For the past nine months, David Levenberg of General Growth Properties has focused on “hardening the targets” that make up the real estate investment trust (REIT)'s massive retail portfolio.

Like a number of his counterparts throughout the industry, the vice president of security and loss prevention at Chicago-based General Growth has sought to increase security at the company's properties in the wake of the September 11 terrorist attacks. A series of metal poles that both patrons and bikes can pass through but not vehicles have been installed at many malls. Hourly security sweeps seeking out-of-place or unusual packages have been implemented. Mall personnel have attended refresher training for bomb threats and other emergencies. The deadbolts on telephone and utility rooms have been changed and roof top access — already highly controlled — became even more restricted.

“We have implemented a variety of things in addition to our standard security programs,” says Levenberg. “We've done some physical changes such as erecting bollards at mall entrances to simple things like controlling parking at curbs and fire lanes to carefully checking the manifests of trucks that go into our loading locks. It's basic stuff. But we're also conscious of the fact that increased security cannot impact the day-to-day business of the mall.”

While Levenberg has been on the front line, his boss — John L. Bucksbaum, CEO of General Growth — has been preoccupied with a more pressing concern: the uncertainty over terrorism insurance. Property insurance costs were on the rise before September 11, but the attacks brought larger and faster increases — often doubling and tripling prices. At the same time, the attacks have brought terrorist coverage to the forefront as many loan and mortgage companies have begun to insist that owners have terrorism coverage. And there's the rub, says Bucksbaum.

“The retail real estate industry needs federal assistance,” he continued. “The president supports intervention by the government and that is encouraging. I'm hopeful that they will take action fairly soon.”

Nine months after the first attacks in the U. S., much has changed in the retail industry — including some that are not noticeable to the average shopper. Since terrorists destroyed New York City's World Trade Center and damaged the Pentagon in Washington, D. C., mall owners and operators have sought to balance increased security with the need for shoppers to go about their business. Changes large and small have taken place in the shopping center world with owners and operators spending millions of dollars to make it more difficult for terrorists — to say nothing of run of-the-mill criminals.

Jonathan Lusher, senior vice president at IPC International, a firm based in Bannockburn, Ill., that provides security for shopping centers, says mall owners and operators have “used their heads, not lost their heads. Shopping centers are not the same as other buildings with limited access and because they are so open, features used to limit access in other buildings cannot be used.”

Lusher, who works with retail real estate developers to develop security measures and to improve the public's perception of safety, says mall and shopping center owners have implemented a number of changes since September 11 including:

  • Prohibiting curbside parking. Unattended vehicles are being towed quickly; vehicles left overnight in parking lots are typically towed. Delivery people have been given updated and specialized delivery instructions to minimize risks.

  • Security teams are now performing hourly sweeps of properties on the lookout for unusual or out-of-place packages, or other items. Restricted areas such as utility rooms, mechanical rooms and roof hatches have been re-keyed and access now requires company and personal identification.

  • Increased coordination with local police, fire and civil defense authorities. Some owners, such as Westfield, are making center blueprints accessible to law enforcement and rescue personnel. Data such as photos of stores, sprinkler system maps and details of evacuation procedures have been put on the Internet. Owners and managers are also working with retailers to coordinate emergency plans so that if something does happen, everyone will be “reading off the same page.”

That's a good start, says Mary P. Hollins, principal at Hollins Risk Management Consulting of Seattle, Wash. Although the likelihood of a terrorist attack on a shopping center may seem remote, owners and operators now realize the vulnerability of public venues and the importance of emergency preparedness and risk-management programs, she adds.

“Safety concerns are now viewed as a joint effort, not just between mall owners and managers but also in conjunction with tenants, employees, vendors and patrons,” Hollins says. “ Communication is important. Involving tenants in the process, from creating awareness to providing opportunities for suggestions and feedback has promoted support for safety programs.”

What mall and shopping owners and operators haven't done is turn their properties into fortresses — and they don't have plans to do so in the future. Lusher stresses crime prevention through environmental design, a concept dubbed CPTED.

“We are unlikely to see huge, ugly concrete barriers in front of shopping centers, but we are making great strides in the number of shopping centers that are now being designed to be easier to secure, with fewer dead spots and better lighting. One of the lessons from the World Trade Center was that most people weren't killed upon impact; they died when the buildings collapsed. So we're looking to design the types of buildings that are more conscious of survivability — not of the building itself but the people in it.”

To minimize bioterrorism attacks, for instance, the retail real estate industry is looking at more stringent air quality standards. Fire prevention is also being upgraded. “We can't change entirely our system of operating shopping centers,” he says. “Airport security is good but you can still walk into any airport, theoretically carrying bombs or guns and no one detect it until you try to go to your gate. Israel has some of the finest systems in place anywhere and they still get hit by terrorist attacks. You can't close a country — or a mall — down.”

