Change Is In The Air
Finding your niche today means constantly evolving to fit today’s development climate. Here’s how one successful developer is doing it.
Patrick S. Donahue

Patrick S. Donahue

With all this said, by nearly every measure, it is still a great time to be involved in retail real estate — as an investor, developer or tenant. Retail sales remain strong, interest rates are low and property values are at record highs. As a result, retail has outperformed all other investment classes over the last 5 years.

Behind the good times, however, change is imminent. Too much capital has flooded into the market, resulting in higher prices, lower cap rates and aggressive financing vehicles. Demographic shifts are remaking the map of the United States — and defining what and where we should build. Continuing turmoil among major retailers has led some to question how anyone can compete against the big discounters and lament how hard it is to find new, exciting retailers to populate our centers. We can no longer build by formula: today’s successful developer must blend a consistent focus and source of capital with the ability to adapt to each individual market and the ever-changing retail environment.

Financing

Perhaps nothing has changed as dramatically as the capital structure and availability of funds for shopping center development. Today we have historically low interest rates, low capitalization rates and abundant capital as investors remain leery of a volatile stock market. This was not always the case. Faced with the credit crunch in the early 1990s, many companies went to the public market in search of capital. Donahue Schriber wanted a steady capital source as well, to change from our previous, one-off pattern of finding a property to develop, and then sourcing capital. Our answer was to form a private REIT in 1997. Forming a group of pension fund investors has given us the best of both worlds — tax advantages for our investors, with adequate capital in place to act quickly when an opportunity presents itself.

Whole Foods fits nicely into the retail mix of Fig Garden Village, a lifestyle center Donahue Schriber is redeveloping in Fresno, California, that will also contain retailers like Coach, Banana Republic, Pottery Barn, Williams-Sonoma,Coldwater Creek and J. Jill.

That’s not to say that we’re averse to selling properties when the time is right. In fact, over the last 4 years, we’ve sold nearly $400 million out of a $1.5 billion portfolio to recycle the capital into our acquisition and development pipeline. In fact, this strategy has allowed Donahue Schriber to exceed our shareholders’ expectations for the last 3 years.

Western States Perspective

Developers for decades have talked about “following the rooftops,” making sure that they are building where people live — or where they will move shortly. The U.S. Census shows that 8 of the 10 fastest growing states are in the West with California expected to be the fastest growing state from 1995-2025.

That dovetails with Donahue Schriber’s focus on California, Arizona and Nevada. When our company was founded by Dan Donahue and Tom Schriber 37 years ago, they decided not to pursue expansion beyond a 1-hour flight from our base in Orange County, California. While lifestyle was certainly a factor in that choice, even more important was the ability to be close to our projects and intimately know our markets. Today, about 80 percent of our portfolio is in California, with 10 percent in Arizona and 10 percent in Nevada.

Now, we have a well established history in, and knowledge of, three of the most vibrant markets in the United States. We still believe that real estate is a localized business, benefiting from a hands-on approach throughout the process.

The Time Starved Shopper

Another major change is the habits of consumers. Shoppers today are time-pressed and frequent; long visits to regional malls are just not feasible for most. That’s why other retail formats are increasingly popular for both tenant and developer: shoppers prefer to enter quickly, pull up directly to their desired store and complete transactions quickly — yet still have the option to linger, if they wish. It is transitions like these that will continue to prompt changes to traditional shopping center formats.

This shift in shopping habits, along with our belief that it would be difficult to grow and compete with the major mall owners, prompted us to sell our regional portfolio to focus on developing and managing “necessity-based retail.” Simply put, we want to interact with our shoppers as often as possible. Shoppers may visit a great regional mall three times a month, whereas, they’ll visit a grocery-anchored center three times a week.

Necessity Retail — The Grocery Store

One thing that doesn’t change: shoppers will always need milk, eggs and diapers, and those that deliver these goods should survive and thrive. So, we believe, will the companies that develop for them. At Donahue Schriber, we’ve embraced the supermarket/necessity retail format and nearly all of our centers — neighborhood, community, power and lifestyle centers — have a grocery component. We like the smaller scale, the speed of development, and the chance to expand into new markets. At the same time, we’re able to use marketing, leasing and property management skills we’ve acquired from our regional mall experience to differentiate our centers.

Though the customer base for supermarkets is stable, the operators are seeing dramatic changes.

Regional grocers like this SaveMart at Donahue Schriber's Windmill Marketplace in Bakersfield, California, have expanded their presence in all markets.

Supermarkets have always been a competitive business operating on the slimmest of margins. Kroger and Safeway each have made major strides in righting their ships, and we’re very encouraged by the results. Additionally, we feel that the depth of choices available today for supermarket anchors provides diversification for both shopping center owner and consumer. Trader Joe’s, Costco, Super Target and regional independents such as Raley’s, SaveMart and Bashas’ are all expanding in our trade area.

Formats And Stores

Retailers that were mainstays less than 5 years ago have fallen by the wayside. The Internet has become another distribution channel on the retail landscape. The industry is still waiting to see the full consequences of department store consolidations, but it is certain to spur change in what has been the traditional definition of a regional mall.

It’s hard to believe that only a few years ago, the investment community was wary of the open-air lifestyle center because the format had no track record. Today, these centers dominate new construction as investors’ whims have shifted. We, too, are redeveloping a center in this format — Fig Garden Village in Fresno, California. In keeping with our focus on “necessity retail,” it’s anchored by Whole Foods and Longs Drugs, but also includes Coach, Banana Republic, Pottery Barn, Williams-Sonoma, Coldwater Creek and J. Jill.

We still believe that despite all this change, retail real estate remains a dynamic, vibrant and profitable business. Those of us committed to it have to balance a calm, steady business model with the ability to anticipate and change with the times, the tenants and our customers.

Patrick S. Donahue is president and chief executive officer of Southern California-based Donahue Schriber, a fully integrated, privately held real estate investment trust (REIT) operating in the western United States. The firm owns and/or operates a portfolio of 74 neighborhood, community and power shopping centers representing over 12 million square feet.