Resizing Retail
Dec 1, 2007 12:00 PM, By Anne Field
Experts forecast the industry's prospects for 2008 and things look a little bumpy.
Take Beachwood, Ohio-based Developers Diversified Realty (DDR). “If some developers we compete with have difficulty financing their projects, we will find opportunities to take those projects over. We will be more aggressive in light of the subprime crisis,” says CEO Scott Wolfstein. Still, that won't be the focus of his efforts. In fact,Wolfstein expects to do a lot of churning next year. “We will be a net seller in 2008,” he says. According to industry observers, most developers will probably follow the same path as DDR, becoming net sellers overall.
As for new development, companies such as DDR, General Growth Properties and Simon Property Group still have plenty of projects in the pipeline. According to Wolfstein, for example, DDR has around $4 billion in domestic and international projects planned. But, analysts and some companies expect construction to slow down. While properties already under construction will continue, those in the planning stages for 2010-2011 will be considerably delayed. “With a surplus of new houses, there won't be as many shopping centers opening to support those homes,” says Nuveen Jaggi, senior managing director for retail services at Los Angeles-based CB Richard Ellis. “New development will be more cautious than in the past.”
Simon Property Group is a case in point. “We would certainly expect some of the new projects that are in various stages of the pipeline to be delayed in their execution,” said Richard Sokolov, Simon's president and COO during a recent investor conference call. Meanwhile, General Growth already pulled out of a previously announced project. In early October, the REIT confirmed it would not pursue development of the proposed one-million-square-foot Pabst Farms Town Centre outside Milwaukee.
What's more, suddenly stringent lenders are requiring higher levels of preleasing, according to Haddigan. He sees a range of 60 percent to 70 percent, compared to the 50 percent to 60 percent more typical of the past decade. “Most developers will build to suit as opposed to spec,” he says.
New projects will mostly be in open-air properties, since it's easier to get approval for their construction than for enclosed malls, predict analysts. Mixed-use will also continue to be emphasized by developers as a whole. Lenders like the projects because of the diverse uses.
But mixed-use projects are also undergoing changes. Developers are cutting out residential components on projects being built now because of the uncertainty in housing. For example, Emerick Cosi, executive vice president of development for Cleveland-based Forest City Enterprises has 13 mixed-use projects in the works. In hard-hit markets such as Florida, he's scaling back the residential part of the projects. “You have to be selective by the market,” he says.
There is a big downside to mixed-use, however, especially in uncertain markets. The buildout takes longer than a single-use property. And with no one quite sure what things will look like in 12 or 24 months, developers pursuing mixed-use may be taking a bit of a gamble and may even slow down the development of such projects to ensure they open in stronger market conditions, according to Jaggi.
The good news for developers planning new construction is that costs are moderating. The Producer Price Index for construction materials and their components fell by 0.2 percent between the second and third quarters of 2007, yielding a year-over-year change of 1.2 percent from September 2006 to September 2007, according to REIS Inc., a New York-based real estate information company. That compares to a 6.1 percent increase in 2005 and 4.3 percent in 2006.
Some analysts predict that the big focus will be a renewed emphasis on redeveloping existing properties. In a recent conference call with analysts, Simon's CEO, David Simon, pointed to a $3 billion to $4 billion redevelopment program in the works. “It's very easy to underwrite, you know what tenant demand is going to be and not only do you add value from the redevelopment, but you add value from the existing asset,” he said.
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