownership in the past decade has given Wall Street a decidedly greater influence in the industry, which many real estate observers view as a disciplining hand in avoiding the excesses of past boom cycles.
"It's similar to the entitlement issue. Having some sanity to the financial side of things to me is a very good thing," says Alexander. "Money is available for well-conceived deals with real equity. It's not as plentiful as it was in the early '80s ... and it's not as tight as in the early '90s, when it was overly controlled. It's in good balance."
Alexander says investors continue to flock to centers that are anchored by drugstores and grocery stores, which in many respects are the "darlings of the investment sector." The restructuring and consolidation so evident in other retailing categories should not be as chaotic on this specific niche, Alexander says. "Everybody's got to eat," he adds.
One example of the calming influence of Wall Street has been the relatively dormant REIT sector, following a hectic acquisition binge that lasted for several years. Until recently, REIT stocks had been shunned, deflating their stock prices and making it difficult for them to acquire new properties in exchange for shares. That situation, however, looks to be changing, as REIT prices rebound to their net asset value (the value of the underlying real estate). That is expected to lead to another round of acquisitions.
Alexander hopes retailers and real estate developers will take to heart a bumper sticker that was commonly seen in Texas not too long ago. "It says, `God, please let there be another oil boom. I won't mess up this time,'" he says.
In retail, at least so far, it seems God and real estate investors are holding up their end of that bargain.
Holiday retail sales are expected to remain at a solid level and may even increase this year, according to a recent survey. The National Retail Federation (NRF), Washington, D.C., and Deloitte & Touche, New York, conducted their 15th annual "Consumer and Retailer Mood Survey: Retail Holiday Outlook" this fall. Both consumers and retailers participated in the survey.
Men expect to spend more money than they did last year, but 82% of consumers surveyed say they expect to spend the same as they did last year, if not more.
Among the findings: - Consumers expect to buy about 25 presents each;
- 83% of consumers will do some shopping at discount stores such as Wal-Mart and Kmart.
Internet spending is playing a bigger role this year.
- 17% will spend some time shopping online; those who buy expect to spend an average of $264 on online purchases;
- Among retailers, 45% are selling products on their Web sites; an additional 28% are using their Web sites to supply product information only.
Retailers responding to the survey say they expect a 4.5% increase in sales over last year's holiday season. Deloitte & Touche and the NRF predict a 5.5% to 6.5% increase in November and December sales over 1999 sales figures.