A primary attraction of a shopping center is its dynamism. It is a place that pulses with activity, a place where people go to see and be seen, and a place that is the dominant destination for retail sales.
The shopping center industry itself is also engaged in the throes of dynamism. Every property warrants a continual reassessment of its role in its mark etplace. Shopping center owners want to know how their center can strengthen its position, or how it can react to what is happening across the street, across the city or on the Internet.
It seems most shopping center owners are looking toward the future while also looking over their shoulder. If you want to protect an asset in a good location, change is in order. The question is: What is the magnitude of change?
The challenges come from many fronts. The 1999 Lend Lease real estate investment report, "Emerging Trends in Real Estate," reports that 15% to 20% of regional malls existing in 1990 may be non-functional by 2000. The customer is demanding more personalized service and products reflective of who they are, or, at the very least, who they aspire to be. As a recent issue of American Demographics states, "There are no more homogenous groups."
Retail sales on the Internet are projected to reach $40 billion by 2002, representing about 15% of the total retail market. This is an alarming thought, considering that six years earlier it was not even an option.
While these trends may appear daunting, other factors are much more supportive of the industry. The U.S. personal consumption rate has grown almost 4% annually, from $1.76 billion in 1980 to $5.49 billion in 1997. According to the U.S. Bureau of Labor Statistics, spending on entertainment has grown at twice the rate of overall spending and faster than any other major industry segment expenditures in the past few years.
Reading these "tea leaves" gives only a partial and, at times, conflicting picture of the state of the shopping center industry. But they do capture the confusion and uncertainty in the market and the necessity to respond to change. Any criticism of the overall impact and success of the industry can be summed up in this saying from retired New York Yankees great Yogi Berra, referring to a popular restaurant of the time: "Nobody goes there anymore, it's too crowded!"
Standing apart from 'the rest' The reality is that many shopping centers are reinventing themselves in response to fundamental shifts in shopping patterns. First is the shift from being all things to all people to increasingly targeting the immediate shopper demographic and neighboring community. Second is a polarization of the shopping trip to be either one of necessity or one of pleasure. The shopping trip of necessity is served by value, convenience and selection, while a pleasure-inspired shopping visit is oriented around experience, lifestyle and entertainment.
To provide more customer-driven service and products, the shopping center industry is becoming increasingly fragmented around niche markets. This scenario is probably best illustrated by what occurred in Orange County, Calif. Ten years ago, there were three regional shopping centers - Santa Ana Main Place, The Mall at Orange and Anaheim Plaza - which together had saturated the market.
Then Santa Ana Main Place repositioned itself as the dominant fashion center by adding a Nordstrom store and undergoing a significant remodel and expansion. In 1996, Anaheim Plaza was completely reinvented as a power, value-oriented center.
Finally, last November, The Mall at Orange was razed to re-emerge as the new Mills entertainment concept, The Block at Orange. The original shopping center was completely demolished with the new outdoor, highway signage-induced version opening to critical acclaim.
Clearly it can be argued that two regional shopping centers vanished while a third was fortified. But the more interesting lesson is in the extreme reincarnation of the two specialty centers. It's not that the retailing goes away; it is resurrected in new forms. Though these centers are still competing in the same market, they are now trading on different shopping trips and experiences. Each center was able to build on the equity of its location and tradition as the market areas around them expanded and became more valuable.
While there are opportunities to develop new shopping centers, rehabilitating and/or expanding existing ones is clearly a significant trend in the industry. In fact, 74% of respondents to SCW's 1999 survey of shopping center executives report that they will renovate centers in their portfolios within the next year. Depending on the goal, a renovation can be as simple as reinvigorating a center, or it can be a major expansion and remodel to accommodate a re-tenanting or repositioning. Generally, the type and scale of a shopping center renovation falls into the four following categories:
The facelift The simplest renovation usually involves the upgrade of finishes, color, neutral piers, flooring, amenities and enhanced lighting, landscaping, and parking area resurfacing. The purpose is to breathe some fresh air into a center to offset customer erosion or complement the introduction of new tenants. Often, a new or reconfigured food court is included and upgrades are made. To go along with the facelift renovation, the identity and logo are often refined or replaced to reinforce the fresh look.
This renovation can range from $3 million to $6 million and can be accomplished in one year, usually targeted for completion in September or October.
