For seven frustrating years, Forest City California sat on one of the most attractive properties in urban retail real estate — the historic Emporium department store building on San Francisco's Union Square. The plan was always to turn the 1896 building into the city's first Bloomingdale's for Federated Department Stores, which owns the property. But because of political opposition, lawsuits and the near-collapse of the Bay Area economy, Forest City could not get the project off the ground.
Until it found a joint-venture partner right next door, that is. In February, Forest City announced a deal with Westfield America, owner of the San Francisco Shopping Centre just across the street, to create a 1.5 million-square-foot center by adding a new, bridge-like structure that links the Nordstrom-anchored mall with the Emporium building. It will be the biggest urban retail development west of the Mississippi. Pending approval by the city, the $380 million project could be completed in the summer of 2006.
What finally got the development unstuck was a change in ownership of the San Francisco Shopping Centre, which Westfield acquired after Rodamco's breakup last year. “We had been trying to arrange a deal with San Francisco Centre through a secession of potential partners, from Rodamco to Urban and finally to Westfield,” says Forest City Executive Vice President and COO David LaRue.
Westfield America, the Los Angeles-based unit of the Australian developer, has been aggressive in pursuing joint-venture deals. It partnered with Simon Property Group and Rouse to acquire Rodamco in 2002 and has joined Simon in a hostile bid for Taubman Centers.
In the Union Square deal, Westfield will put up an as-yet-undisclosed portion of the financing and, in return, will run the center. Under the plan, the two buildings would be connected on five levels of shopping. The Emporium building's 102-foot-wide glass-and-steel dome will be elevated to 54 feet, extending it above the existing roofline. Federated would continue to own the building (also known as 385 Market Street), but Forest City and Westfield would retain rights to manage and lease the redeveloped space.
Both REITs stand to reap benefits that neither could on its own. Forest City finally has the money it needs to break ground, and could see higher profits by spreading operational and management resources between the two properties. Also, Forest City can rely on Westfield, California's largest retail landlord, to use its leasing muscle to fill small shop space. For Westfield, the lucrative right to lease and manage the new center, which is expected to generate $500 million in annual sales, is quite a trophy.
Though Westfield is known for its branding practices, Westfield America Vice Chairman Richard Green says there are no plans to create a Westfield Shoppingtown San Francisco Shopping Centre. “But the branding will still be there,” he says. “As people walk through the center they'll know they're in a Westfield property.”
The merger of the two projects and the debut of San Francisco's first Bloomingdale's will trigger a tremendous boom in traffic for the Union Square district, says Sperry Van Ness senior advisor Kevin Chin. “Union Square is doing well in general, but there are a few dark buildings on the fringes,” he says. “The plan calls for good connections to the BART system, which will bring more suburbanites in for a city shopping experience.”
More Diversity
In addition to Bloomingdale's, the new San Francisco Centre will include 200 shops, a few restaurants and a nine-screen cinema, as well as office space atop the Emporium building. “We'll probably see some non-traditional Union Square tenants,” Chin says. “The area is pretty upscale and will stay that way, but we'll get a better representation of middle-of-the-road retailers.”
The only hurdle is the San Francisco Redevelopment Commission, which has final approval of the plans. But the renovation plans will not change the 385 Market Street building's landmark rotunda or its exterior architecture, which local preservationists have demanded. “The agency is reviewing the plans, and we don't expect any problems with going ahead,” LaRue says. Groundbreaking is scheduled for this fall.
How dose a deal of this magnitude get put together? Next month SCW interviews top brass for an inside look at the parntership.