Developing, leasing, acquiring and creating open-air centers in today's economic climate isn't easy. But many are getting business done. Here's a look inside open-air centers.
Creating a successful open-air environment is tricky, especially in an uncertain economic climate. Categories of open-air centers, such as neighborhood and community centers, remain top investment choices, while lifestyle, power and mixed-use centers tend to consistently draw the most shoppers.
To explore the universe of open-air centers, Shopping Center Business interviewed a wide scope of visionary developers, owners, investors and architects who are pioneering many types of centers. From investment to design to retaining tenants, we found that location, leasing and demographics are the key ingredients for a successful property.
Among open-air centers, grocery-anchored neighborhood and community shopping centers top the list for institutional investors who buy retail properties.
"The hottest centers are grocery-anchored centers," says Whitney Knoll, principal, capital markets, of Newmark Grubb Knight Frank. "Everyone buys groceries. Therefore, you get daily traffic that helps you keep your smaller tenants. This becomes important in times like the downturn of the past few years. Across the board, location, demographics and population density are the driving forces after your grocery anchor."
Vying for good quality neighborhood and community centers is a tough business today. Low interest rates have fueled a buying frenzy among investors who can afford the low cap rate premiums that top centers bring.
"The feeling is there is a lack of core properties for sale," says Knoll. "Although cap rates for these properties are strong, some [current] owners are wondering where they will reinvest their money if they sell. No one has been building grocery-anchored centers for the past four years. The lack of supply to be sold makes a big difference in the market."
Lifestyle and mixed-use centers, while in demand among some buyers, are leasing intensive and rely on discretionary income more than needs-based shopping trips.
"In a needs-based shopping center environment, such as a grocery-anchored or power center, the rents you charge to your tenant are based on the cost of your project," says Yaromir Steiner, CEO of Steiner + Associates, which has developed some of the top open-air leisure-oriented centers in the nation. "In a discretionary spending environment, like Easton Town Center [Columbus, Ohio], the rents of the developer are not based on cost; they are based on the sales of merchants."
That differentiation is what separates these two major categories of open-air centers: power centers, neighborhood and community centers fall into the needs-based category, while lifestyle, most mixed-use and entertainment centers fall into the want-based category, says Steiner.
For investors who acquire open-air centers, the easy access of property and tenant information and data has made owning shopping centers a nationwide business, even for private investors based in one area of the country and buying elsewhere.
"The transparency of information that flows via e-mail and the Internet in today's real estate business compared to 15 years ago has made it easy for everyone to take advantage of the market," says Joe Dykstra, executive vice president of Los Angeles-based Westwood Financial, which owns centers across the country. "With more capital looking for a safe place to invest, you are seeing [cap rates on] deals drop lower and lower."
That, he adds, forces buyers to look out of their home markets and into markets where they are more comfortable owning assets.
For some investors in open-air centers, the best sign of a good center is the potential for upside or net operating income improvements. Atlanta-based RCG Ventures acquires centers in secondary and tertiary markets where it sees potential for turnaround investments. The company looks for centers in markets that are missing retailers or for properties that have financial or operational difficulties. RCG's game plan is to improve the asset through leasing and improving operational efficiencies. After repositioning the center, RCG will either refinance the asset or sell to private or institutional investors, depending on the quality of tenants and market size.
"Our acquisition strategy for a center is based on what retailers are willing to pay in order to locate in that specific market," says Mike McMillen, CEO of RCG Ventures. "We can be offered a center at an above-market cap rate or low price per foot, but if no retailer wants to be there, we wouldn't have interest in buying it. Most of our buying decisions are made based on our cost basis and where we believe we can stabilize the net operating income. We are not looking to acquire the most attractive center in town, but we are looking to buy assets that have the potential for significant improvement."
Many companies in the open-air center sector have become experts at making great places where people want to spend time. Thinking creatively, many developers have transformed former regional malls in good locations to open-air environments that see marked sales improvements. Lifestyle and leisure center developers have reset the idea of what a shopping center can be to some consumers. Centers like Caruso Affiliated's The Americana at Brand and The Grove in the Los Angeles area have set a high bar for other developers. Projects like Steiner + Associates' Easton Town Center also continue to set the stage for open-air lifestyle retail as they continue to evolve after years of successful operation. Creating a great open-air center takes more than just a developer and an architect sitting around a table.
