At the beginning of this decade the nation's largest shopping center owners were in a race to pump up their portfolios, acquiring assets at a breathtaking pace. In the past year, however, the buyout binge has been halted at most major companies that have turned instead to investing in their existing properties. They're practicing retail “densification,” a buzzword for building more product above and around shopping centers they already own.

This new style of development often involves multiple uses. Old regional malls and neighborhood centers and strip centers are being refashioned as town centers with owners adding restaurants, offices, condos and hotels as they erect fresh mosaics of non-retail tenants supplementing department and specialty stores.

General Growth Properties saw its retail holdings shrink 1% in 2006 to 178 million sq. ft., according to this year's survey of shopping center owners. The Chicago-based REIT has practically turned its back on the acquisition market as capitalization rates on shopping centers have often fallen below 7%. “A lot of consolidation in malls has already taken place by now,” says Robert Michaels, president and chief operating officer of General Growth. “With cap rates so low, it's difficult to acquire properties today and have them make sense as an investment.”

Moving outside its comfort zone

General Growth is placing its bets on development and redevelopment. The company will unveil in September its rehabbed Natick Mall in suburban Boston. It's been enlarged from 1.1 to 1.6 million sq. ft. with the addition of Nordstrom and Neiman Marcus as new department store anchors alongside a half-dozen or more restaurants.

Above the stores, the company is building 210 condos. A hotel is being readied for the next phase. All of this construction is occurring within the original footprint of the shopping center, and General Growth is managing the project without enlisting the help of hotel or residential specialists.

“We hadn't done any residential in many years,” says Michaels of General Growth. “Densification will become a very important part of our redevelopment efforts at existing centers. The idea is to bring more people to these shopping destinations.”

In Houston, CBL & Associates Properties is in the middle of work on Pearland Town Center, a 1.2 million sq. ft. mixed-use facility that will feature a lifestyle center with 300 apartments, 50,000 sq. ft. of offices and a Courtyard by Marriott hotel, all placed above the stores. Marriott has never built a Courtyard above retail stores in the suburbs before.

What do you call Pearland? “A town center is the best name I know of,” says Stephen Lebovitz, president of CBL in Chattanooga, Tenn., ranked No. 7 in the survey with 72.2 million sq. ft. in its portfolio. “Retail remains the primary component, the glue that holds everything together. But we're adding other uses to broaden the attraction for the consumer. We're building vertical to take better advantage of our infrastructure. This is a new format for Marriott,” says Lebovitz.

A few years ago major big-box retailers such as Home Depot and Wal-Mart began putting up two-story branch stores in inner-city neighborhoods where space was at a premium. Now, the idea is spreading to the suburbs, too. Edens & Avant LLP of Columbia, S.C., which has a portfolio of 16.4 million sq. ft. of retail, recently broke ground on its 193,000 sq. ft. Shoppes at Page Pointe in Stoughton, Mass., a Boston suburb, which will feature a rare two-story Target format.

A decade ago Edens & Avant accomplished 80% of its growth via acquisition. Today the company's growth is two-thirds focused on development. “To get the best returns today, you develop yourself,” says CEO Terry Brown. Or you redevelop, he adds. Edens & Avant is demalling its 241,000 sq. ft. enclosed Norwichtown Mall in Norwich, Conn., and giving it lifestyle center features. “It was an underutilized piece of real estate,” Brown says.

Consolidation still a force

That's not to say M&A activity has ceased. In February, a unit of the Inland Real Estate Group of Cos. in Oak Brook, Ill., sold 36 million sq. ft. across 328 properties to Developers Diversified Realty of Beachwood, Ohio, for $6.2 billion.

George Pandaleon, president of Inland Institutional Capital Partners, says the assets were tied up in a fund started in 1999. Investors in the fund received annual dividends of 8.3%, and the selling price was a 40% profit on the average purchase price of investors' shares in the fund.

Inland, which once financed most of its own deals, often pursues joint venture partners. In June, the company invested $250 million in Lauth Group Inc., a developer of commercial property.

Inland has long coveted a means to develop new assets without the need to erect a development division, says Pandaleon. Earlier, Inland announced a joint venture fund of $1 billion with Morgan Stanley Real Estate.