More goodfor California came via the state Employ- ment Development Depart-ment (EDD) in mid-August. The governmental agency reported that the state jobless rate had dropped to 5.6 percent, the lowest in eight years, and down from 6.2 percent in July 1997.
Combining to post job gains of 380,000 over the same period last year were the following industry divisions: construction, manufacturing, transportation and public utilities, wholesale and retail trade, the finance, insurance and real estate groups, as well as services and government, the EDD re-ports. On a percentage growth basis, employment in construction continues to show the strongest job growth, up by 9.9 percent, or an increase of 55,000 jobs over last year.
It was against that backdrop that the staff of SCW recently hosted a roundtable breakfast at the Four Seasons Hotel in Newport Beach. Eight industry experts participated in the discussion, which focused on overall retail trends, infrastructure, the public markets, and the burgeoning field of entertainment retailing. An edited transcript follows.
SCW: Tom, according to local news reports, Orange County alone will add 45,000 new jobs this year. Does that translate locally into more good times ahead for the industry, or is there a bear lurking in the woods?
Tom Schriber: Obviously, when you have job growth, that translates to sales. That bodes well for retail in general. In most markets, Orange County probably being the same, we're overstored. We're over-retailed in most segments, whether it's neighborhood shopping centers, community centers or regional malls. Those that manage the best can make adjustments - as Macerich is doing in Huntington Beach - to create a new product that the consumer is looking for. Others will fail. They will continue to see shopping centers, particularly the neighborhood business, go through transformations.
At most major intersections in Orange County, you will find three or four shopping centers. Are they all viable? Right now I'd suspect that one out of the three or four are viable. The others will be recycled or changed into something else.
If the economy goes well for Orange County, then the job growth is tremendous. I can assure you that the pay scale that workers are coming in at is high, so they have disposable income. Housing prices may be the only governor in Orange County. They have gone up 10 percent, 15 percent, 20 percent already in this last year.
SCW: You've been in this business 30 years. Does this economy differ in any way from previous dips and peaks?
Schriber: I think so because the industries are so diverse. We are adding a different kind of industry to Orange County than before, and as a result I think you will have a diverse economy that can withstand more of the cycles. We are doing the right thing in our county as far as the infrastructure. If you have been on any of the roads in Orange County, it is unbelievable. Everything is under construction, or so it seems. The major freeways are under construction, interchanges are being done, particularly through the city of Anaheim, which is going to do well for central Orange County.
SCW: Rick, your thoughts?
Frederick Evans: In all areas of our real estate business in Irvine we are hitting on AAA numbers right now. Everything is AAA. We just closed our fiscal year for last year. We had the largest year we have ever had in the history of this company. We expect to exceed that this year. The thing that we think is driving it is job growth, as you mentioned in the beginning.
The question in our mind is how long this job growth can be sustainable. We have not been able to find either one economist or a series of economists who could agree on what the ripple effect of the Asian crisis is going to be at this point.
My thesis has to do with segmentation of certain things. There is a segment of Orange County that I call the 55 freeway or Newport Boulevard. When you look at that particular roadway, you see some big distinctions. One is that San Diego is an all-planned community, one with gate-garden communities, very high-quality planning. On the L.A. side, it is traditional urban sprawl that has developed over the years.
Another distinction is that about 10 percent of the available developable land is on the L.A. side of that particular line, and 90 percent of the remaining developable land is on the San Diego side of that line. All the growth in Orange County now is going to occur on the San Diego side of the 55 basically.
We also have the largest introduction of roadway systems ever to hit Orange County in a short period of time. In five years we will have added about 45 miles of new freeway-style roadway systems. They are tollways, but they are freeway style-roadway systems. That will have a huge impact. It affects the economy and jobs dramatically.
SCW: Rick, you stated before today's meeting that property management will take on a heightened role as we move forward. Please explain.
Evans: This time of the year is when I always do salary surveys to find out what is happening in different places. In comparing salary surveys over the past three years, I've noticed that we have had a moderating factor in demand for development jobs and an increasing factor for the demand of management jobs.
The biggest problem we have in this business is good people in management roles who want to be in those roles. For so many years we were paying on the high side for development, financing (professionals). We were paying on the low side for operations and management people. Those are the people who are going to sustain all these properties out there. I don't want towith coming back into that property in five years and finding out that nobody is paying any attention to the merchants, or the sales, or all those things that are very fundamental principles to this business.
SCW: Terry, Burnham Pacific Properties is the largest REIT in the western United States. Is it possible to overstate the importance of management?