Listening to the community helps form the basis for a well performing center, says Terry Montesi, CEO of Fort Worth, Texas-based Trademark Properties. Rather than having a developer place its vision on the community, receiving input from the community helps create a great open-air center.
"Really great open-air centers spend a lot of time with, and are committed to meeting the needs of, their communities," says Montesi. "If you listen to the community, find out what it needs, and give residents a center that exceeds their expectations, it customizes the center to the individual community."
Trademark has added lifestyle elements like public spaces to community centers as well as its lifestyle and power center projects. This, says Montesi, creates environments where people want to spend a little bit more time. Eventually, that translates to repeat visits and dollars for owners. In larger centers, listening to what the community wants pays off in creating a new project.
To redevelop Padre Staples Mall into a center called La Palmera in Corpus Christi, Texas, Trademark held several focus groups with members of the community. Those resulted in the idea to de-mall the main entrance of the center and create an open-air lifestyle court with water features and seating.
"We wanted La Palmera to be an indoor/outdoor environment," says Montesi. "The results have met or exceeded the community's needs. The center's sales are up approximately 50 percent in the past four years since we did the major renovation."
Trademark purchased a 200,000-square-foot shopping center across from LaPalmera that had not been renovated in the past 30 years. The company is doing a complete transformation of the center. So far, the company has landed Dick's Sporting Goods and a number of lifestyle tenants. Trademark is also renovating and evolving Saddle Creek Village in Memphis, Tenn., widely known as the first lifestyle center in the country, for Heitman, who owns the center.
"We believe that retail has to constantly evolve," says Montesi. "With Saddle Creek, you are seeing a smart owner who wants to keep its center relevant."
Even community and neighborhood centers can have amazing market draw that leads to high sales, if they are well located in areas of strong demographics and have the tenants shoppers want. Such is the case with the community shopping center portfolio of Federal Realty Investment Trust, which boasts the highest median household income for its trade area of any community center REIT. Federal Realty's assets are predominantly in mature markets that have high barriers to entry, with highly educated and affluent consumers.
"Because of the demographics, our centers have the ability to be a lot more than just a neighborhood grocery-anchored shopping center," says Chris Weilminster, senior vice president of leasing for Federal Realty.
Congressional Plaza in Rockville, Md., which Federal Realty has owned for decades, found a niche in the market by serving mothers with young children. Federal took features it learned from its on-street retail program and incorporated them into the community center environment at Congressional Plaza. These included seating areas and a strong landscaping program.
"That added an extra level of ambiance that created an environment of a town center for the community," says Weilminster.
With a new center, Pike & Rose, just down Rockville Pike from Congressional Plaza, Federal Realty is creating another experience for the community. The first anchor to be announced at the project was iPic, a theater and dining entertainment experience. Federal is seeking to attract a sophisticated audience for the center, one that will stay for a few hours versus short daily trips [for more on Pike & Rose, see page 50].
Federal is also developing The Point, an extension of its Plaza El Segundo at the high traffic corner of Rosecrans and Sepulveda Boulevards in Manhattan Beach, Calif.
"We are planning to add something that is very complementary to an already successful shopping center," says Weilminster. "That makes the entire district stronger; [Plaza El Segundo] is the place people think about shopping if they live or work within that community."
For lifestyle and large open-air mixed-use centers, keeping the customer coming back is the key to getting them to spend their discretionary income.
"Aspirational environments have to go one step beyond," says Yaromir Steiner. "People come because they want to go, so we have to offer them things that they aspire for. The environment is about place-making and leisure time uses."
The New Method of Development
For many developers, getting a project of significant size off the ground over the past few years has been impossible. For some, it just means changing the way development is done. Rather than build a center all at once, some developers have staged development, even going so far as to build centers store by store.
Southpoint, a project south of Atlanta along Interstate 75, was developed in phases by Jim Baker, president of Atlanta-based Baker & Lassiter, starting with two stores in 2007. The strong numbers during the recession from those two stores, JC Penney and Kohl's, had significant bearing on other retailers' decisions to move ahead with their locations at Southpoint, says Ralph Conti, principal of RA Co Advisors, who is leasing the center. Later phases, developed from 2009 to present, have included Toys R Us, Haverty's, Hobby Lobby and Movie Tavern.
"We had negotiated leases with many tenants before the recession," says Conti. "Hobby Lobby emerged first after 2008 and became our third tenant."
