Execs at publicly traded REITs dial Kemper Freeman Jr. with the annoying regularity of telemarketers. And they're about as likely to take “Thanks, but no thanks” for an answer.

Freeman's Bellevue Square, a 1.3 million-square-foot mall in Bellevue, Wash., serves as the centerpiece for a kind of Valhalla of retail demographics (the trade area includes Bill Gates' $53 million Pacific Northwest-style lodge). Thanks to swanky tenants like Tiffany & Co., cash-flush shopaholics from Microsoft and six decades of Freeman-family TLC, sales top $600 per square foot, compared with the national average of $341. “Bellevue Square hits the bull's-eye in terms of everything you look for in a shopping location,” says Norm Olsen, a senior investment adviser in Bellevue for Irvine, Calif.-based Sperry Van Ness.

Naturally, REIT execs salivate at the prospect of buying the place. “They've all tried,” says Freeman, whose father and grandfather opened the original mall in 1946. “They see it as a sugar coating for their portfolios.” Although Freeman vows not to sell, as a private owner of a top-tier mall he shares something in common with the local coho salmon. “Ours is a disappearing breed,” he says.

The REIT Shopping Spree

A recent analysis of 1,116 regional malls by Arlington, Va.-based Friedman, Billings, Ramsey & Co., shows that publicly traded REITs continue to acquire ever-larger shares of the nation's best properties. Of 599 class-A regional centers identified in the report, “The 2004 Mall Investors Handbook,” only 70 remain in private hands. The muscular mall REITs, writes the report's author Paul Morgan, own a disproportionate 73 percent of these properties, compared with just 34 percent of weaker malls.

Morgan predicts private ownership of top-tier centers could soon become a statistical anomaly. Mall REITs continue to gain important economies of scale, not only through sheer size, but also by landing marquee centers in major markets. “We want to own centers that are the most important shopping venues in the markets they serve,” explains Simon Property Group CFO Steve Sterrett, “and the increasing presence of Wal-Mart, Target, Kohl's — all the big boxes, discounters and category-killers — has led us to focus on upper-end, luxury-dominated malls.” Indeed, Morgan's report illustrates this shift in strategy: Simon now owns an industry-leading 98 malls classified as “strong,” as well as 30 of the author's “Top 100 malls in the United States.”

Although Sterrett agrees the overall number of privately owned, class-A malls is dwindling, he notes that 23 of Morgan's “Top 100” remain under private ownership. “So there are still a number of opportunities,” he says, “and you'll see more consolidation in our sector because, quite frankly, it's the one component of real estate where size, a national portfolio and leverage with tenants makes the most sense.”

In fact, a bidding war is currently under way for a cadre of fortress malls owned by General Motors Pension Trust. Among the malls on the block: Briarwood in Ann Arbor, Mich. and Stoneridge in suburban San Francisco. Taubman Centers, which holds the management contracts for the two malls, is rumored to be a bidder, as are Westfield, Simon, General Growth and a gaggle of other publicly traded companies. The pension trust isn't prepared to part with two of its other properties, however. GM is keeping two stellar malls: Columbus City Center in Ohio and Woodfield Mall in suburban Chicago.

Jewels in the Crown

Asked for an impromptu wish-list of privately owned malls, General Growth CEO John Bucksbaum quickly names South Coast Plaza in Costa Mesa, Calif., Fashion Island in Newport Beach, Calif., NorthPark Center in Dallas and, yes, the venerable Bellevue Square. Other widely coveted centers include Tysons Corner Center in McLean, Va. and The Somerset Collection in Troy, Mich.

So why aren't these plum properties plastered with Simon or General Growth logos? “It's a question of whether the seller is interested in putting them on the market,” Morgan says. Often, the answer to that question is a resounding no.

A quick glance at The Somerset Collection, owned by Southfield, Mich.-based The Forbes Co. and partner Frankel Associates, underscores why. Annual sales at the three-level, 1.4 million-square-foot mall approach $600 million; sales per square foot exceed $620; and trade-area household income averages a jaw-dropping $115,000. The mall's 180 retail shops and restaurants include St. John Boutique, Burberry, Tiffany & Co., Cartier, Gucci and Louis Vuitton. “We have the only Neiman Marcus, the only Saks Fifth Avenue and the only Nordstrom in the state of Michigan,” says Nathan Forbes, managing partner in The Forbes Co. and operator of The Somerset Collection.

Forbes says he occasionally receives buyout offers from public REITs, but always delivers the same message: “It's really not for sale.” If his stance were to change, however, Taubman Centers seems a likely suitor. The Bloomfield Hills, Mich.-based REIT owns four malls in the state: Twelve Oaks in Novi, Fairlane Town Center in Dearborn, Woodland in Grand Rapids and Great Lakes Crossing in Auburn Hills.

Nonetheless, The Somerset Collection faces scant competition, says Paul Kerber, a senior investment associate in Marcus & Millichap's Detroit office. “It you want a trophy, class-A property, it is the finest in our market and in the state, frankly,” says Kerber, whose neighbors in Grosse Pointe drive 45 minutes to shop at Somerset. “No other property here has the same caliber of retailers.”

Personal Touch

Conventional wisdom holds that smaller private owners face major disadvantages in the REIT-dominated world of leasing. And yet elite, privately owned properties like The Somerset Collection, Bellevue Square and South Coast Plaza enjoy exclusive arrangements with chic boutiques and national tenants alike. The list of luxury tenants exclusive to South Coast Plaza, for example, runs three full pages (the Segerstrom family's 2.8 million-square-foot mall in “the OC” boasts annual sales of more than $1 billion).

