How Lifestyle Centers Are Changing The Business
Five ways lifestyle centers have changed the retail development industry.
Michael T. Greeby

Lifestyle centers have caused a major shift in the retail development landscape. While the industry thrives on innovation, changing the physical shopping center format requires owners and retailers to rethink the way they do business. From the design and construction perspective, there are five major changes in the retail development model as a result of opening up the traditional shopping center to the elements:

1. Smaller retailers are in the driver’s seat.
2. Malls are no longer the premier product choice.
3. Retailers are more design and construction savvy.
4. Landlords give away money and take on more risk.
5. Tenant coordinators need to be more knowledgeable.

1. Smaller retailers are in the driver’s seat.

Popular smaller retailers have moved into the  driver’s seat in lifestyle centers, dictating to owners where they want their stores and how much they’ll pay for them. Pictured is Friendly Center in Greensboro, North Carolina.

Tenants have always been key to a shopping center’s success, but in the early years of regional mall development, anchors and owners called the shots. Over time, the most popular and sophisticated retailers have moved into the driver’s seat, dictating to owners where they want stores, how they want them built and how much they’re going to pay for them.

Popular big box retailers such as Best Buy, Target and Bed Bath & Beyond also are driving the development engine but in a different way. They greased the skids for lifestyle developers to customize space for in-line retailers; first by mandating that power center developers give them more than a cold dark shell, and then, since many big box retailers open several hundred stores each year, by demanding the developer build out the space so they can open quickly. Big box retailers got very sophisticated very fast, and over time owners have taken on more and more of the retailers’ risk to accommodate their needs.

At the same time, power center developers began up-scaling their tenant mix by blending in retailers such as Ann Taylor or Pottery Barn. Since these owners had been doing more for the big boxes, putting on a roof top unit for a smaller tenant wasn’t a big deal. As owners learned they could turn a power center into a lifestyle center by taking on a bit more risk, that is — doing more work on the tenant’s behalf, the owner’s negotiations shifted from, “Here’s a cold dark shell and some cash to finish out the space…” to “What can we build for you, how do you want it and what can we pay you to have your store in our center?”

2. Malls are no longer the premier product choice, which affects leasing and tenant improvement allowances.

In 2007, the industry officially marks its 50th anniversary so it is no wonder most of the premier sites are gone. After the malls were built, and many local merchants felt unable to compete, city managers were forced to reinvent their Main Streets. Over time, regional and national retailers wanted a presence in the quaint little downtown areas where, in addition to stores, shoppers found more convenient parking, outdoor dining and other streetscape amenities the malls had tried to replicate for years. Lifestyle centers seemed to provide the magic blend.

In addition, retailers have told us product type is just not as important as getting closer to target customers. True, some retailers thrive in one format versus another, but bottom line results are based on good fundamentals: the deal, market assets, traffic and customers.

Retailers driving deals and owners’ diverse product types have had a profound effect on deal making. Lifestyle center tenants are demanding the owner work harder to make a deal. These retailers are trying to shed the risk/work by, 1) demanding more money upfront in tenant improvement allowances and/or 2) having the owner perform more work on their behalf. This really becomes apparent in the lifestyle center format, which simply is a different physical structure than an enclosed regional mall.

Items included in the lease have changed as well. Mall leases are fairly similar for most deals. The simplest example of this in a traditional mall scenario is that second level tenant floors are poured. That’s not necessarily the case in a lifestyle center where retailers can dictate the options for each deal, and the deals are mutually exclusive. So a lifestyle tenant may want floors poured, or not. Since everything is typically outside in a lifestyle center, landlords have been more willing to adapt and, furthermore, tenants have been more willing to push them.

All of this affects tenant improvement allowances (see sidebar)

3. Retailers are more design and construction savvy.

Retailers today are driving the construction process more than ever. They’re smarter and more demanding, which puts landlords into a position of accepting more risk. Here are some examples:

Store Design

Retailers still like prototypes, but their lifestyle centers’ stores are more unique than those in regional malls. Lifestyle center architectural elements tend to be more ornate exterior facades. Owners do their best to influence the store design through the tenant criteria, but sometimes tenants are willing to alter their store design; sometimes they are not.

Storefronts

Lifestyle center storefronts are more complex than those in malls, with significant additions to the facade involving glass, steel,  brick, stone and canopies, like these at The Southlands in Denver.

