After decades of consolidation, it has come to this: The mall industry is dominated by two gigantic companies, Simon Property Group and General Growth Properties. Indianapolis-based Simon, which controls 203 million square feet of retail space in 175 malls, 67 community centers and four mixed-use projects, has long been the No. 1 mall REIT. But with its $12.6 billion acquisition of The Rouse Co., Chicago-based General Growth is suddenly a very close second — operating 209 malls totaling 180 million square feet. The next biggest U.S. retail REIT, Developers Diversified Realty, is about half the size.

There's more than bragging rights — or the family honor of two dynastic corporations — at stake as these mega-REITs face off. Increasingly, it will be these two companies that shape the retail real estate industry. Where they build, what they buy and which tenants they choose to deal with will determine what lesser developers can do — and, perhaps, which national retailers will thrive. They will have the power to make or break retailers and, in many places, determine where new development occurs and where it does not.

“It's brutal,” says Mark Lichtman, one of the founders of the Bos Group, which has run up against General Growth as a competitor for retailers in Rogers, Ark., near Wal-Mart's headquarters in Bentonville. He has already signed up many tenants, however, and expects to be David to General Growth's Goliath.

General Growth acknowledges that its new heft gives it greater leverage with retailers. CEO John Bucksbaum says that the company now expects to get at least 50 percent of any national retailer's store expansion program. “We don't control 50 percent of the space,” he concedes, but he believes that the REIT is in the position to demand a disproportionate share of new leases. “A primary reason for building the national platform from which we operate is that we're in a national business,” says Bucksbaum. “We're dealing with national retailers.”

Not all developers are afraid of the duo in the mall business. “I don't think that the General Growth/Rouse deal will dramatically change the landscape,” says Stephen Lebovitz president of Chattanooga, Tenn.-based CBL Properties Inc, which ranked sixth on Retail Traffic's list of retail real estate owners. Lebovitz, whose company owns 70 primarily middle-market malls mostly in the Southeast and Midwest, views the Rouse acquisition as just one more in the string of acquisitions that will occur as the maturing mall industry rationalizes and consolidates. “I do think, however, that for General Growth it's a watershed transaction and takes them to a new level.” (See how smaller REITs feel about the challenge, starting on page 104.)

Fomenting Dissent

Even before it swallowed the 37-center Rouse portfolio, General Growth was accused of using strong-arm tactics, including intimidating retailers who were considering opening shops in competing centers. Last year, Los Angeles-based developer Rick Caruso of Caruso Affiliated, sued General Growth after, he says, the giant REIT helped create the community opposition to his attempt to build a $264.2 million lifestyle center across from General Growth's Glendale Galleria. While that suit is still in the courts, Caruso spent millions of dollars fighting the developer who tried to stop the project, ultimately forcing the city to hold a special election to decide its fate. Caruso won by a narrow margin and his Glendale project, Americana at Brand, is under construction.

“We strongly believe they are violating anti-trust laws, and I think we have a good suit,” says Caruso. “We have strong evidence of them calling retailers and telling them if they went into our center, they wouldn't be allowed to go into other General Growth properties where they wanted to be. This is bad for the industry, and bad for business.”

Bucksbaum, interviewed before Caruso, wasn't available to comment on these claims at press time. In the past, the company has had no comment.

In a similar situation, Taubman Centers accuses Simon of derailing its plans to add a new upscale center in New York's Long Island, one of the most affluent areas in the nation. Simon owns four malls on Long Island including the sprawling Roosevelt Field project. Taubman's project is stalled as it continues to fight litigation from community dissenters, who it alleges were incited and supported by Simon.

It remains to be seen exactly how the two giants will behave differently, but it is clear that they have dealt themselves what poker players call a “nut hand” — an unbeatable combination of assets, resources and relationships. Together, they dominate other public and private retail owners and developers. In addition to their sheer size — they control 20 percent of all the malls in the nation — they have the highest concentration of Class A fortress malls, well-established regional centers like The Galleria in Houston. As the name implies, such properties have virtually unassailable positions in their markets.

Going From B to A

This is not the kind of turf that General Growth has always held. “General Growth for a long time had mostly a class B portfolio,” says REIT analyst Lou Taylor of Deutsche Bank. “With the acquisition of Rouse and some other assets they've brought that into a more even mix of As, Bs and some Cs,” he says.

