Fueling Growth

News

With a volatile stock market, tightening credit and a cautious consumer, a casual observer could think that the good times are over for developing lifestyle centers. But that isn’t true at all.

Developers are continuing to build the open-air format, with locations in still-strong economic markets, mixing uses, the use of nontraditional and local tenants, and dedicated lenders continuing to propel growth.

“Over the past few years, we’ve built eight lifestyle centers and are in development on another seven,” said Dan Lowe, a managing and founding partner of RED Development, based in Scottsdale, Ariz., and Kansas City, Mo.

Location, location, location is still the key. Despite the overall economic slowdown, some markets remain strong, and continue to need, and foster, lifestyle center expansion.

“If you find a good area with good incomes and educational levels, where there is no lifestyle center option,” a project still works, said Brian Sciera, VP of lifestyle centers for Chestnut Hill, Mass.-based W/S Development, which is building a number of projects throughout New England.

That doesn’t mean they’ll work everywhere, particularly in the current, more difficult environment. Density and wealth, always important, will be more so, particularly as tenants, lenders and even municipalities are cautious about investing their efforts and money.

“Lifestyle centers will tend to make sense in major metro areas,” which can avoid the boom-or-bust syndrome, said Michael N. Jaffe, president of Northbrook, Ill.-based Jaffe Cos. Jaffe’s The Arboretum at South Barrington lifestyle center is under construction in South Barrington, Ill., an affluent Chicago suburb.

The point of lifestyle centers, after all, was to provide a downtown-like convenience in affluent suburban markets, not too close to a regional mall.

“A true lifestyle center is fueled by convenience and high-income areas,” said Greg Maloney, president of Jones Lang LaSalle Retail (JLL), Atlanta. “That’s what’s fueled it in the past, and what’s fueling it in the future.”

JLL is leasing the retail for the 1.5 million-sq.-ft. Golden Triangle mixed-use lifestyle complex, being developed by The Garrett Group and Domenigoni Barton Properties at the intersection of Interstates 15 and 215 in Murrieta, Calif. The project includes 630,000 sq. ft. of retail, joined by office and hotel space.

In fact, adding other uses also is keeping the lifestyle center format growing. Projects that called themselves “town centers” now are becoming exactly that, as office and/or residential space is built above or alongside stores.

“In today’s world, office space is practically a must,” RED’s Lowe said. The company’s 625,000-sq.-ft. Eagle River Station in Eagle, Colo., will include residential and hospitality space as well as retail. The project, a joint venture with Trinity Development Group, will open in fall 2009.

“Office and residential are really useful for lifestyle centers,” agreed Matthew Holmes, a principal of San Francisco-based retail and real estate consulting firm Retail West, which is leasing Sunnyvale (Calif.) Town Center, among other lifestyle/mixed-use projects. “If the idea is to create an urban environment, you must bring all three together. If you can’t bring three, certainly you should have two uses.”

Varying types of uses are possible, depending on the market. Jaffe’s The Arboretum will include the Creme de la Creme pre-school, bringing affluent parents to the project daily, as well as a health club.

In a sense, another use can even be a different retail format. Developers continue to attach open-air lifestyle centers to existing regional malls, a case in point being the conversion of a vacated anchor at Rosedale Center in Roseville, Minn., to a lifestyle wing, JLL’s Maloney said.

Differing, and expanding, uses have served to stretch the definition of the term “lifestyle center.” In fact, said RED’s Lowe, “We use the term ‘lifestyle’ loosely. Our centers are more of a hybrid.”

RED’s Shadow Lake Towne Center, near Omaha, Neb., combines a J.C. Penney-anchored lifestyle component with a power center and grocery-anchored project. Typical lifestyle center tenants such as Talbots and J. Jill are joined by a Hy-Vee gourmet grocer.

“It’s about creating an experience,” Lowe said. “That’s what people today are looking for.”

That’s why communities’ desire for open space also is propelling the format. W/S Development projects such as the upcoming 680,000-sq.-ft. Meadow Walk at Lynnfield in Lynnfield, Mass., include a large town green, Sciera said. “Space feels good to people,” he said. “People spend so much of their time indoors that the ability to visit a really nice sidewalk and an appealing town green is important.”

Truth be told, however, the main experience of a lifestyle center is still shopping. And tenant expansion, while slower perhaps than in recent years, is still the catalyst for selective development.

“Today’s leasing environment is extremely challenging for developers announcing new centers,” Jaffe said. “We are fortunate in the case of The Arboretum that we had tremendous momentum going into the slowdown and secured our core of soft goods retailers when there was a more rosy outlook.”

Those long lead times are helping projects in the short term.

“Deals for the first part of 2008 are already done,” Maloney said.

