Some of the biggest players in the U.S. retail market who gathered at this year’s RECon event in Las Vegas have announced their intentions to slow or halt development in the retail sector for the next two to three years. The general consensus is that large retail spaces like big shopping malls are having more difficulty competing in today’s marketplace, and that in the future there will be less of these facilities. Experts at Cushman & Wakefield project mall space will shrink by one-fourth in coming years, despite the fact that leasing demand is increasing. For more on this continue reading the following article from National Real Estate Investor.
It might not be what retail professionals were hoping to hear going into this year’s RECon, but the pace of new development is not likely to pick up speed until 2014.
The country’s largest mall developers don’t plan to build any new regional malls in the next three years, according to Glen Rufrano, CEO of global brokerage firm Cushman & Wakefield. In fact, in the coming years, some of the existing regional malls that can no longer compete in today’s marketplace will likely go away, reducing the total number of U.S. malls by more than one fourth.
In spite of increased momentum on the leasing front, demand from tenants outside the major urban markets is still not strong enough to satisfy most lenders pre-leasing requirements for new projects, according to Thomas W. Gilmore, executive vice president with Washington, D.C.-based Madison Marquette. Plus, with both 20-somethings and their empty nester parents moving to the cities, outlook for population growth in suburban areas doesn’t look too promising, he adds.
“There are about 1,300 malls in the U.S. The question is a few years down the road will there be more or less? I think it will be less,” says Rufrano.
Michael Glimcher, CEO of Glimcher Realty Trust, holds a similar view. The country’s retail real estate market has reached a state of maturity, he notes. That means that companies that specialize in pure development plays will have to find other areas of growth.
Claim up to $26,000 per W2 Employee
- Billions of dollars in funding available
- Funds are available to U.S. Businesses NOW
- This is not a loan. These tax credits do not need to be repaid
“Very little ground-up development will happen in the next five years,” Glimcher says. “On a risk-adjusted basis it just doesn’t make sense. There is no need for exuberance.” In fact, “most of what has been built in the last 10 years shouldn’t have been built.”
Shopping center developers might be able to build some new projects if they have anchor tenants who are anxious to open stores in specific locations, according to Rufrano. But even in that space the volume of new ground-up construction will remain limited. “Our story is portfolio enhancement,” confirms an executive with DDR Corp. The only segment of the market where there is still room for growth is outlet centers, and developers are racing each other to take advantage of the few opportunities that exist.
A notable exception to that trend is Taubman Centers. The firm opened City Creek Center in Salt Lake City, Utah, earlier this year and has other projects in its pipeline, although some of those are outlet centers. It has four projects where construction has begun or is close to starting and others that it s continuing to pursue.
“We’ve been more active than others,” says William Taubman, COO of Taubman Centers. “It has to do with our stability and longevity. And we worked on many of these projects [throughout the downturn].”
What to do?
In the absence of new construction projects, what most developers have been concentrating on has been repositioning and redevelopment of existing centers. In certain cases, the population that lives within a center’s trade area might have changed and property owners can upgrade their center’s design or tenant mix to reflect those shifts, according to executives with Forest City Enterprises.
In other instances, the weaker retailers at a center might have lease terms coming up and that gives the owner an opportunity to get those tenants out and bring better retailers in, says Richard K. Green, professor with the Real Estate Marshall School of Business and the University of Southern California.
“Good locations are not easy to come by, so if leases are coming up, people are repositioning” their properties, he notes. “That’s happening a lot more.”
An added benefit of redevelopment as opposed to ground-up construction is the fact that it requires a lot less capital, adds Rufrano. And so landlords are able to bring in better tenants and more dining and entertainment options into their centers at relatively little cost.
“Ten million dollars goes a long way,” when it comes to repositioning, he says.
This article was republished with permission from National Real Estate Investor.