Officially, the arrival of General Growth in Simon's class is no big deal, say Simon executives.

“Being big is important today, but whether you're first versus second is irrelevant,” says Michael McCarty, president of Simon's community center division.

Still, no No. 2 has ever come this close. “No one ever thought they would see the day when there are two owners that own more than 200 malls each,” says Greg Maloney, CEO of Jones Lang LaSalle Retail.

In many respects, the companies are similar. Both were family run businesses that became REITs in the 1990s. Both are headed by scions of the founding entrepreneurs (John Bucksbaum is the son of Matthew Bucksbaum and Simon Properties CEO David Simon is the son of Melvin Simon). Both families still hold major chunks of their companies.

Culturally, however, the companies couldn't be less alike. Simon is known for being more introverted, while General Growth is more extroverted. Industry players joke about the idiosyncrasies of both Simon and General Growth, which reflect the personalities of David Simon and John Bucksbaum. David Simon rarely gives interviews, leaving executives like McCarty to represent the company in public. Even Wall Street analysts say they have trouble getting anything from the tight-lipped leader. Bucksbaum, on the other hand, is generally available and even chatty.

Although both companies downplay their rivalry, industry watchers say there is no love lost between the clans. “Everybody knows that they don't like one another,” notes one industry player who didn't want to be identified. “But I don't think either one goes out of the way to antagonize the other.”

That may be harder to do in the future. In the past they could keep away from each other, but now they are of such a size that they are competing in the same markets more and more.

In Las Vegas, for example, the companies have dueling properties on the Las Vegas strip. General Growth acquired the Grand Canal Shoppes at the Venetian last year. Its $900-plus in sales per square foot figures are second only to the $1,400 that Simon is pulling down a few doors away at the Forum Shops at Caesars Palace. Both properties have an abundance of luxury retailers and target the same high-end shopper.

In Austin, Texas, General Growth has started to encroach on Simon's turf, thanks to the Rouse deal. Rouse owned Highland Mall, one of the oldest malls in the city. Simon has been the undisputed leader in the capitol region, owning two of the three regional malls: Barton Creek Square and Lakeline Mall. And it operates the only lifestyle centers in the city: Arboretum at Great Hills and Gateway Shopping Centers.

When rumors began circulating that General Growth planned to expands its presence in Austin by developing a project on the West Side of town, Simon made moves to strengthen its grip. In addition to developing Wolf Ranch, a 750,000-square-foot open-air center in Georgetown, a suburb of Austin, it also has announced that it will participate in the development of The Domain, a 750,000-square-foot open-air center set on 50 acres formerly occupied by IBM Corp. Moreover, in a southern suburb, Buda, Simon is in predevelopment for Buda Town Center, another lifestyle center. And Simon's outlet arm, Chelsea, is developing Round Rock Premium Outlets, a 430,000-square-foot outlet center in the northern suburb of Round Rock where Dell Inc. is based.

Rodamco Battle

The highest-profile run-in between General Growth and Simon began in late 2001 when General Growth came close to nailing a deal to acquire Netherlands-based Rodamco North America N.V. The deal was so close, in fact, that General Growth refinanced its main line of credit and sold 9.2 million shares of company stock to Lehman Brothers Inc. to raise $344.5 million in cash. But Simon came in at the last minute, along with Westfield America Trust and The Rouse Co., and trumped General Growth's bid. After a legal battle in Dutch courts, the joint venture divided up Rodamco's assets in a $5.3 billion buyout.

General Growth emerged from the fight with a bruised reputation (several analysts criticized company management for misplaying its hand). But its second-place finish in the Rodamco race sent it on a vigorous buying spree that lasted for the next three years. Using the cash it had earmarked for Rodamco, General Growth completed two big acquisitions in 2002: JP Realty for $1.1 billion and Hawaii-based Victoria Ward Ltd. for $250 million. General Growth kept the spree going through a series of one-off deals, including whoppers like its $766 million acquisition of the Grand Canal Shoppes. The company was able to top it all off with the record $12.6 billion Rouse deal, made all the more sweet by the fact that Rouse was one of the companies that had taken a piece of the Rodamco deal.