Terrence Tallen: It is critical, and I completely agree with Rick, especially with so many properties where you are looking to add value into redevelopments, which are a number of our properties right now. To have management people who are on top of these issues so we can react quickly when a deal comes before us is critical. The issues include the interrelations between the covenants and restrictions of the shopping center, the anchor-tenant leases, how those documents control what you want to do going forward, the ability certain tenants have to preclude other tenants from coming into the shopping center, areas you can or cannot build in ... There is so much right-sizing going on right now with a number of anchor tenants. We see so many tenants that were 8,000 sq. ft. three years ago, now they're 15,000 sq. ft., or they were 17,000 sq. ft and now they're 30,000 sq. ft. There is a lot of this right-sizing and positioning going forward with this good economy. Now we all know that the consumer retail confidence index is the highest it has been in 29 years. Most retailers will try to take advantage of that. To be able to react quickly enough to seize that opportunity is very important.
SCW: Terry, assess the performance of the retail REITs this past year.
Tallen: We think we are doing very well. We realize that most REITs have been challenged to make their numbers for a variety of reasons. The climate for new acquisition is extremely competitive, so you may not use the same economic models for your returns as you did in the past because there is a desire to build mass and to build profitable mass.
We have determined that to be successful, geographic diversification is also important. If one area of the country is going through a mild recession at one particular point in time, then we are able to balance out the portfolio by having successful properties in other areas. We are very excited about our entry into the Denver market.
The relationship with CalPERS is very important to us because we do have quite a bit of capital to go out and work on large pools of assets. Most properties we are looking at now are in pools of 20 or 30 assets. When you do that you are inheriting a lot of staff, a lot of opportunity. To work through those processes is very important.
SCW: John, you are involved in the redevelopment of several regional retail entertainment complexes. Can you expound on that?
John Genovese: We look at entertainment as a piece of the overall puzzle. So the projects that we are looking at today, like our mall in Buena Ventura, doesn't have a theater as part of it because with what we are trying to do there it just doesn't make sense. But in our project in Huntington Beach, we are going to put in a large multi-screen complex with Edwards Theatres. You really have got to look at each particular asset. Although we buy and are in the market to acquire shopping centers, Macerich has been known throughout its history as a redeveloper.
SCW: How much when you redevelop is instinctive vs. research?
Genovese: It's a combination of the two. I would say it's probably more instinctive. Our company has been in business since 1965. We know a lot of markets throughout the country. Probably 50 percent of our properties are in California, but we are in 17 states. Our acquisitions group constantly talks with owners of shopping centers and institutional owners throughout the country.
Schriber: John, how much is coming from internal growth as opposed to acquisitions?
Genovese: A majority of our growth is going to be through internal, through redevelopment. We are constantly buying shopping centers. We are not out there buying them just because we need to grow and we are a public company. Where we see an opportunity, we are going to buy something. If you look at Macerich's history, a lot of our shopping centers or acquisitions are single elements.
Schriber: You have not been penalized in the stock market to the degree some others have, even though redevelopment takes an extended period of time to really get the benefits from it. It's kind of interesting how the stock market, or the analysts, look at Macerich and don't penalize the company, giving it the time to reposition these things to get the capital back, which really comes to the bottom line. Macerich is unique in the business. A lot of companies, for example Burnham Pacific, which was really small in size, have bulked up. Their mandate apparently has been to bulk up.
Genovese: Part of it is getting the word out to investors and the financial community what we are doing. Our CEO has said that we are looking at spending probably $100 million a year for the next four or five years on development. But it takes time. Some of these projects take years.
SCW: Shifting gears, Bill Gerrity, why is there so much interest in owning grocery-anchored neighborhood centers?
Gerrity: It provides basic goods and services that can't be replaced. I guess you can shop for groceries on the Internet. It provides basic services that everybody needs. The successful grocery center, almost by definition, is going to be the location. I think people want to own them because of the perception of security, the stability that it is not populated by retailers who are trendy. A certain percentage of space in any grocery-anchored center is going to be shifting around as we have trends, but the basic anchor tenants and some of the other key tenants are going to be there. They are going to succeed and prosper day in and day out regardless of the economic issue.
SCW: Now we have grocery store chains buying others in California. What is the net effect of that trend?
Gerrity: There doesn't seem to be any more change or volatility than there has been. It's always been pretty dynamic in Southern California, throughout California. From a buying perspective, we really evaluate the location of the grocery site more than we do the grocer because of the assumption that the grocery itself might change. So the question we ask is: "If this grocery ceases to operate, will the site be attractive to another grocer?"
The grocers are by and large the healthiest they've been since I've been in the industry.
Financially, their balance sheets are stronger. They are operating with more discipline.
SCW: Are the grocers modernizing their stores?
Gerrity: I would say that there is a tremendous demand by all the grocers to reposition their stores and to look for infill trade areas.
SCW: Because the grocery is competing with restaurants nowadays, right?
Gerrity: Absolutely, yes.
