No Demand, No Land for More Malls
By Neil Irwin
Washington Post, February 2, 2003
Last week, workers began ripping apart the old Hechinger's
building on Wisconsin Avenue in Northwest Washington, beginning
a long-awaited transformation of the site into gleaming
new big-box retail.
Also last week, in conference rooms in Indiana, executives
of giant mall owner Simon Property Group plotted a hostile
takeover of Michigan mall owner Taubman Centers Inc., an
acquisition that would give the combined companies control
of seven Washington area malls.
Designers are trying to figure out how to turn Fox Chase,
a shabby looking strip shopping center in Alexandria into
a modern place to shop.
All were isolated developments in the retail world. But
taken together they illustrate what retail experts and mall
developers say is a fundamental reconsideration of where
Americans will shop in the years ahead.
For decades, retail development has been pretty simple.
Developers built strip shopping centers, of various sizes,
to accommodate small groceries and other stores. Bigger
versions of those shopping centers, known as "power
centers" in industry lingo, were built for stores such
as Wal-Mart, Target or Home Depot. Bigger still were regional
malls, with anchor department stores on the ends and food
courts in their middles.
Developers and the retailers they serve are increasingly
concluding, though, that so many shopping centers dot the
suburban landscape that the market is saturated. Consumers
can only buy so much stuff and retailers need only so much
space in which to put it. Where the population is underserved,
there is no the land available to build. So much retail
development has occurred, especially since 1990, that to
do much more of it would lead to a kind of cannibalization.
"The bottom line is we have enough malls and shopping
centers, and the only ones to get built will be because
of geographic shifts of population or newer formats that
make sense," said David M. Fick, an analyst who follows
the retail real estate industry for Legg Mason.
How do retail developers grow if they cannot build new shopping
centers?
In the Washington area, the answer has been a renewed emphasis
on urban retail, consolidation of mall owners and renovation
of rundown properties.
By many measures, the market for retail real estate is strong
in the Washington area. High-quality malls and shopping
centers fetched record prices when they were sold last year.
Local vacancy rates rose to 4.8 percent in 2002, from 3.3
percent in 2001, according to research firm Delta Associates,
but are still well below those in most other cities.
But other research from Delta offers some idea of how saturated
with retail the Washington area is. Delta says there are
23 square feet of retail space in the Washington area for
every resident, compared with the 17-square-foot national
average, although some people familiar with the local market
say the space is justified by the high incomes of people
here.
Malls may be the biggest losers in the competition, analysts
say. There has been extensive mall construction over the
past 20 years, even as a consumers have shifted their buying
from department stores to "big box" retailers
such as Wal-Mart. Meanwhile, new shopping options such as
"lifestyle centers," or outdoor shopping plazas,
have been built, and growing numbers of people shop using
catalogs and the Internet.
Mall builders such as Rouse Co. of Columbia and Mills Corp.
of Arlington see few signs of demand for more mall space.
"New malls are simply cannibalizing older properties,"
said John C. Melaniphy III, a Chicago-based retail consultant.
"We've seen it all over the country, where the newer
mall is built on the interstate, and it's brand new and
shiny and has the latest tenants, and it tends to displace
sales that were at the older center."
Fick said: "The bottom line is we have enough malls,
and the only ones to get built now will be because of geographic
shifts of population or newer formats."
Shopping centers like Landover Mall, without high-end tenants
and strong traffic, are nearly empty. As a result, mall
developers are focusing less on new construction and more
on increasing profits by consolidating, squeezing operating
costs and negotiating with national retailers.
Simon Property's attempted takeover of Taubman, which is
being resisted, is the latest example. If the two companies
were to merge they would be the dominant mall landlord in
the Washington area. Taubman owns Lakeforest Mall in Gaithersburg,
Marley Station in Anne Arundel County, and Fair Oaks in
Fairfax County. Simon owns half of Fashion Centre at Pentagon
City, and all of Bowie Town Center, Forest Village Park
Mall in Forestville, and St. Charles Towne Center in Waldorf.
Roadside Development in Washington plans to turn the former
Hechinger's building in Tenleytown into a complex to include
the District's first Best Buy electronics store and a Container
Store, with about 200 apartments on top.
"Retailers have done their expansions through the suburban
market," said Roadside Development principal Richard
Lake. "It's not dead, but there's only so much retail
you can put out there and wait for the population to catch
up to it."
The Tenleytown project will be expensive and time consuming,
Lake said, but will fill a market need that is absent in
the suburbs. The same thinking is behind construction of
a Home Depot in Northeast Washington and plans for a Target
in Columbia Heights.
"What a delight it will be to never ever drive to Rockville
again" to shop, D.C. Council member Kathy Patterson
(D-Ward 3) said at a ceremony last week as work began on
the Tenleytown project.
In the suburbs the glut of conventional retail space is
driving landlords to renovate older properties. Given so
many choices, retailers will logically choose the nicest,
they reason.
"There's a real flight to quality going on," said
John Germano, who heads the Washington office of Insignia
ESG, a brokerage with a large retail operation.
Edmund B. Cronin Jr., chairman of Washington Real Estate
Investment Trust, has focused on buying rundown strip malls
in the Washington suburbs and transforming them into higher-end
properties, rather than building new shopping centers.
"These older centers have been bypassed with all the
new buildings in the outer suburbs," Cronin said..
"They were allowed to deteriorate, so we're coming
back and revitalizing those."
The Fox Chase shopping center, which Cronin's firm plans
to renovate in the next year or two, is a prime example.
It has a Giant Food grocery store and a movie theater, and
is well-located, but hasn't been changed substantially in
decades. Cronin plans to tear down part of it and rebuild,
then tie in the rest of the center to make it look like
one continuous complex.
As others have, Cronin notes the relative affluence of the
D.C. shopper. It's true, said Fick, the Legg Mason analyst.
"D.C. is the healthiest market in the U.S. for most
commercial property types," Fick said. "And it
should remain a robust market, as long as there's nobody
building more malls."
Neil Irwin writes about commercial real estate and economic
development every week in Washington Business. His e-mail
address is irwinn@washpost.com.
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