Lifestyle Centers Capitalize on Shoppers' Need for Speed

Despite the economy negatively affecting retailers' sales, the retail real estate market's overall tone is positive. While activity varies by location, investors demonstrate continued interest in retail properties nationwide. As always, tenant mix is critically important: Owners of centers with credit tenants are asking for, and frequently getting, premium prices for their properties. And a number of these tenants currently are chasing the hottest retail trend — lifestyle centers — and questioning their commitment to enclosed malls because of consumers' desire for convenience.

Lifestyle Centers Take Off Lifestyle centers target upscale demographic clusters and attempt to bring the shopping experience as close to consumers as possible. Early lifestyle centers usually were unanchored, open-air properties of less than 200,000 square feet that featured upscale specialty stores, restaurants, and entertainment, according to the International Council of Shopping Centers. In this phase of their development, lifestyle centers did not include department stores.

Developers stretch this definition, building properties as small as 88,000 sf and as large as 800,000 sf, and some are planning even larger centers. Some of these new developments incorporate department store anchors, usually in the most upscale category, such as Nordstrom and Saks Fifth Avenue.

For example, an 88,500-sf lifestyle center recently opened in New Jersey's richest county, between two enclosed malls on a highway carrying more than 40,000 cars per day. Tenants include Pier 1 Imports, Bombay Co., Gap and Gap Body, Talbots, and Jos. A. Bank Clothiers, as well as Starbucks and Panera Bread. The center's store managers report customers commenting that they are glad to have an alternative to the malls for their shopping.

Many developers are interested in the lifestyle center phenomenon's appeal and are actively seeking sites that offer similar demographics and proximity to established shopping venues.

But signs already point to a glut of lifestyle centers in desirable locations, which almost certainly is to become a national pattern. As owners of properties suitable for lifestyle centers experience increased interest in their holdings, land prices rise, driving operating costs higher — closer to the levels found in malls — and negating a key advantage that alternative locations now offer retailers.

In their efforts to bring lifestyle aspects to their properties, open-air center landlords also pressure lifestyle centers. As existing tenant leases expire, they seek new, upscale tenants such as jewelry stores and fast-casual restaurants to increase their centers' ability to attract a larger and wealthier customer base, subsequently creating a new development barrier for competing lifestyle centers by decreasing the universe of prospective tenants in a market.

But they don't have to look far. Many mall tenants are anxious to reduce their operating costs and seek higher visibility than malls typically provide. For instance, Somerset Shopping Center in Bridgewater, N.J., the state's first strip center, recently added Eastern Mountain Sports as a tenant. Formerly located in a successful mall nearby, EMS has reported significant sales increases since its move.

Malls and Power Centers Lose Momentum
Unlike lifestyle centers, few enclosed malls currently are being built in the United States. The principal reason behind this loss of momentum is the department store chains' lack of demand for new venues; it is department store anchors that drive the development and success of enclosed malls. Additionally, municipalities are reluctant to approve the sea of parking that malls require.

New reports also reveal consumer dissatisfaction with enclosed mall shopping experiences. Shoppers pressed for time generally must park far away from the stores they wish to visit and walk past many stores they aren't interested in to reach their ultimate destination. The average mall trip takes more than 75 minutes, while shopping trips to open-air centers average about 57 minutes, according to ICSC. Also, although they spend less time, lifestyle center shoppers visit more stores and spend more money than those who frequent malls. In a report comparing five lifestyle centers to five malls, the ICSC found that shoppers entered an average of 2.9 stores and spent $75.70 in the lifestyle centers versus 2.3 stores and $73.30 in the malls.

For similar reasons, few power centers are being built. Power center developers and tenants already have cherry-picked suitable sites in most markets, and the same regulatory difficulties await new development.

Acquisition Activity
Investor appetite for retail properties is hearty. For instance, Kimco Realty Corp. — with GE Real Estate, the New York State Common Retirement Fund, and RioCan Real Estate Investment Trust — has embarked on a $1 billion acquisition program. This year Pennsylvania REIT has purchased six shopping malls totaling approximately 5.5 million sf from the Rouse Co. for about $549 million; the REIT also recently merged with Crown American Realty Trust, which added 26 regional malls to its portfolio.

Although institutional buyers such as REITs and pension funds target class A malls and shopping centers, the market also is strong for class B and C centers in fundamentally sound locations with upside potential through rehabilitation or retenanting. Municipalities generally support efforts to intensify existing sites' retail use, which better serve the marketplace without development disruptions and the loss of open space.

In many cases, funding for these acquisitions comes from capital withdrawn from the stock and bond markets, where returns have been weak. A shopping center that offers an 8 percent or higher return to its investors and, in all likelihood, appreciates in value over time is seen as a more stable investment.

Another factor driving the retail acquisition market is the difficulty of developing new retail properties, particularly in mature markets such as the New York City metropolitan area, where parcels large enough to handle significant new developments are nearly impossible to find. Generally, more rural areas are experiencing the bulk of new retail development. These burgeoning regions offer sufficient land, existing highway infrastructure, and residential growth requiring a strong retail presence to support it.

However, some strong resistance to selling exists, especially by owners unsure of the reinvestment opportunities available in the current marketplace. The overall lack of product also is slowing Internal Revenue Code Section 1031 exchanges. In these cases, single-tenant properties such as drugstores that are long-term credit tenants typically offering 8 percent returns are more available than multitenant properties.