Schriber: You've got to look at the real estate first for reuse, anticipatory that something is going to happen here, that you are going to lose your market sooner or later or something is going to change, if you are going to be a long-term holder of these assets. I think the consolidation is not over. I know we know it is not over, it is going to happen again, real soon.
Evans: I would like to say something about the grocery store business because we are really a community developer. It makes us shudder every time we see a consolidation. We went from one day where we had five Ralphs grocery stores to today where we have 10 Ralphs stores out of 23 neighborhood centers. That's a tough thing for our communities to take, especially if none of them are really Ralphs' shoppers. We miss the diversity.
SCW: Randy, what does your research tell us today about what consumers want in their regional shopping center?
Randall Smith: I don't know if it has really changed that much over time. We position our centers for the mass-oriented customer, but obviously we all know the percentage of our customers used to be the woman customer in the regional mall. And that woman customer today is working, she is a professional, and therefore our shopping visits - basically there will be fewer of them. But we have to try to entice our shoppers to stay in the mall as long as possible, and that is a function of how pleasant and safe the environment can be.
Our whole marketing program and our entire differentiation revolves around customer service. Time is very important to customers today. Serving their family with the greatest of shopping ease is very important. We are competing with the Internet, we are competing with power centers, strip centers, neighborhood centers. There is just a lot of competition, and from a research standpoint our trade areas are pretty much what they were 10 years ago. They are pretty much a 10-mile radius and a 20-minute driving time. Our customers are still very interested in fashion. They really aren't that interested in electronic shopping when it comes to fashion goods. They like to compare, they like to try it on, they like to touch the goods, they also like the socialization of shopping. It is still entertainment in itself.
SCW: It's as though not much has changed when you put it that way.
Smith: You are right. There are demographics that you mention that have changed. For example, the customers in Southern California are very diverse. We have a center seven miles from the Mexican border called Plaza Bonita. It is important to understand the Spanish customer. Our manager has to be able to speak Spanish and relate to the community. They have larger families, so leasing is much more oriented toward children's stores, children's ready to wear, children's shoes. All of our events are very family-oriented. We have large kids clubs that relate to that particular community.
You really have to position your center to each market, whether it is an ethnically diverse customer or whether it's senior citizens. We really like our teenagers because they are all working, they all have unbelievable amounts of disposable income, and they still live at home. They also like to hang out at the mall.
SCW: Are you seeing any unique retailers coming into your centers that you were not seeing five years ago. Any type of niches?
Smith: Entertainment is an interesting anchor for a regional shopping center. We repositioned a center in San Diego, Mission Valley Center, where we added a 20-screen AMC movie theater. Because of that, which brought us 2 million people the first year, Junior Seau, the San Diego Charger football player, built a family/sports restaurant and bar. Wolfgang Puck brought in a new cafe. So you can see all of a sudden that entertainment is food-oriented. All of a sudden there is a large sporting goods store. You can see how the tenant mix is changing because of the entertainment aspect.
SCW: Rosalind, any compelling trends in retail that you care to enlighten us about?
Rosalind Jonas Schurgin: I agree with Randy that trade areas have not changed very much. If anything, our trade areas are condensing. They are smaller, they are not larger. The major reason is that most retailers are just locating in sites that are closer together. Plus, I think that the consumer does not want to travel very far for his or her shopping or entertainment experience. It is forcing the industry to retool the product they have to make sure they are creating a niche that really fits the community.
Trends that are occurring right now suddenly are entertainment-based retail. That's a very broad term in itself. All retailers are becoming entertainment based. The customers expect more entertainment, more stimulation going into any type of store. I look at the interiors of retailers and how they merchandise now as compared to how they did a few years ago. And everyone, even the power tenants, are becoming more cognizant that they have to have more interactivity, more compelling reasons to get consumers into their stores. It is more the need to provide more service, more stimulation to get that spendable dollar.
The economy being so strong as it is in California has pushed a tremendous amount of disposable-dollar-type retail in entertainment concepts: the movie theaters, the related uses that go along with the movie theaters, restaurants, video arcades. It is the hard-earned consumer spendable dollar that everyone is after, which is great, and it is working. I question in the long term how many of these types of centers can be built if they are not part of a shopping center, where it's just purely an entertainment center.
Tallen: I completely agree with you that developing a sense of community within your shopping centers is important, especially where there is an entertainment component. Now in a smaller market it may be the Starbucks, or the communal gathering place, which is very important. We are redeveloping an exciting project in Freemont, Calif., called Freemont Hub, where we are literally taking a 700,000 sq. ft. shopping center, putting a road right through the middle of it to open it up to pedestrians, as well as the killer traffic, and we are merchandising with a variety of shops on the interior.
SCW: Sam, we're starting to see Taco Bell crop up in gas stations. Is this the prototype of the 1990s?