And the situation can change quickly if the economy turns around. Many observers, including Maloney, expect that the second half of 2008 will be stronger than the first half of this year. After all, RED’s Lowe observed, there aren’t too many alternatives for lifestyle tenants. “There is definitely still activity, since malls for the most part are not being built today,” he said.

Still, it’s important to get a critical mass that will attract even more retail to a project, and the trick is getting a core of tenants to commit early.

“Retailers follow the herd mentality,” Retail West’s Holmes explained. Projects that are “well-thought-out, well-planned and well-leased,” he said, will draw even more tenants.

Longer term, developers may get more creative, expanding their tenant mix beyond the national apparel chains to include nontraditional tenants, grocers and locals.

Luckily, nontraditional tenants are looking to grow, propelling expansion. The 500,000-sq.-ft. first phase of Jaffe’s Arboretum will include a “handmade” tenant mix that will add unusual uses to the expected fashion base. The move is particularly appropriate for the Arboretum’s location right off the intersection of Route 59 and Higgins Road in an exceptionally wealthy community, Jaffe said. The project includes the second-ever Village Roadshow Gold Class Cinemas, an upscale movie theater featuring valet parking, concierge and full-service bar.

Another such tenant is Pinstripes, a 33,000-sq.-ft., upscale bowling alley/bocce-ball court/Italian bistro/event center. The unit will be Pinstripes’ second in the market.

“This is targeted to the affluent office workers,” said Jaffe, and its accoutrements include leather seating in the bowling alley and an elegant casual cafe. Concepts such as Pinstripes will help The Arboretum become more than just a shopping place.

Even less traditional will be the entire 100,000-sq.-ft. Pedro Point Shopping Center in Pacifica, Calif., being co-developed by Retail West and Sand Hill Property Co., San Mateo, Calif. The project is focused almost entirely around surfing- and youth-oriented shops. The unique project is in the permitting phase, with a planned delivery late this year.

“We’re not going to the typical lifestyle tenants,” Holmes said. “We’re going to active lifestyle retailers.”

Even more traditional lifestyle centers can follow along the same lines, incorporating health- and wellness-related uses such as spas and fitness centers. For example, all of W/S Development’s lifestyle centers now include a Whole Foods Market, which will bring upscale shoppers to a project two to three times weekly, rather than the two-or-three-times-a-month draw of a fashion anchor, Sciera said.

“Restaurants also bring a great customer to the site,” Sciera noted. “The better customer likes good food.” Customers also like the unique, and that means looking for tenants that are first in a market, or unique to the market. Developers note that there are still a number of local tenants interested in, and financially capable of, growing. The resulting mix can allow a developer to expand and differentiate a project.

The Arboretum, for example, has included a number of local Chicago tenants looking to expand, as well as several stores opening their first units in the market. But adding locals requires a much greater commitment from the developer, both in terms of its own staff, and that staff’s time. Jaffe noted that his company began looking for Chicago tenants more than 18 months ago, for a project opening this fall.

It also means a bit more handholding, said Retail West’s Holmes, which is placing and helping to train a number of local tenants at Pedro Point.

“You have to reach out to innovative concepts and help them out,” Holmes said.

None of this is possible, however, without financing, and money also is encouraging growth. Strong lenders continue to invest in the format, albeit with stringent requirements. The California Public Employees’ Retirement System (CalPERS), one of the largest retirement systems in the nation, is a partner in The Arboretum.

“When we closed our loan in mid-August, it was because of the strength of that equity partner,” Jaffe said.

And unlike 1992, which was catastrophic for some struggling developers, there is money available—just with more strings attached. Lowe noted that RED now puts more equity into its developments than earlier. Still, institutions that have pulled funds from a shaky stock market still must invest those funds somewhere.

“When a pond fills up, [the excess water] has to go somewhere,” JLL’s Maloney said. “There is a lot of money with no place to go. Real estate is a good long-term investment.” Best known for its enclosed-mall management, development and consulting services, JLL last year created an open-air division, largely at the behest of its institutional owner clients.

“They said, ‘Why not do for open-air [projects] what you do for malls?’” Maloney said. The different skills needed for lifestyle centers required establishing a separate division, he explained. By year-end, the division was working on 75 properties, and the division has even boosted its mall division.

“We quickly realized we were doing the right thing,” Maloney said. “Now, we have assignments that have both open-air centers and malls.”

All of the above forces—needy markets, mixed-use, expanding tenants and financial wherewithal—pale somewhat, however, when compared to the greatest force that fuels the expansion of the format, that puts the life in lifestyle centers, W/S Development’s Sciera said.

“The biggest force is the end user, the customer,” Sciera said. “There is a really great customer that prefers this lifestyle-center venue.”