Now that the Rouse has turned General Growth into Simon's most powerful rival, smaller developers are less interested in the effect it will have on the No. 1 than the presence of two giants will have on the market. “Through mergers and acquisitions, REITs have gotten tremendous influence and power with retailers and the whole industry,” says developer Caruso. Whether that's good for competition or good for the industry overall, “just depends on how they want to use it,” he says.

Caruso's claims have yet to be heard, much less proved, in court. But the mere presence of giants like Simon and General Growth in many markets puts smaller developers on the defense. That's why many have turned to retail consultants or third-party management firms like Jones Lang LaSalle or Chicago-based Urban Retail Properties Inc. to help them go toe-to-toe with the big boys.

One example is Fort Smith, Ark.-based Nelson and Beatty Co. LLP. It's developing a $300 million “Main Street” retail project in Rogers, Ark., where it has partnered with Urban Retail Properties. Work on Centre Pointe at Pleasant Grove, which will include 350,000 square feet of retail, 70,000 square feet of commercial space, a hotel and more than 180 residential condominiums, is scheduled to begin this summer.

Centre Pointe at Pleasant Grove competes directly with Pinnacle Hills Promenade, a $100 million, 980,000-square-foot project being developed by General Growth and its partner, The Pinnacle Group. The project will feature 106 acres of dining, entertainment, office and recreation center that includes a 155,000-square-foot, two-level Dillard's. The project is expected to open in Spring 2006.

“Smaller developers and owners need the relationships that guys like a Jones Lang or an Urban provide,” says one industry leader. “Mostly though, they just need someone who can stand up to the big guys.”

On the other hand, even as many industry players attest to having seen signs of Simon and General Growth throwing their weight around, there are questions about how effective they have been. “They try to leverage their size in a lot of different areas, but how successful they are is a question,” says Maloney.

A retail broker, who asks not to be identified, says that Bucksbaum's claim that he has the muscle to demand half of all new leases is wishful thinking. “That's ridiculous,” he says. “Which retailers is he talking about? And how can [General Growth] make that happen when some retailers don't want to be in malls, period?”

Indeed, says Richard Moore, real estate analyst for KeyBanc Capital Markets, “I'm not sure that Simon and General Growth being as big as they are really matters to the other guys.”

The folks who are in a position to tell — the retailers — are mum on the subject, for obvious reasons. Retailers contacted by Retail Traffic for this story, declined to comment. “When you ask retailers about it, most of them laugh it off, but there is an element of truth about the so-called packaging of deals,” says an industry expert who specializes in retail tenant representation. “It's widely known that Simon and General Growth, and every mall owner for that matter, has some bad assets in their portfolio. So they dangle the carrot of being in a great mall like Ala Moana Center or The Forum Shops and tell them they can have the space they want as long as they take the space in the turd buckets too.”

In fact, the two mall giants have reached a position of maximum power when their bread-and-butter properties — regional malls — are facing maximum challenges. The department stores that anchor these centers are under siege and continue to consolidate. The retailers are feeling a bit squeezed. “They can't afford to be leveraged anymore,” Maloney asserts. To cut their costs, they and other retailers have made the decision to go off-mall, muting the power of the mall landlords to dictate terms.

The list of mall defectors includes Sears, which helped develop dozens of malls, but whose new management is betting heavily on a new off-mall format to take on the discounters. Meanwhile JCPenney, in announcing its strategic plan for 2005, told investors that it will grow the chain “without dependence on new mall development.” It expects to have 22 off-mall stores by the end of this year and says that there is potential for up to 200.

As both companies add to their portfolios, the way they do business must change, especially internally, Maloney says. “Trying to manage that many malls and trying to do it the same way that it's always been done is going to strain any company,” he asserts.

Competing Cultures

Nonetheless, McCarty says that Simon maintains its entrepreneurial nature, where individuals are given opportunities to take risks and are rewarded for their successes while being held accountable for their failures. “The strength of the family-run business remains in place today,” he says, but notes that “you're not going to see the mission statement splattered across the front door.”

In contrast, General Growth widely shares its vision, “People Creating Special Places & Experiences” and mission statement, both internally and externally. Bucksbaum says that customer satisfaction, individual development and corporate integrity are top priorities. “We hope [our vision and mission statements] give a clear indication of the kind of people that we are and the type of company that we operate here,” he says.