Sam Marasco: The secular trend that we have to recognize in the western U.S. is the urbanization that is occurring. Most of us have enjoyed a very horizontal lifestyle, wide-open spaces, very typical of what the West was all about. Those of us in the shopping center business have to spend more time in the eastern U.S. and more time in Europe because those trends are coming.
We talk about entertainment. Well, the department stores of New York were the first entertainment. You got off the dusty streets and as you walked in there was a piano player, there was a fashion model, and they took you into a whole new paradigm. They allowed you to escape some of the drudgeries of life. I think somewhere in the '70s and '80s we started to divide everything up into very strict formulas, and we went away from the more humanistic side of the business because of the western United States experience.
You go to Connecticut, they don't experience what we experience out here in terms of this massification of merchandising and retailing and shopping centers. It has been great business for all of us providing this product, but what is happening that we all recognize is that as we do urbanize, our geographical range becomes less. Things have to become more adaptable. We developers have to start to blur the very lines that we spent the last 20 years starting to understand.
We could define a difference between a neighborhood center, a community center, a specialty center, power center, a regional center, a superregional center, and we could probably memorize the definition of each. All we are doing now is mixing them all up, blurring the line. You have to be much more creative, much more adaptable. That is what the retailers are trying to do. So to answer your question about Taco Bell and gas stations and Burger King and gas stations, it's just the merchant trying to figure out a way to get his product to market to sell more goods. There are going to be a lot of experiments.
SCW: Sam, you've been quoted as saying that "shopping centers are important focal points of life and bring value to their communities." How is the industry faring on that front?
Marasco: We are doing a lot better. This blurring of the lines is going to bring back the developer into the prestige that he or she once possessed. Somewhere along the '70s and '80s, when we went into that power center mode, we lost that connectivity between the consumer and the provider of goods. I think there has to be an intimacy there.
Schurgin: In the East, the residential is a lot different from the West. In the East we have people who live in cities and walk to work. In the West, we don't have that, and therefore we have a disparity of the type of retail environment we want to create and the real proximity of people to use them. I think that the trend will be that in the West developers will become more mixed-use developers as most East Coast developers are.
SCW: Rosalind, is there a concern that we have too many megaplexes cropping up, which could then glut the market?
Schurgin: I hear from all of the major movie theater chains that they are concerned about the amount of competition, yet I see more and more entertainment centers being proposed, bigger and greater. As far as the number of screens, there has to be a concern. There can't possibly be enough people to see all the movies that could be run on all of the screens that we have in Southern California.
Smith: Part of it is the movie product itself. By having six screens of the 20-screen theater show Titanic or the next Batman movie, you know your window of opportunity is two to three weeks and you have to try maximize that market and reach the public, you need those extra screens.
Schurgin: It is neat that you can go and see a movie anytime day or night. But there is definitely an over-saturation of screens as a consensus. What do you do with the reusing? I know some movie exhibitors are looking at art movie houses, but that is very niche retail and there is only a very, very small appreciation for true art movies in urban areas.
SCW: Have any of you looked at branding your shopping centers so that consumers can go from city to city and have the same kind of experience? Westfield has branded its centers in Australia with great success.
Genovese: We have a mission statement, and we want to make sure with all of our properties that we have a standard level of operation in things that we expect to have for our customers and for our employees. We are trying to get that kind of image - if you want to call it a brand - across all of our properties, so people will know that this is a Macerich property.
Smith: The reason that was successful, and almost by accident, is that Australia is different from the United States. It is very urban, even though it is as large as the continental United States. Eighteen million people live in a very small coastal area, basically in Sydney and Melbourne. What happened is that even though we have over 50 percent of the market share of the entire continent, all the centers are in those major metropolitan areas. Therefore, when it comes to the economies of scale to advertise, especially on network TV, we were able to advertise all of our centers at one time, which you can't do in America.
Evans: In our particular case, we had thought about it (branding) a couple of times but not very often because we want to be part of the community that a project is in. If it is a particular neighborhood center and it is in Woodbridge, for example, we want that to be Woodbridge's place, not the Irvine Co.'s place. Our attitude has been to make those things secular geographically and to stand alone geographically as much as possible.
* Frederick Evans, president of Irvine Retail Properties Co., Newport Beach
* John M. Genovese, senior vice president, director of real estate, The Macerich Co., Santa Monica
* William Gerrity, president and CEO, GMS Realty LLC, Carlsbad
* Samuel Marasco, president, LandGrant Development, San Diego
* Thomas Schriber, president of Donahue Schriber, Newport Beach
* Rosalind Jonas Schurgin, vice president,The Festival Cos., Santa Monica
* Randall Smith, executive vice president of marketing, Westfield Corp. Inc., Los Angeles
* Terrence Tallen, vice presi- dent and executive director of leasing, Burnham Pacific Properties Inc., San Francisco office