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DEVELOPERS PREDICT DELAYED OPENINGS, STABLE OCCUPANCY

By Debra Hazel

CBL is sprucing up its Hickory Hollow Mall in Nashville, Tenn., this year.

The recession and a cutback in retailers’ expansion programs have delayed some project openings, major mall developers say, but many of their plans for this year nevertheless remain on track, and they predict stable occupancy rates.

Unlike the last recession in the early 1990s, few in the industry were surprised by, or unprepared for, the cutbacks. And even the Sept. 11 attacks in New York City and Washington, D.C., only accelerated an already established economic decline, said James Sullivan, REIT analyst with New York City-based Prudential Securities.

“What has been problematic all year, has only gotten more intense,” he said. Moreover, this recession will not last as long as the last one, predicted Christopher J. Niehaus, managing director of Morgan Stanley Realty, at November’s ICSC Retail Real Estate Capital and Finance Conference in New York City.

“There will be recovery in the second half of 2002, and it will be vigorous,” he said.

But Howard L. Davidowitz, chairman of New York City-based Davidowitz & Associates, painted a much grimmer outlook for delegates attending last month’s New York Idea Exchange and Deal Making, predicting that recovery will take 10 years.

“I don’t see an explosion in retail, I see an explosion in insecurity,” he said, predicting that retail spending will be cut back following exploding unemployment and cutbacks in compensation, and that retailers such as Gap, The Limited and discount department stores will close stores and dump lots of space on the real estate market.

In the meantime, developers are facing the realities of the present, with several leading retailers hitting the brakes on store openings. Gap, for instance, has announced that it will reduce its expansion, normally about 7 percent to 10 percent annually, to 5 percent this year, and it was making no commitments for 2003.

Some upscale retailers have opted not to go into new centers in favor of opening in existing ones.

This has pushed back the opening of a few centers. CBL has shifted some debuts from this year to next. Its Mall of South Carolina, originally scheduled to open this year, now has a 2003 debut, although several department store and big-box commitments are already in place, Howard Grody, vice president of leasing at the Chattanooga, Tenn.-based company reported. Westfield also has delayed some openings.

But not too much should be read into this.

“The softer economic conditions might affect the timing of one or two projects in our redevelopment program, but the intrinsic economic attractiveness of the projects remain,” Westfield Corp.’s chairman, Frank Lowy, told shareholders at a meeting in mid-November. The Sydney, Australia-based developer is parent of Westfield America, Los Angeles, which owns 36 regional malls in the United States. “Given that these developments occur over a three- to five-year time line, we expect our program will be relatively unaffected by recent events.”

As it happens, the slowdown in some retailers’ growth coincides with a long-planned downshift in new development, anyway: Only nine new malls are scheduled to open this year (see chart above), versus 11 in 2001, according to ICSC research. That square footage should be fairly well-absorbed, Prudential’s Sullivan said: Most new projects are at least 75 percent occupied at opening.

General Growth Properties has no new malls under construction this year, and its plans for new developments next year and later remain on track.

“We’re concentrating on our redevelopments,” said General Growth President Robert Michaels.

The Richard E. Jacobs Group’s Triangle Town Center is one of nine malls set to open this year.

CBL remains on schedule with its substantial redevelopment program; in addition to regularly renovating projects from 10 to 12 years old, the firm is rehabbing centers acquired last year from The Richard E. Jacobs Group, Cleveland.

Dominant centers are going to be just fine, said David Contis, executive vice president and COO of The Macerich Co., Santa Monica, Calif.

“If the retailers cut back, they cut back on the iffy stores, the less dominant centers,” he said. Many of the large chains such as Gap that have reduced growth already have stores in place in many of the leading projects, he noted, minimizing the impact of the current cutback.

CBL expressed cautious optimism about its leasing prospects.

“The leasing for ’03 is strong; if retailers have cut back, they’re pushing ’02 into ’03,” said Stephen Lebovitz, the company’s president. “The biggest wild card is, will there be more bankruptcies?”

Smaller developers will be struggling though, observed John N. Foy, CFO and vice chairman of the board at CBL.

“A lot of people went out and developed properties on their own, started their own companies,” he said, speaking at the Capital and Finance Conference. “Now they’re finding it’s not so easy.”

When it comes to retailers, not all the news is grim: Newer chains are taking up the slack for specialty stores, developers say. When an Ann Taylor slows down, a Chico’s can take the space. For every Gap superstore that might have been expected to open at a mall, the space can be taken by a combination of growing retailers such as American Eagle, Build-a-Bear and PacSun, and new chains including Abercrombie’s Hollister & Co., Hot Topic’s Torrid and portrait studios Sadie’s and Picture People.

Locating three retailers in a spot previously considered for one large store can improve the mall’s tenant mix and reduce risk.

“It could make it better for the center,” said Grody.

Even so, occupancy levels across the industry will probably be a bit more on the downside for the next five quarters, Sullivan predicted. For now, Macerich predicts occupancy will be flat or down 1 percent in 2002. At press time General Growth expected occupancy levels to finish flat in 2001 and remain flat or increase by 1 percent in 2002.

Despite the challenges in leasing, the balance of power has not swung totally toward expanding retailers; there’s still competition among tenants eager to find space in A-type malls.

“We don’t feel like there’s any vulture mentality among retailers,” Lebovitz said. “They’ve always negotiated tough deals.”

As a result, most mall owners are cautiously optimistic about their prospects for this year, at least.

“[This] year will be steady, which is fine by me,” Macerich’s Contis said. “The real question is 2003.”

With additional reporting by Donna Mitchell.

 

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