Currently, Bucksbaum is focused on getting his arms around the Rouse assets, as well as paying down and restructuring the burdensome debt taken on to make the acquisition. According to Moore, the debt burden is the biggest challenge confronting the REIT. “General Growth has really stuck its neck out with this Rouse acquisition,” he says. “They're terrific properties, but it's dangerous, and they haven't taken the necessary steps to correct that.”

General Growth has, however, made significant progress in its plan to reduce its floating-rate loans, including setting up $2 billion of fixed-rate replacements last year. And many analysts feel the company will achieve its goal of restructuring its balance sheet in the next couple of years.

Still, it's a good thing Bucksbaum says another big acquisition isn't in the cards. He contends that redeveloping the Rouse properties will keep him busy. “That will receive tremendous emphasis,” he says. “Most of these properties have not received much redevelopment, so there's a tremendous amount of that.”

Moreover, Rouse's acquisition also brought General Growth into the community development business. “That's a fascinating and very profitable business that few companies in the U.S. do well,” Taylor says. Now, General Growth owns several master-planned communities including: The Woodlands and Bridgelands outside of Houston; Summerlin, in suburban Las Vegas; and Columbia, Md.

General Growth has taken steps to make sure that it benefits from the community development business. The REIT recently hired Thomas J. D'Alesandro IV to oversee its master-planned community development portfolio. Specifically, he focuses on evaluating redevelopment potential when there is an opportunity to transform a General Growth retail center into a mixed-use property. D'Alesandro joined General Growth from The Woodlands, a 27,000-acre master-planned community, where he spent two years as CEO of The Woodlands Development Co.

In addition to redevelopment and community development, General Growth's recent expansion has allowed it to more effectively sell access to its common areas to national brands. Bucksbaum reports that the REIT has tapped the growing business, cementing deals with American Express, Pepsi, Fox Movie Studios and others. “Size has contributed to giving us those opportunities,” he says.

Bucksbaum also acknowledges the importance of international growth. “You're seeing more globalization with foreign retailers entering the U.S. and U.S. retailers going abroad,” he says. “For the same reason our platform is beneficial here in the U.S, for domestic retailers, our belief is that we can provide similar opportunities to international retailers and, going forward, to establish opportunities abroad.”

Simon is growing outside of the United States, largely due to its 2004 acquisition of Chelsea Property Holding Inc. for $3.6 billion. “When they bought Chelsea, they bought not only a company with outstanding earnings growth, they also bought an international presence,” Moore says. “And international is going to be important.” Chelsea has projects in Japan, Mexico, and as a result of a joint venture in April, in South Korea.

Chelsea's management, which stayed on through the acquisition, will also beef up Simon's team, Moore notes. “You put the two together and you have great properties, including some international, great management and a conservative balance sheet compared to General Growth,” he says.

On the homefront, Simon wants to bring a mixed-use element to its existing properties and new developments. The REIT rolled out a strategy that is a critical component of its asset intensification program. Dubbed Version 5.0, it focuses on adding hotel, office and other uses to Simon's retail properties, McCarty says.

The REIT's new St. John's Town Center in Jacksonville, Fla., is a Version 5.0 prototype. “If you look at the five or six properties we have under construction right now, every one of them has one if not two other real estate uses being combined with retail,” McCarty points out.

Both Simon and General Growth have been up front about their overall growth objectives. But, there are doubts in the industry about their future expansion. “We all wonder how much bigger they can get before they take their eye off the ball,” Maloney says. “It's a huge challenge to manage that size of a group effectively.”

In the meantime, the pot keeps getting richer, and in the high stakes game of mall ownership, neither Simon nor General Growth is bluffing, and it's unlikely that either will fold.
With reporting by Patricia Kirk and Mark Henricks.

Who Will Be No. 3?

Developers Diversified Realty Corp.

Credentials: Developers Diversified's portfolio contains 107 million square feet of space, ranking it as the third-largest owner of retail property in the country. Through a series of joint ventures with Macquarie Bank, Kuwait Finance House, Coventry Real Estate Fund and Prudential Real Estate Investors, it has enormous access to capital. It has used these relationships adeptly to build its portfolio from 35.7 million square feet at the end of 1999 to its current level.

Drawbacks: It is the dominant force in community centers and has done some mixed use, but it doesn't own regional malls, so is it really in the same league as Simon and General Growth? It doesn't target the same tenants. So even if the firm grows to the same size as the two giants, it would likely be on a different playing field.