Bucksbaum says such private powerhouses are exceptions to the rule. “If you're a Bellevue Square or a South Coast Plaza, the retailers certainly will respond,” he says. “But when you step below that tier, it's harder. A retailer needing to open 60 locations in a given year can do 20 or 25 deals with a General Growth and then do 20 or 25 more with another large company. They can be so efficient.”

And increasingly, mall REITs can deliver multiple stores in the hottest growth markets. In fact, Morgan reports that in the 42 metropolitan U.S. markets with more than five regional malls, REITs now own 79 percent of the 224 strongest properties. In Boston, for example, Simon dominates with ownership of Southshore, Burlington, Copley Place and Northshore malls. “It's just a very effective business model for a tenant to be able to gain market penetration so efficiently,” Sterrett says.

Analysts and REIT execs say these efficiencies benefit shareholders, retailers and consumers alike, but some critics mourn the loss of the private owner's personal touch. Freeman says bulk-leased properties run from a distance by corporate headquarters respond more readily to Wall Street than to local shoppers. He bemoans homogenous, REIT-owned malls crammed with distracting ads and wall-to-wall carts and kiosks. “I am fearful of the REIT form of ownership,” he says. “I don't think Wall Street and real estate make a good marriage.”

Michael Beyard, a senior resident fellow at the Washington, D.C.-based Urban Land Institute, also sees a humdrum mix at upscale REIT-owned malls. “We talk about diversity and about not having cookie-cutter, formulaic centers,” Beyard says. “But at the high end they're pretty much the same.”

Jewels in the Crown

Private owners such as Freeman and Forbes set their centers apart by placing premiums on exclusive tenant lineups, eschewing sponsorship deals and banning carts and kiosks. The result may be elegant and profitable, but on the whole, analysts like Morgan still place their bets on the reinvestment capital, redevelopment expertise and leasing prowess of the REITs.

Family fortunes change, they note, and not all private owners are as committed as Freeman, who pestered execs at Ann Taylor for 14 years before convincing the retailer to open a store at Bellevue Square. The iconoclastic developer continues to insist Wall Street and Main Street are a mismatch. “You're hearing phrases like ‘the demalling of America’ and people are saying malls don't work anymore,” he says. “I think malls work better than ever, but if you're not running them right, they're no good.”

THE INDEPENDENTS

PRIVATE PARTS

Some privately owned malls are more in tune with their shoppers because they don't have to answer to Wall Street. Private owners offer more unique merchandising that keep customers coming back for an non-cookie-cutter experience.

PUBLIC DOMAIN

Large REITs, which usually own multiple properties in a city, can offer a national retailer a better and chesper chance to achieve market penetration.

THE REITS HAVE IT

Of the 599 class-A malls in the United States, only 70 remain in private hands. Mall REITs control 73 percent of these high-profile trophies.

COVETED CENTERS

Detroit's The Somerset Collection, Costa Mesa, Calif.'s South Coast Plaza, Seattle's Bellevue Square, Newport Beach, Calif.'s Fashion Island and Dallas' NorthPark Center rank at the top of privately owned malls the REITs would like to sink their teeth into.

THE TOP U.S. MALLS IN PRIVATE HANDS

Of the 100 most dominant malls in the country, 76 percent are REIT owned. Listed below are the most profitable trophy properties still owned by private companies, according to Friedman Billings Ramsey research.

MALL MSA OWNER TOTAL GLA (in millions of sq. Ft.) ANCHORS
Arden Fair Sacramento, CA Heitman Properties 1.1 Macy's, JCPenney, Nordstrom, Sears
Bellevue Square Seattle Freeman family 1.3 Nordstrom, Crate & Barrel, Bon-Macy's
Crossgates Mall Albany, NY The Pyramid Cos. 1.6 Dick's, Filene's, JCPenney, Lord & Taylor
Danbury Fair Mall New Haven, CT Wilmorite 1.3 Filene's, JCPenney, Lord & Taylor, Macy's
Palisades Center West Nyack, NY The Pyramid Cos. 1.854 Best Buy, Target, Lord & Taylor
Walden Galleria Buffalo, NY The Pyramid Cos. 1.762 Sears, Lord & Taylor, Kaufmann's
Hillsdale Shopping Center San Francisco Bohannan Development 1.3 Nordstrom, Macy's, Mervyn's, Sears
Northpark Center Dallas/Ft. Worth NorthPark Management 1.3 Dillard's, Foley's, Lord & Taylor
Oak Park Mall Kansas City Copaken, White & Blitt 1.57 Dillard's, JCPenney, Nordstrom
Rosedale Center Minn/St. Paul Lend Lease Real Estate 1.138 JCPenney, Marshall Field's, Mervyn's
South Coast Plaza Los Angeles Segerstrom family 2.8 Sears, Nordstrom, Robinsons-May
Southdale Center Minn/St. Paul Blackstone Group 1.3 JCPenney, Marshall Field's, Mervyn's
Stoneridge Mall San Francisco GM Pension Trust 1.3 Macy's, Nordstrom
The Galleria Dallas/Ft. Worth Hines 1.4 Macy's, Nordstrom, Saks Fifth Avenue
The Gardens Palm Beach Gardens, FL Forbes Co. 1.35 Bloomingdale's, Burdines-Macy's,
The Somerset Collection Detroit Forbes Co. 1.4 Neiman-Marcus, Saks Fifth Avenue
Triangle Town Center Raleigh, NC. RE Jacobs Group 1.4 Belk, Dillard's, Hecht's, Sears
Tysons Corner Center Washington, D.C. Wilmorite 2 Nordstrom, Bloomingdale's, Hecht's
Woodfield Chicago GM PensionTrust/Calpers 2.3 JCPenney, Marshall Field's, Lord & Taylor