Thus retail owners continue to fine-tune their security plans. “We're in the final process of putting together a risk assessment, similar to the Homeland Security office's color- coded threat levels, so that if an incident occurs somewhere in the country and the U.S.'s threat level goes up, we have a certain level of procedures that correspond to that escalated warning,” says Levenberg of General Growth.

While preoccupied with shoppers' security, mall owners are also worried about terrorism insurance. Frank DeLucia, vice president of Kay Insurance Associates of New York — one of the 10 largest insurance brokers in the country — points out that September 11 has turned the property insurance industry upside down. “We just had a client, a New York developer, who was refinancing a shopping center and at the last minute the insurance company put a terrorism exclusion on the building, so we had to sell him a policy for terrorism that cost an extra $1 million,” says DeLucia. “He had no choice but to pay the extra $1 million. We know that is happening quite often now and the government knows it is a problem.”

DeLucia and others say the problem is that lenders fear potential terrorist targets. “They don't want to lend money if you have a terrorist exclusion because the bank is at risk,” says DeLucia. “God forbid something happens and they can't get paid. Now they feel there is more of a high risk with high-profile shopping centers and malls.”

In addition, lenders are seeking additional information about security procedures and personnel. “Before September 11, they didn't think it was that important,” he says. “Now, they're getting real strict and they're seeking 10 times more underlying information.”

In the past, buildings have been insured based on their value, but now some are also being insured according to their public identity or the public identity of their tenants since that affects their potential as terrorist targets.

New York City based-Moody's Investors Service, one of the two major debt-rating agencies, has developed a method to evaluate and categorize the risk that commercial properties face from terrorist attacks, dividing real estate assets into three tiers based on their profile. The most well-known and tallest structures fall into the top tier while most major super-regional malls fall into the second tier on the scale. The goal? To help insurers determine the cost of terrorism insurance.

In addition, Therese M. Vaughan, president of the National Association of Insurance Commissioners, notes that the industry is “seeing widespread use of terrorism exclusions — of clauses that exclude terrorism damage from coverage.”

Already this effect is being felt by the world's best-known retail facility, the Mall of America in Bloomington, Minn. In a behind-the-scenes battle that eventually spilled over into the public arena, Simon Property Group and GMAC Commercial Mortgage tussled over terrorism insurance, with the Indianapolis-based REIT eventually taking out two $100 million stand-alone policies — one to insure Mall of America against damage incurred from acts of terrorism and the second to insure the remainder of Simon's shopping center portfolio against similar perils.

According to industry officials, Simon says it could not find an insurer for a terrorism policy. GMAC objected, claiming Simon had violated the ‘all-risk’ insurance requirement, so GMAC bought a stand-alone $100 million policy and demanded repayment by the mall of the $750,000 premium. Simon balked and went to court. The new coverage ended the dispute.

Simon's CEO, David Simon, says the premium for the terrorism insurance coverage was “substantially less” than what GMAC sought from the owners of Mall of America — Simon, Teachers Insurance and Annuity Association and Triple Five Corp.

“It was extremely important that we secure coverage that would provide protection for our properties but not impose an unreasonable burden on our malls' tenants, many of whom are small business owners,” says Simon.

Congress has yet to pass a terrorism insurance bill but those in the industry are hoping it is passed before Congress adjourns. President George W. Bush has called for Congress to pass terrorism insurance legislation, citing the loss of jobs and transactions currently at risk from a lack of affordable comprehensive terrorism insurance.

In December, the House of Representatives passed legislation creating a federal backstop for insurance but the Senate has yet to act. “Congress needs to pass a terrorism insurance solution during the current session,” says Nelson C. Rising, chairman and CEO of San Francisco-based Catellus Development Corp.

DeLucia urges owners not to wait until the last minute to seek insurance.

“Shop early. Make sure you are dealing with a broker that handles shopping center accounts. Go to people who really specialize in the area and go to them early. Now people call up and want a quote because their broker came in with a triple premium increase with a terrorist exclusion and it's five days before renewal. Owners should check at least three months before their policies expire.

The retail real estate world has certainly changed in the nine months since terrorists attacked New York and Washington. Changes are still being felt and will continue to be. Terrorism insurance is expected to become an even greater concern in the months ahead, as those in the real estate industry look to Congress to help solve the problem.

In ways large and small, ostentatious and invisible, the way real estate developers and retailers go about their business has been altered forever.

Mike Sheridan is a Houston-based financial writer.