How They Got Here: General Growth Properties Inc.
The Bucksbaum brothers — Martin and Matthew — expand their family grocery operation by building Town and Country Center in Cedar Rapids, Iowa, one of the first Midwest shopping centers. 195
The Bucksbaums, now owners of five properties, become majority stockholders in General Management Corp. They exchange the stock for shares in a REIT called General Growth Properties. They form General Growth Cos. to plan, develop and manage the REIT's assets. 196
GGP is listed on the New York Stock Exchange. 197
General Growth sells 19 malls with 8 million square feet of space to Equitable for $800 million — at the time, the largest single real estate transaction in U.S. history. The REIT is liquidated, but General Growth Management Inc., the management arm of General Growth Cos. — continues as a third-party management business. 198
General Growth buys The Center Cos., making it the fourth largest owner of malls. However, it ranks as the second-largest manager of mall properties. 198
General Growth goes public for the second time. It raises about $220 million through its IPO. At the time, its ownership portfolio had dwindled to 21 malls, but it manages 75 centers. 199
With Westfield Holdings, General Growth Properties acquires CenterMark Properties in a $1 billion deal. General Growth puts up $200 million for a 40 percent ownership stake. 199
General Growth sells its interests in the Centermark portfolio to Westfield in two transactions. In turn, it goes on with four investment partners to buy Homart Development Co. from Sears, Roebuck and Co. in a $1.85 billion deal, setting a new record. It sells off 12 million square feet of community centers in a $500 million deal with Developers Diversified Corp. General Growth moves its corporate headquarters from Des Moines to Chicago. 199
General Growth acquires General Growth Management Inc., integrating its ownership and management arms into a single entity. It also continues acquiring malls, mostly in one-off deals. 199
General Growth goes on a buying spree. In a few months it acquires the U.S.-assets of MEPC, a U.K.-based firm for $871 million. It also buys a portfolio from Prime Property Inc. in a $625 million deal. In September, the acquisition of four malls in Louisiana and Florida push its owned portfolio to more than 100 million square feet. 199
John Bucksbuam becomes the company's CEO, succeeding his father, Matthew Bucksbaum. 199
General Growth comes close to acquiring Netherlands-based Rodamco North America, before a consortium of Westfield Holdings, Simon Property Group and The Rouse Co. sweep in with a $5.3 billion bid. Later in the year General Growth acquires JP Realty. It also buys Hawaii-based Victoria Ward Limited for $250 million. 200
General Growth buys The Grand Canal Shoppes at the Venetian casino in Las Vegas for $766 million. It once again sets a record for the largest real estate acquisition, this time with the $12.6 billion purchase of The Rouse Co. At the end of the year, General Growth's owns more than 200 regional malls with a combined 180 million square feet of space. Its managed portfolio stands at 200 million square feet. 200
Source: General Growth Properties Inc.

Who Will Be No. 3?

Westfield Group

Credentials: Westfield is the fifth-largest owner of regional malls with a portfolio of 63 million square feet of U.S. assets. It is part of a global operation worth $32 billion with 108 million square feet of properties. As an Australia-based firm, it has benefited from the decline of the U.S. dollar and has a cheap cost of capital.

Drawbacks: Since the end of 1998, Westfield's U.S. portfolio has barely moved up going from 60.8 million square feet to 63 million square feet. In the same time, Simon has grown its portfolio by about 67 million square feet while General Growth has added almost 109 million square feet.