Hobby Lobby moved ahead with its original position at the center, which caused it to be in a location that had no co-tenancy at first. When the store opened in late 2009, it performed strongly. In 2010, other retailers began to express interest in the center. Academy Sports + Outdoors, Toys R Us/Babies R Us and TJ Maxx were the next anchors to open. Junior anchors Five Below, Ulta and Party City were constructed next to Kohl's in 2011.
"Shopping centers are like jigsaw puzzles," says Conti. "Southpoint is a classic example that you have to come out of the gate knowing what the jigsaw puzzle is going to look like, but you may not build the puzzle right away."
For Southpoint and other centers in development, the market was in place and demand indicators, such as sales leakage to other markets, were significant before the projects were started.
"Market fundamentals have to be there; you have to have good access and good visibility," says Conti. "They have to be in place in order for a project like Southpoint to continue to have success year after year, and it will for a long time. You can't replicate the center in that market; the fundamentals do not exist elsewhere."
In California, Shea Properties is developing The Collection at Riverpark in Ventura County, Calif. Delivering to an environmentally conscious community was a strong theme for the project, says Andres Friedman, vice president of development and acquisitions for Shea Properties. The project was originally conceived as a regional mall when the master developer envisioned the plan for Riverpark, a 700-acre planned community in Oxnard, Calif. The project sits on 80 acres along the 101 Freeway, which was acquired by Shea Properties in 2007. Anchors for the project are Whole Foods Market, Target, Century Theatres and REI. The center called for strong sustainable and architectural features, as well as a lot of art work, elaborate landscaping and other features that tied it to the community.
While construction started in 2007, the project halted in 2009 as the economy suffered. Despite the fact that all the anchors remained with the project, Shea couldn't move forward until the economy improved.
"We had to rethink how we were going to face this project and open it," says Friedman. "We knew we did not want to compromise the quality of the center."
Shea created some flexibility for tenants who had signed on to the project, since they were all rethinking the way they did business as well. It subdivided some of the buildings that were already under construction and looked at ways it could merchandise the center more efficiently. In January 2011, the project restarted with no plans to stop. Target opened in summer 2011 as the first retailer at the project. Soon after, the center's other 10 anchors were ready to move forward with opening, so the second phase began construction in January 2012. In October 2012, Century Theatres opened along with six other tenants. In March, REI will open, followed by Whole Foods Market in June. This summer, Friedman expects the center will be at 60 percent occupancy. He hopes to have the entire center fully leased and built by the summer of 2014. A few months ago, Shea Properties partnered with CenterCal Properties and Oak Tree Capital on the center.
Like many successful open-air centers, The Collection at Riverpark has found a hole in the doughnut in its market. The center provides an attractive environment for needs-based shoppers and entertainment seekers. With tenants like Whole Foods and Target, it serves daily needs, while others, like Century Theatres and restaurants, serve entertainment and nighttime traffic.
"We think the merchandising we have fills the center throughout the week," says Friedman. "All the retailers and restaurants that have opened so far have suggested a strong center. That has helped us go to a lot of tenants we are negotiating with and prove to them that the location and the type of project we are developing is a successful one."
At Menin Development's Magnolia Park development in Greenville, S.C., location tops the list of why the center is successful. The 550,000-square-foot center is situated at the intersection of Interstates 385 and 85 and Woodruff Road — the busiest intersection in the state. Add to that Greenville's sophisticated demographics — the city is home to BMW's U.S. manufacturing facilities, Michelin's U.S. headquarters, a regional headquarters campus for TD Bank, and those of a host of other companies in various industries — and you have the recipe for a successful center. Menin envisioned bringing a number of new national and regional tenants to Greenville when it came across the former regional mall that was on the site.
"We only look at centers that have excellent land and location," says Marc Yavinsky, executive vice president of Palm Beach, Florida-based Menin Development. "Our philosophy is if you have good real estate, there will always be a tenant to fill that space."
Like Southpoint and other large centers developed in recent times, Magnolia Park took time. Over the past six years, Menin has been creating an open-air center, retaining anchors from the mall — Sears and Regal Cinemas — and attracting a host of top anchors to the market. Regal Cinemas, which opened at the former center in 1997, remains the top-grossing theater in the Carolinas. One of the first tenants to open at Magnolia Park was Costco, which Yavinsky says is the warehouse club's top performing unit in the state. Old Navy, Bed Bath & Beyond and Rooms-To-Go also have their top stores in the state at Magnolia Park, according to Yavinsky.
