When the Village of Merrick Park opened last September in Coral Gables, a suburb of Miami, there were high expectations for the 770,000 sq. ft. retail component and the 110,000 sq. ft. office component of the $200 million, mixed-use Rouse Co. development.

Featuring such stellar names as Neiman Marcus, Nordstrom and Diane Von Furstenberg, the retail portion was positioned to challenge the Bal Harbour Shops, roughly 20 miles to the north. Bal Harbour was ranked last December as the most productive shopping center in the U.S. by Women's Wear Daily magazine based on its average sales per sq. ft. of $1,350.

But six months after opening, the retail component of Merrick Park is only 78% occupied and 90% leased, while the office space is only 75% leased. The original pro forma for the mall projected an 11.2% return on investment, but it is only yielding 7%, says David Fick, managing director of real estate research group Legg Mason Wood Walker in Baltimore. “When a company comes out of the box at a 7% return, and its best objective is 9% by 2006,” considering the cost of capital, it is losing money, he says.

Merrick Park has significant handicaps, says Fick, including its location, the economic fallout from 9/11, which happened during construction, and a significant downturn in Miami-Dade County tourism. The mall's site near several auto body shops, a public high school and a rapid transit line isn't befitting a development of its stature, says Fick.

To make up for this deficit, it was built “like a castle.” Its architecture faces inward, away from the surrounding neighborhood, Fick explains.

There is no comparison between the setting of the Bal Harbour Shops and Merrick Park. The former is ensconced in a ocean-side paradise with million-dollar condominiums framed by lush landscaping. The latter is surrounded by low-income housing and a luxury car dealership, among other neighbors.

But the demographics of Merrick Park are desirable in spite of its immediate surroundings, says Michael Finkel, managing director, FKS Realty Group, in Miami Beach. According to 2002 projections, nearly 450,000 people live within a five-mile radius of the development. And although the median household income for the area is only $45,000 to $50,000, “you have pockets of great wealth,” he explains. Coconut Grove, Key Biscayne and South Miami are some of the wealthiest enclaves in South Florida.

Retail rents at Merrick Park for non-anchor tenants are well below Rouse's projections. But just how much small stores are paying is hard to determine, says Finkel. The amount of tenant improvement allowances can offset high rents, he says. “The average projected base rent for non-anchor tenants, without pass-throughs, was $50 per sq. ft.,” says David Tripp, vice president of investor relations at the Rouse Co. in Columbia, Md. But those projections were pre-9/11, he says. After the tragedy, leasing dropped off and so did rental rates.

The 20-acre Merrick Park development also is having trouble as an office development. Prospects for a quick turnaround are not great, says Fick. As of fourth-quarter 2002, the Coral Gables submarket had a vacancy rate of 21.6%, while the Miami-Dade County rate was 18%, according to Cushman & Wakefield.