Last year the Simon Property Group celebrated the opening of The Shops at Mission Viejo, a project that entailed the redevelopment and expansion of Mission Viejo Mall in the Southern California community of Mission Viejo. When Simon gained control of the mall as part of its acquisition of The Edward J. DeBartolo Corp., the 20-year-old property was not so much outdated as "mislocated."
The shopping center reflected the tastes of the typical late 1970s middle-class suburban population for which it was built. The problem was the market had undergone a dramatic demographic shift in the succeeding decades, with long-term residents growing both older and more affluent as a result of professional advancement and new residents characterized by higher-level positions from the beginning of their careers.
"When Mission Viejo Mall was originally developed," remarks Art Spellmeyer, Simon's senior vice president for development, "there were still stretches of highway between Los Angeles and San Diego that were not developed. Today everything is filled in and what were up-and-coming areas then are matured areas now."
Like a large percentage of Americans, the populace had also grown more sophisticated. Where the typical residents at one time may have been the real-life equivalents of the Brady Bunch, by the late '90s they were closer in spirit to Gary and Val Ewing of Knots Landing. Most were well-educated, well-traveled and well aware of the best the world had to offer. Mission Viejo Mall, unfortunately, did not offer the best. Where residents would have preferred Nordstrom or Saks, they got Montgomery Ward.
"Time had clearly passed it by," Spellmeyer observes. "The design, the retailers, the merchandising mix, everything was out of character with the community as it is today."
At the same time, he points out, the location had become much more attractive economically. By 1999, the average household income for the surrounding area had topped $100,000 a year. "It's in a terrific location. There's tremendous residential growth, solid commercial development and income growth. You can hardly find a better location," says Spellmeyer.
In fact, he adds, in southern Orange County you literally can't find a better location because virtually every parcel of land is taken. "If you tried to find 60 acres at an intersection of Interstate-5 to build a shopping center on, it would be very hard to do. And here we had one already. We knew this was a diamond in the rough " he says.
The obvious decision, then, was to polish up that diamond and make it shine. Which is precisely what Simon opted to do.
Among the first steps was deciding which tenants to keep and which to ask to leave. The task was easier than it might seem, Spellmeyer says, because once word got around the mall was going to be redeveloped, a significant number of tenants chose to leave on their own, guessing they either would not be welcome in the upgraded environment or could not afford to pay the kind of rents charged in a shopping center targeted to a more sophisticated and affluent customer.
In the end, Simon kept 36 in-line tenants and two anchors, Macy's and Robinson-May, both of which committed to renovations of their stores. Macy's also committed to a 60,000 sq.ft. expansion. The other tenants, including Ward's, left.
Right off the bat, Spellmeyer recounts, the company began negotiating with Nordstrom to open a 165,000 sq.ft. store. When Simon had Nordstrom on board, it went after Saks, which agreed to open a 100,000 sq.ft. facility. Convincing the two higher-end department stores to sign on was not difficult. "We parlayed the location, then brought in the other key ingredients to take advantage of market demographics," he says.
The developer debated about the best way to renew the property, but according to Spellmeyer, the site limited expansion and construction possibilities. The fact that remaining tenants needed to stay open during construction imposed additional limitations about where and how to rebuild. Though the project planners considered Main Street and entertainment type options, in the end they decided to go with a fairly traditional approach.
There would be no internal streets and sidewalks, no movie theater and no flashy extravagances. The only shift from a conventional retail mix, says Spellmeyer, is the addition of a number of high-profile full-service restaurants.
According to the Simon executive, the key to the redevelopment was the decision to "blast through" the Ward's building, which was a separate structure, move it to adjoin the main mall building and rebuild the interior for shop space. The decision created 120,000 sq.ft. of additional shop space, the true bread and butter of all regional shopping centers. The transformation of the structure was so total, you would never know Montgomery Ward had ever been there, Spellmeyer remarks.
In addition to buying out Ward's, the developer bought one of two buildings at opposite ends of the mall owned by Robinsons-May. The retailer had been using the structure at the south end to house its furniture department. Simon took that over and is transforming it into a shop for Old Navy and an upper-level food court.
The developer commissioned architects Altoon & Porter of San Diego to redesign the center. Out went the "dark, earth-tone kind of energy-crunch" look that reflected the aesthetics (and economic realities) of 1979, the year the mall opened. In came the lighter, brighter and more sophisticated style typical of Southern California today.
Spellmeyer calls the end product, which is 100% leased, an example of "casual elegance" consistent with the lifestyle of Orange County: high-quality finishes and detailing in which customers would feel comfortable wearing designer labels, but a relaxed setting appropriate for the fact that much of the designer clothing would be resort wear.
The tenant roll repeats the same theme. On the one hand, you have Armani Exchange, DKNY, Brooks Bros., Williams-Sonoma, Z Gallerie and Restoration Hardware; on the other you find The Gap, Athlete's Foot and The Limited.
The entire project cost more than $160 million, expanded the center from 800,000 to 1.2 million sq.ft. and took 16 months to complete. Part of the cost was defrayed by the city's inclusion of the site in an official redevelopment zone, which gave Simon access to tax increment bond financing, which was used to build a parking deck. While issuance of such bonds for private projects is often controversial (albeit common), in this case, Spellmeyer emphasizes, the City of Mission Viejo was eager to help once officials felt confident the renovation matched their vision of improving the city.
"The city realized the tax base was eroding quickly. Revenues from the property had been sliding for several years. We were able to satisfy them that they were going to be better off if we developed the kind of property we told them we were going to," Spellmeyer relates. In the end, he adds, the project exceeded the city's expectations.
Simon held the grand opening of the renovation in September 1999 to coincide with the opening of Nordstrom, even though portions of the mall, including the Saks building, were not yet complete. The company estimates more than 500,000 customers visited the mall in the first 17 days of operation, despite the unfinished state. Since then, says Spellmeyer, traffic has remained high.
According to the Simon vice president, the developer has the option of adding about another 100,000 sq.ft. of GLA, but there are no immediate plans to take advantage of that option. He says the company wants to wait until everything is in place. The Old Navy and food court building is just being completed and construction on the last element of the renovation, a building for Coldwater Creek, will be finished soon after. Simon plans to give the project time to fulfill its potential before deciding on a future expansion.
Even though the project is already popular, Spellmeyer says it will still take time to fully change the shopping patterns of the surrounding community. Residents have been used to driving farther afield to locally based developer C.J. Segerstrom & Sons' two million sq. ft. South Coast Plaza and other higher-end shopping centers. Breaking them of that habit, he points out, requires patience.
In Spellmeyer's opinion, the project provides a significant cast study for dealing with poor-performing but well-located properties acquired as the result of a merger. "This was probably the most complicated and largest redevelopment we have done to date," he states. "It took all the departments that we have ae architecture, construction, leasing, marketing, management, development ae working in unison in order to keep the project open while we did a major overhaul. Everybody had to pull at the same time, and it was a lot of hard work."
So hard, in fact, that it must have been tempting not to tackle it in the first place. But tackle it Simon did, and in the end, Spellmeyer comments, the company is very pleased it took the leap. As he sums it up, "We were able to create a project you could never build from scratch. We took a property with serious problems and created a lot of value for our portfolio."