Almost from the moment that lifestyle centers emerged as a hot new trend in retail development, they have been branded as just another format fad that would soon fade away. But, if anything, there is more demand than ever for these projects, which are popular with the public and retailers alike.

“What really is driving these deals is the customers' love for them, which translates into higher sales for the retailers,” says Terry McEwen, president of Poag & McEwen Lifestyle Centers LLC, a pioneer in lifestyle center development based in Memphis, Tenn.

Poag & McEwen centers generate between $400 to $500 per sq. ft. in sales, which, combined with declining regional mall development, have ignited demand for lifestyle center locales. The average sales per sq. ft. for U.S. malls was $330 in 2002, according to the International Council of Shopping Centers (ICSC).

Retailers also are attracted to less expensive occupancy costs, thanks to lower common area maintenance (CAM) charges. Average CAM costs at lifestyle centers are around $6 per sq. ft. compared to CAM costs of $15 to $20 at premier regional malls, McEwen notes.

Key to the definition of the lifestyle center is an open-air design with upscale architecture and a critical mass of specialty retailers and restaurants such as J. Crew, Ann Taylor, Williams-Sonoma, P.F. Chang and Cheesecake Factory. “Under that definition, there are very few of those shopping centers in the country, and very few of those shopping centers being built,” McEwen says.

In fact, “true” lifestyle center construction is relatively modest. According to the ICSC, there are just 58 lifestyle centers in the U.S. — a drop in the bucket compared with the country's 1,182 regional malls. Nevertheless, construction has accelerated in recent years and continues to gain momentum. McEwen estimates that roughly 10 new lifestyle centers are being built per year.

Developers continue to jump on the lifestyle center bandwagon in pursuit of returns that, for successful centers, are slightly higher than what malls yield. Even top mall developers such as Simon Property Group are dedicating resources to the new formats, while scaling back on new enclosed-mall projects. According to research by U.S. Bancorp Piper Jaffray, in 2001 the average return on investment in the third year of operation of lifestyle centers is 60%, compared with 49% for malls.

Yet lifestyle centers are not without risk. Lifestyle centers are about twice as expensive to build as traditional strip centers and even more expensive per sq. ft. than regional malls. Construction costs range between $200 to $250 per sq. ft., McEwen notes.

Cousins Properties of Atlanta has enjoyed success with its lifestyle centers developed under “The Avenue” brand, but at least one project has proved to be a challenge. The Avenue of the Peninsula in affluent Rolling Hills Estates Calif., a redevelopment opened in 1999, initially struggled to attract a critical mass of shoppers due to intense competition. The 375,000 sq. ft. Avenue of the Peninsula is 88% leased as of March 31, still well below the 97% leasing rate for the company's overall retail portfolio.

There are a lot of developments that don't qualify as lifestyle centers and may not perform like the real thing. They have some of the trappings, but don't have the right mix of tenants to deliver lifestyle-level results. “There are a lot of people calling their projects lifestyle centers that are essentially strip centers,” McEwen says.

However, it's difficult to determine how many are too many. “Lifestyle centers are clearly over-marketed, but I think it is still a little too early to tell if the market is overheated,” says Michael McCarty, president of the community center division for Simon Property Group. “The key indication that the lifestyle center sector is becoming overheated is that properties will start failing. Thus far, I have not seen that happen.”

Yet the sector may be rapidly approaching its peak. “There are just not that many markets that need these lifestyle centers,” McCarty says. In Indianapolis for example, one 520,000 sq. ft. lifestyle center is proposed, and that project will likely saturate the market of 1.6 million people, he adds.

Another concern is that overeager developers will push into markets that do not have the affluent demographics to support lifestyle projects.

According to a recent ICSC survey, the average household income among five lifestyle center trade areas surveyed was $72,288 — nearly one-fourth higher than the overall U.S. average. “I expect that there will be developments that are borderline in their tenant mix and borderline in their demographics,” says Michael LaRue, president of LaRue Associates, a retail consulting firm in Deerfield, Ill., “and when those things occur, it will cause retailers to be more skeptical.”