How They Got Here: Simon Property Group
Three Brooklyn-born brothers, Melvin, Herbert and Fred Simon start Melvin Simon & Associates with the aim of developing and owning Midwest shopping centers. Later that year they open their first property: Southgate Plaza in Bloomington, Ind. 196
The company opens its first enclosed mall, the University Mall in Fort Collins, Colo. 196
Melvin Simon & Associates opens two of the country's most unique retail properties. With Triple 5, it opens the 5 million-square-foot Mall of America. With Gordon Group, it opens The Forum Shops at Caesars, considered the highest-grossing retail property in the country. 199
Simon Property Group is formed through the then-largest REIT IPO in U.S. history. It sells 37.75 million shares, generating $840 million in cash. 199
In March, Simon announces a merger with DeBartolo Realty Corp. worth $3 billion, giving the re-christened Simon Debartolo Group Inc. more than 110 million square feet of retail space. 199
Simon Debartolo forms an alliance with Chelsea Property Group to develop and acquire upscale outlet centers with 500,000 or more square feet. 199
Simon acquires Corporate Property Investors for $5.8 billion. The deal makes the newly named Simon Property Group two-and-a-half times larger than its nearest competitor. After the deal, the firm's portfolio contains 222 retail properties and 8 office buildings containing 175 million square feet. 199
Simon acquires 14 regional malls through a joint venture with JP Morgan Investment Management's Strategic Property Fund, New York State Teachers Retirement System and Teachers Insurance and Annuity Association. 199
Simon Business Network is established as a separate business -to-business division, with the largest on-the-ground service network alliance focusing on shopping centers and retail chain stores. 200
With two institutional partners, Simon acquires a 34 percent stake in European Retail Enterprises B.V. to pursue development in Europe. It eventually opens five malls in Poland and three in France. 200
In a joint venture partnership with The Rouse Co. and Westfield America Trust, Simon jointly acquires the real estate assets of Rodamco North America N.V. in a $5.3 billion deal. Also, Simon is added to the S&P 500 Index, the fourth REIT in the index. 200
In June, Simon increases its ownership in Kravco Investments, a Philadelphia-based owner of seven regional malls, to 80 percent and Kravco Co., its affiliated property management company, to 50 percent for a total of $300 million. One month later Simon forms a joint venture with Rinascente Group. Gallerie Commerciali Italia S.p.A. is created for the ownership, management and development of shopping malls in Italy. 200
Simon Property Group acquires Chelsea Property Group in a transaction valued at $3.5 billion. At the end of the year, Simon's owned portfolio stands at 203 million square feet while its managed portfolio is 212.62 million square feet. 200
Source: Simon Property Group Inc.

Who Will Be No. 3?

Macerich Co.

Credentials: The Santa Monica, Calif. firm commands a portfolio of 65.3 million. Last year it emerged as the surprise winner in the sweepstakes for Wilmorite Properties' $2.3 billion portfolio. The deal came at a time when Macerich was being mentioned as a potential acquisition target. Instead, it has emerged as an acquirer. It also won big in 2002 when it bought Westcor Realty LP for $1.5 billion.

Drawbacks: Unlike most of the other candidates for no. 3, Macerich has yet to explore overseas opportunities. The Wilmorite deal also came with an expiration date. The firm has the option to purchase back five of the malls at a later date.

Who Will Be No. 3?

CBL & Associates Properties

Credentials: CBL has elevated itself from being a regional player with B properties in secondary markets to being one of the big boys. It first entered the top 10 on the Retail Traffic ownership list in 2000. Since then it has more than doubled its portfolio from 34.9 million square feet to 71.4 million square feet.

Drawbacks: Its portfolio is dominated by second-tier malls and second-tier markets. It has carved a successful niche specializing in those assets. But as a result, it doesn't have the same high profile as the other REITs its size. It also has not made any move to go international.

Who Will Be No. 3?

Mills Corp.

Credentials: Mills entered the top 10 of Retail Traffic's Top 75 Owners list for the first time this year. It now has a portfolio of 47 million square feet. Mills has successfully diversified from its entertainment megamall focus to become an owner of regional malls. It also has been a pioneer internationally and has invested in Spain, Italy and Scotland. It is not afraid of doing new things, as evidenced by the 5-million-square-foot Xanadu Meadowlands project now under construction.

Drawbacks: Mills is still a relative newcomer to owning regional malls and they make up only a percentage of its overall portfolio. With a lot of money tied up in development, Mills may not be as aggressive an acquirer in coming years.

Who Will Be No. 3?

Taubman Centers

Credentials: Taubman's portfolio is one of the most highly-regarded in the business and is loaded with grade A properties. It boasts the highest sales-per-square-foot marks of any REIT making it an annual cash cow.

Drawbacks: Taubman is much smaller than the other contenders with a portfolio containing just 23.6 million square feet. It is mentioned more often as an acquisition target than an acquirer, though its successful defeat of Simon's hostile bid has quelled some of that talk. It also took a hit last year when General Motors Pension Trust sold nine malls Taubman had developed and still managed to Mills Corp.