The remodel The structural upgrade is most often associated with a significant re-tenanting, particularly with the roll-over of a new anchor or the expansion of an existing one. More recently, cinemas and lifestyle stores have sparked an interest in a major remodel. New ceilings, skylights, feature and service elevators, and new entrances are most often included in the remodel. However, a new roof, HVAC system and parking decks may be added. Main courts are often modified to allow for newly conceived promotional events and restaurants.
Cost of the remodel usually ranges from $5 million to $15 million. The significant remodel will often require a year of planning, approvals and permitting, with a nine-month window of construction taking place between January and October.
Expansion Expansion is usually associated with the introduction of a new department store, cinema or a combination of lifestyle and entertainment tenants. The major tenants may range from 100,000 sq. ft. to 250,000 sq. ft. and often necessitate the addition of smaller shops. In more built-up areas, parking decks are often included. Since most established centers have maximized their site in terms of parking, any significant addition will require a deck.
For example, the developer's intent for Scottsdale Fashion Square in Scottsdale, Ariz., was to attract a desirable first-in-the-region anchor to the center. The decision was to add 200,000 sq. ft. of new retail space, just enough to justify the costs involved in securing a new anchor. The design of this area was not only conceived to complement the existing center but also to accommodate the next improvement. By doing so, future renovation will be a modest, cosmetic upgrade rather than a structural one.
Expansion can also drive a makeover of the existing center to fit with the new construction. Construction costs can vary from $15 million to $50 million. The time frame, from negotiations to design to construction, can take three to five years. Negotiations with major anchors have been known to extend the process well beyond five years.
The tear-down In terms of design, certainly building new is easier. Renovation is more complex. But there are hidden costs in both tracks. Since tearing down and building new includes a demolition cost equivalent to about 7% of the project's total cost, the process is similar in cost with renovation, the more expensive option. The real question is, can you really afford to tear down? The hidden costs can be significant, including tenant leases with high buyouts, cost of relocating tenants during shutdown and loss of customer base.
These costs can be equal to or greater than the actual cost of construction. Many older centers have great equity in terms of location as cities have built themselves around the center. Yet they are underutilized.
Tearing down and building new rarely makes sense. It might happen, if you've tried all the design and construction scenarios and a contractor still says it's going to be easier to tear down, or, there is nothing in the existing project that will lead to new activity. But it is a last resort.
When you tear down, there will be no income for 18 months to two years. During that time, the customers will learn new shopping habits, and it's hard to get them back. Although it provides the greatest potential for change, demolishing all or part of a center can be a feasible solution only if the condition of high vacancy exists.
Build new: A focus on lifestyle/entertainment In SCW's industry survey, 67% of respondents reported that they plan to develop new centers in 1999. The difference from past years is scale. In the past, 2 million to 4 million sq. ft. centers were built from the ground up at major freeway intersections. Today, a large percentage of newly built centers tend to be smaller - 250,000 sq. ft. to 350,000 sq. ft. - located in infill areas. They'll probably have a bundle of specialty tenants and soft entertainment, such as cinemas and restaurants as well as services and lifestyle stores.
In scale, the community lifestyle center has emerged as a smaller, outdoor center offering a rich mix of generally upscale tenants incorporated into a village-like setting. The lifestyle center offers a pedestrian orientation, desirable public spaces, amenities and social activities.
Generally, community lifestyle centers are one-third to one-half the size of the 250,000 sq. ft. to 500,000 sq. ft. regional shopping centers. Usually located in the middle of growing, high-income suburban areas, the concept also offers specialty tenants (many of whom are concerned about rising CAM charges in malls), lower occupancy costs and a new avenue for expansion. They are likely to be unique in their presentation as a product of their setting, building on their community identity and assets, and offering a complement of community-oriented activities.
Similarly, the entertainment center has emerged in comparable size and scale, as in the example of the Irvine Spectrum Center. In the entertainment center, a multiplex cinema is usually dominant and there is a high percentage of restaurants, from 30% to 60% of total GLA. Parking can be an additional challenge, since these centers can demand twice the parking requirements of a traditional center.
Consumer taste for greater customization and personalization is challenging the established role of the regional shopping center. The resulting fragmentation is creating niche opportunities and differentiation with the marketplace. Existing centers must rethink their position, and sometimes are defensively forced into action. Whatever the motive, there is a wide range of choices, with each offering an abundance of creativity in the design response.