"For us, it is about bringing tenants who are unique and different than other centers," says Yavinsky. "It is about keeping customers visiting the center on-site for longer periods of time throughout the day. From a design standpoint, we like to allow tenants to create their own personality through their facades that are unique to their business."
To accomplish that, Menin has a lineup of tenants that accomplish everything from goods and services — like Sears and Costco — to entertainment, with Cabela's, Dave & Buster's and Toby Keith's I Love This Bar and Grill. Menin has signed a number of tenants to Magnolia Park that will have their first location in the state. To create a dinner-and-movie atmosphere, the company is also adding a strong restaurant lineup to Magnolia Park that will be second-to-none in the state, says Yavinsky. Charlotte-based Firebirds and Texas-based Cheddar's are among the restaurants opening their first South Carolina locations at Magnolia Park.
"We are close to announcing four or five other tenants where this will be their first location in the region or state," says Yavinsky.
Cabela's alone is expected to be one of the largest tourism draws in the Upstate area of South Carolina. It is expected that the retailer will have a draw radius of several hours, and that visitors will spend the weekend in Greenville with their visit centered around their trip to Cabela's. In future phases, Menin plans to add up to another 520,000 square feet of retail to Magnolia Park.
Menin had success with this formula at its Downtown at the Gardens project in Palm Beach Gardens, Fla., where it brought the first Whole Foods and Yard House to the area, among other retailers.
"Greenville has been discovered by a lot of the hot tenants," says Yavinsky. "Every [national] retailer who has gone there has been successful."
Trademark is also constructing a new phase of its Alliance Town Center in Texas. The 800,000-square-foot center is anchored by Kroger, Belk and JC Penney and has many lifestyle and power center tenants, as well as a significant offering of restaurants.
"Some call this center a 'power village,' but it has really become the replacement for the regional mall," says Montesi. "You can do lots of fashion shopping, but you can also do your daily needs shopping. That's where retail is going: people will build centers to meet the needs of the area. They are not building just a power center or a community center; they are building a retail center that meets the diverse needs of a specific community."
Watching — and aiding — tenant sales is at the heart of open-air center ownership. Regardless of the type, a center is only as good as its tenants and location. Many owners have learned to watch, assist and foster tenant performance to ensure a healthy and growing center. Doing so means knowing the geographic market, the competition and the tenant's business.
"In our case, we tend to follow the grocery business pretty closely," says Howard Paster, president of St. Paul, Minn.-based Paster Enterprises, whose company has owned and operated community shopping centers in the Twin Cities market for decades. "We can walk into a grocery store and tell you what works and what doesn't work. Not to say that we would know how to run a successful grocery store; but we know from a consumer's perspective what entices and compels them."
Good leasing starts with good lease planning, and that starts in the design — or redesign — phase of a center.
"We are very conscious about what constitutes good planning for creating good space to lease," says Kevin Zak, principal of architecture firm Dorsky + Yue International. "We are always thinking about the last space leased at a shopping center. A center starts with great planning so there isn't 'bad' lease space."
Creating that space involves vision and imagination on the part of the architect and the developer.
"We put ourselves in the project we've designed and make sure it is a comfortable space that has the right scale and amenities," says Zak. "There is a lot of detailed thought that goes into tailoring each of these projects to make sure that they maximize the customer's experience."
Finding the right tenants who will add to the center's draw and conduct high sales volumes is a challenge that many shopping center leasing executives view as highly rewarding.
"A strong center exists because it has good fundamentals that are in place: it is well located, has good access and the market has strong demographics," says Conti. "In leasing, you have to look at who is going to do business there. You can have the best piece of real estate in the world. That doesn't matter if the tenants don't like it. If you build a power center, you want to have the best in class power center tenants."
Retailers who create an emotional connection with shoppers are finding success in today's market. While this may resonate with apparel and other softgoods, tenants like Apple, Anthropologie, Babies R Us and Whole Foods Market create this appeal for different reasons.
"We look at whether a tenant connects emotionally with a customer, as opposed to just providing commodities," says Trademark's Montesi. "If you look at a tenant like Whole Foods, many of their customers view the retailer as a part of their lifestyle. Those consumers feel that Whole Foods is serving them and has the same goals for their lifestyle in mind. Whole Foods has an emotional connection that a conventional food purveyor doesn't have."
