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Shopping Centers Today -> August 2003
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RISING TIDE
A mall’s reconstruction helps restore fortunes of a down-at-heel Houston neighborhood
BY DONNA MITCHELL
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Every developer knows that the health of a shopping center rests on the community surrounding it, but it works the other way round too: The fortunes of a neighborhood can ride on a shopping center.
Gulfgate Shopping Center, Houston’s first regional mall, went up in the eastern area of the city in 1956. The open-air mall, anchored by Joske’s and high-end specialty retailer Sakowitz, did well enough through the 1970s, recalls Robert Sellingsloh, a principal at Houston-based Wulfe & Co., the development company behind the center’s current incarnation, called Gulfgate Center. (Theodore W. Berenson & Associates developed the original center.)
But the arrival of newer malls in the surrounding area spelled trouble. The 797,000-square-foot regional Almeda Mall, developed by Federated Department Stores and The Rouse Co., opened about eight miles south of Gulfgate Shopping Center in 1968. Two years later Gerald Hines built the elegant Galleria, shifting some of the excitement of Houston’s Gulf area to the downtown, Sellingsloh says. The Galleria’s recently completed renovation and expansion brought it to 2.4 million square feet of retail (SCT, July 2003.)
Gulfgate Shopping Center steadily lost its luster as Houston’s upscale shopping destination, and the neighborhood also started going downhill. Residents fled the city for the suburbs, and the area’s average income declined, giving retail tenants little incentive to stay. By 1989 average household income was down to $22,620 within a mile of the center and only slightly higher — $24,592 — within five miles, according to Arlington, Va.-based market research firm Claritas.
Looking beneath the surface, however, Wulfe & Co. President Ed Wulfe was convinced that the site was a hot development prospect. Despite the area’s modest recorded incomes, he felt that the residents possessed enough buying power to sustain a quality center. Furthermore, Interstate 45, which the locals call the Gulf Freeway, meets Loop 610 nearby, offering the potential of a steady stream of shoppers from outside the neighborhood.
He visualized a power center with moderately priced retailers, which he thought would meet the retail needs of the community and upgrade the neighborhood at the same time.
City officials, sharing his vision, weighed in. The city and Wulfe & Co. formed Houston Gulfgate Partners, the entity that owns the shopping center; the city’s interest in the partnership is 27 percent.
The city also established a so-called Tax Increment Reinvestment Zone around the shopping center. Such a zone uses tax increment financing — by which a municipality issues bonds for redevelopment, repayable with new property tax revenues from the site — to promote development in an area that would otherwise have trouble attracting private investment. City officials formed the Gulfgate Redevelopment Authority to oversee the program.
For all the confidence Wulfe and city leaders showed, though, lenders had deep doubts about the site’s redevelopment potential and its capacity to generate tax revenue. In particular, they were worried that without assets, money or cash flow, the redevelopment authority couldn’t repay a loan. San Francisco-based Wells Fargo & Co. eventually agreed to lend the authority $3 million toward the mall’s total $74 million development costs, but only after Wulfe personally guaranteed its repayment, says Sellingsloh.
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| Wulfe & Co.’s reconstruction of Gulfgate has earned it local awards for having a positive impact on the surrounding neighborhood. The developer tore down the old mall and built a power center in its stead. |
The city allayed some of the lender concerns by making projections of about $62 million in property tax revenue over 30 years, according to Robert Litke, planning and development director for the city of Houston. The authority expects to repay the Wells Fargo loan in about five years by issuing $5.2 million in municipal bonds, says Sellingsloh.
Bulldozers moved in on the old center in 2001, and the first phase of the 450,000-square-foot power center opened in May 2002, and it is a far cry from what it used to be.
In place of the old fortess-like brick building, the new Gulfgate Center features bold colors and landscaping with palm trees in front of the stores. San Antonio-based grocery chain HEB, which occupies an 81,000-square-foot store, features a white canopy that resembles a tent. The entire project is illuminated in bright colors at night.
The project already appears to be rewarding the faith of its supporters. Some tenants are paying about $25 per square foot, says Naveen Jaggi, a retail land specialist at CB Richard Ellis’s Houston office. That compares with the area’s usual rents of $12 to $18 per square foot.
“Rent is always a good driver,” said Jaggi. “It says that if we are able to pull those rents, then there is confidence in the market to support [them].”
For at least one tenant, opening in Gulfgate Center has been a homecoming. Cesar Rodriguez, owner of the Doneraki Mexican restaurant chain, who hails from east Houston’s Magnolia neighborhood, launched the business in 1973 and now has four restaurants, all of them in the city. He says the Gulfgate unit was deluged with customers during its second week of business. Designed to seat 450, the restaurant served 17,000 and pulled in about $150,000 in sales that week, which included Father’s Day.
“When Mr. Wulfe tried to build in this area, nobody believed in it,” said Rodriguez. “[But the] reaction of the [Spanish-speaking] market has been incredible. It’s something crazy.”
Meanwhile, the project has won praise from further afield. In February Gulfgate won two Landmark Awards from the Houston Business Journal. It was named Best Commercial Rehabilitation/Re-novation Project and Best Community Impact Project. Gulfgate also won the Award for Community Enhancement for its social and economic benefit to the Houston area, an award bestowed by The Appraisal Institute, the Houston/Gulf Coast chapter of The CCIM (Certified Commercial Investment Member) Institute and The International Real Estate Federation.
The project’s honors are well deserved, says Litke. “It is fresh, clean and … intriguing,” he said.
The second phase, which includes such tenants as Anna’s Linen, Chuck E. Cheese, Ross Dress for Less and Shoe Cents, was completed in March.
The developer expects to complete the third phase sometime next year, by which time the retail space will have been expanded by 250,000 square feet, to 700,000 square feet.
Observers say they expect Gulfgate’s success to draw more retail development to the area.
“It’s been a tremendous surprise in a positive way,” said Jaggi. “If you put good-quality retail in a low-demographic area, those people will support it.”
 | Current Issue December 2008 |