Mall storefronts are less complex because owners typically add only nominal architectural detail on the fascia of the demised space. In lifestyle centers, openings are often taller, wider and highly articulated. There also are significant challenges and additions to the façade affecting glass, steel, bricks, stone, canopies, etc. Most of this detail must be built in advance, complicating lease lines and challenging the interface between base building structure/systems and tenant storefronts/entryways.

Signage

In the mall environment, most tenants deal only with landlord signage criteria and approvals. Tenant signage in lifestyle centers is a significantly more complicated process. Because of greater visibility, municipalities tend to impose more stringent requirements. Now in addition to the owners’ approvals, signage must meet standards set by an architectural design review committee and a zoning commission.

HVAC

Mall developers typically do provide HVAC supply service to the tenants’ space but, again – typically, lifestyle center developers do not. Relying on the tenant to install their own HVAC systems makes it significantly more challenging for tenant coordinators to schedule deliveries, coordinate installation and control quality.

Concrete

In a mall where floor slabs are often poured by the landlord, tenants have to cut and replace concrete in small batches in order to install utilities. Since lifestyle centers are typically single story structures and, generally, floor slabs are not poured, tenants can run all their underground utilities then pour the entire concrete slab. This allows tenants greater cost efficiency and more design flexibility because they control the distribution of interior underground utilities.

4. Landlords give away money and take on more risk.

In the past, mall owners performed white box or build-to-suit work, in general, because retailers and their subcontractors were not knowledgeable about finishing their mall space nor did they have the resources to build it themselves. But what started as helping the tenant who couldn’t help himself has turned into giving unneeded support to the tenant wanting to avoid construction staff expenses.

In a lifestyle center, the more sophisticated tenants want the cold dark shell but with some modification plus $80 per square foot (“because my store is so much nicer”) in tenant allowances (TI) and they’ll pay the same premium rent as everyone else — within reason. This means the landlord takes on a little more work, which costs the owner +/-$20 per square foot, and the tenant gets more money.

The owner could just give $90 per square foot and have the tenant do the work. A highly coveted, in-line specialty tenant can command triple-digit TI allowances per square foot, get all its money in advance plus several months of free rent. That’s on one location; it could be different in another. In reality, most lifestyle tenants do not cost more than $85 per square foot to build, and few are more than $100. The worst thing an owner can do is accept the risk and give money.

5. Tenant coordinators need to be more knowledgeable.

The line between base building and tenant space responsibilities is blurred more now than ever before. All of today’s tenants need to be more sophisticated in coordinating store design and construction, which means that tenant coordinators (TCs) need to be more knowledgeable about base building and tenant design and construction. In the past, TCs were problem solvers and traffic cops, implementing basically the exact same parameters for every lease. Problems were often within the same context or could be repetitively solved. Today the challenges vary dramatically because each lease is different.

Tenants are expecting more, owners are promising more, lifestyle center buildings are more complicated, and each retailer and each deal is unique. This requires the owner’s team to be more knowledgeable than ever. The days of the secretary being a tenant coordinator because she can properly file plans, go through a checklist and collect the money are gone. Today’s buildings and complex leasing nuances require true design and construction professionals. Project managers and tenant coordinators must possess skills previously required of senior design and construction department executives.

With the deals and leases requiring more owner work, owners need to: 1) work efficiently, 2) know who is going to monitor the work, and 3) make sure that it’s done per the lease. So the more an owner promises, the more he needs to know about doing it right, on time and on budget. Ten years ago, budget and schedule were as important as they are today, but the project manager handled all the pricing issues. Today the PM still controls pricing, but now leasing relies on the tenant coordinator’s knowledge of build-out cost options to evaluate the lease/deal, and the PM looks to the TC to raise any issues these options might have on the base building.

Project managers need to be more sophisticated, too. PMs sometimes are asked to go from soup to nuts, from project management to tenant coordination, because there is no clear differentiation as to when one stops and one starts. The jobs are becoming more and more alike and these owners’ reps need to be able to move seamlessly between each function as needed.

As developers focus on maximizing return while minimizing risk, they also need to employ the industry’s best practices. Some owners believe lifestyle centers are easier to build, and that project management and tenant coordination can be handled remotely or by fewer people. This just isn’t the case. Because the format has changed significantly, the rules are different, not easier.

Is your staff up to these new challenges?

Michael T. Greeby, EI, is executive vice president of The Greeby Companies, Inc., based in Lake Bluff, Illinois.