Many shoppers now stay connected with retailers via e-mail and social media. It's important that the physical store reflects shoppers expectations for the brand and its merchandise.
"We look for tenants who will draw folks more often and who will have a much deeper connection with consumers," says Montesi. "These tenants are much less likely to lose their customer because some other store opened half a block closer to their location."
This factor also extends to how willing developers are today to let retailers stand out from the crowd in their centers. Gone are the plain boxes; retailers today are differentiating their stores with design features and elements that go beyond widened storefronts and additional windows.
RDL Architects is working on a building for Arhaus Furniture at North American Properties' Avalon open-air project in Alpharetta, Ga.
"With tenants like Arhaus, we try to give them their own identity within a center," says David Parrish, director of business development for RDL Architects. "They want to fit in, but they also want to stand out."
RDL also works with Pinstripes, an entertainment anchor, that finds it necessary to make its units stand out from the crowd to exhibit a fun atmosphere to consumers.
In some cases, this differentiation is extending to the center itself. At Shea Properties' The Collection at Riverpark, the sustainable features Shea Properties was hoping to implement have come to life: the project uses LED lighting throughout, has a system to collect and reuse rainwater, and the company is reusing many materials throughout the center. Shea hopes to achieve LEED certification at the center.
"Our company culture is to be sustainable and responsible," says Friedman. "We also believe that the community is embracing a sustainable environment and we want to be supportive of that. Also, our tenants are embracing sustainability and our sustainability helps them know where this project is going. At the end of the day, sustainability saves money by saving water and electricity."
As well, the center's public art program has added to its attraction in the community.
"The center isn't just a collection of retailers, but it is a collection of experiences," says Friedman. "Of course, the merchandising is the key element of any retail project, but the architecture and the art at The Collection at Riverpark adds a sense of discovery to the center. When people walk the center, they always discover something new; there are 17 different pieces by five different artists here."
Some owners are also looking at how they can differentiate their properties through leasing. While many institutional neighborhood center owners raise an eyebrow when it comes to non-credit small shop tenants, Westwood Financial has embraced them.
"There are a lot of small businesses out there who want to be in the best properties," says Westwood's Dykstra. "If you have vacancies, you will find in most neighborhood retail in major MSAs, many tenants are gravitating toward the better properties. They have determined that is the place to be if you want to continue to benefit from foot traffic and give your business the highest probability of succeeding. Mom-and-pop tenants are becoming more sophisticated and smart landlords are wisely looking to add that kind of user to the rent rolls."
Time can never stand still at existing shopping centers, warn developers. Letting a center go stale is the kiss of death; you never know when a developer down the road could be getting ready to redevelop and take your tenants. Staying strong is the key to staying healthy.
"When sales are not productive with your retail base, you have to shore that up," says Paster. "Bringing new tenants in is usually the precursor to spending a lot of capital dollars on a center. You are not going to spend capital with the hope that you are going to land a tenant. Just like a new development, you have to have that anchor tenant in tow before you can deploy a redevelopment strategy."
Federal Realty's Weilminster says that landlords shouldn't be afraid of turnover if they are seeking to constantly keep their customers coming back. At Federal Realty's Santana Row, a mixed-use town center in San Jose, Calif., Federal constantly reviews the tenant mix to stay ahead of what the market wants. The center has recently introduced Kate Spade, C-Wonder and Madewell.
"We brought new faces to a center that is already established," says Weilminster. "We like our [tenant] turnover; it is not anything at all that we are fearful of. As a developer and landlord, you need to embrace the fact that there is going to be transition and use that to your benefit to enhance and improve your assets."
Making projects stand the test of time is a challenge for designers. One Dorsky + Yue-designed open-air project, Legacy Village in Cleveland, Ohio, is celebrating its 10-year anniversary this year. Zak says that one of the reasons that the center is successful is that its owner, First Interstate Properties, has been open to retailers who want to break out of the box.
"They have tenants who want space, but they want to do certain things that maybe the center didn't do before," says Zak. "We are always encouraging creativity and allowing the center to evolve. If the tenant wants to do something that the design of the building did not support before, how can we accommodate that? What other ideas are there that will accommodate an idea? For us, it's trying to be creative and open-minded through every step of the process. Retail evolves year to year, and tenants come and go. It is a matter of being open and trying to help the center be successful."
— Randall Shearin