SAN DIEGO—While retail developers are busier than they were a few years ago, they're still doing more redevelopment and repositioning of existing shopping centers than ground-up construction, said panelists at ICSC Western Division Conference's general session yesterday. The panel was titled, “Development is Revving Up,” but speakers said there's still too much available retail space on the market to warrant new ground-up development.
Moderator Kevin MacKenzie, senior managing director of HFF LP, said that on the spectrum of retail centers, outlet centers are the furthest along in the development cycle, while power centers are seeing the least amount of development nationally. Rick Kuhle, chairman and CEO of Vestar, noted that an increase in pension fund money going to real estate—a new allotment from 6% to 10% among pension funds around the world—which will drive cap rates down. But, he added, pension funds “will be the most aggressive buyers out there.”
When asked which markets the panelists were focusing on in the West Coast and why, Kuhle said his firm targets markets where they can be the dominant center in that area in their subspecialty. He added, “Our geographic diversity is that of our partners—those are the areas in which they want to participate.” Brad Geier, managing partner of Merlone Geier Patners, said his firm targets “markets that are supply constrained with barriers of entry and infill locations within those markets.”
Comparing this development cycle to the previous one, the panelists were cautious. Jeffrey Berkes, president, West Coast, of Federal Realty Investment Trust, said, “There's too much retail space in the US right now; it's early on in the cycle, and Kemper Freeman, president/partner of Bellevue Square Managers Inc., added, “We have a conservative standard for growth.”
Kuhle said, “Redevelopment has taken off over the last two years, and it's in full swing,” and other panelists agreed that redevelopment is strong, but ground-up development has not yet hit its stride because of the amount of space still available.
The panelists also agreed that mixed-use space is getting stronger for retail uses and that retail helps pull in apartment, hotel, theater, restaurant and even office users and drives up rents in most of those product types. “The synergy of uses makes each of the components run better,” said Geier.
Berkes said executing the ground floor of a mixed-use development correctly is the driver of its success. “Above-retail space gets a 20% to 25% premium over what you would get down the street.” He added since experts in most other property types don't know how to execute retail components, retail experts can have a leg up and create value in these developments.
In addition, the panelists agreed that today's retailers are finding a balance between online and bricks-and-mortar sales and using them in tandem rather than one fighting the other. “Apple is the best retailer in the world,” said Freeman, adding that on a recent Saturday afternoon at 2:00, he noticed a 1:1 employee-to-customer ratio in his local Apple store, which was hopping with customers.
Freeman noted that bricks-and-mortar retailers need to “provide the customer with a great, emotionally fulfilling experience, and Berkes added, “People are still social creatures. You must create some place people want to go, with ample parking, that's clean, exciting and different. Pick retailers that embrace that. Be a differentiated shopping experience; you can't be a commodity anymore.”
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
