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M&A Activity Slows

The once feverish pace of mergers and acquisitions among shopping center giants has begun to slow, prompting owners to find new ways to grow. These strategies include participation in suburban mixed-use projects, and reconfiguration of existing assets to feature more lifestyle components.

The shift is evident in NREI's ranking of the top 25 shopping center owners, originally compiled by sister publication Retail Traffic. The 19 companies that have appeared in the top 25 for the past two years acquired 70 million sq. ft. of gross leasable area in 2005, a respectable increase of roughly 9.5% in total square footage. But that figure pales in comparison to the 220 million sq. ft. those same companies gobbled up in 2004.

“What's driving growth today is tenant demand for higher-quality space,” says Daniel Hurwitz, senior vice president and CIO of Ohio-based Developers Diversified Realty, which owns 113 million sq. ft. and is No. 4 on this year's survey. “Owners are turning their attention to creating improved space — new or renovated — rather than bulking up.”

Retailers are in a position to seek better-looking and better-configured space, since retail real estate remains strong. According to data provider Reis Inc., which tracks 67 retail markets nationwide, the retail vacancy rate registered 7% in the first quarter, up slightly from 6.9% in the same period a year ago. Also, non-anchor effective rents posted average gains of 0.7%, a bit less than the increases of the two previous quarters.

Owners are now seeking mixed-use opportunities for retail. “Mixed-use isn't new, particularly in urban markets, but now we're seeing it in many suburban markets as well,” says Hurwitz.

For example, Simon Properties, which ranks No. 1 on the survey with 200 million sq. ft of GLA, is working on a number of mixed-use projects in the suburbs, including Coconut Point in suburban Ft. Myers, Fla. The suburban mixed-use development will boast 1.2 million sq. ft. of retail space, 45,000 sq. ft. of office space and 305 condo units.

Likewise, No. 19 Casto, which owns 20 million sq. ft. of GLA, is developing projects such as Westar Village in suburban Columbus, Ohio, which will feature 300,000 sq. ft. of retail space plus office, residential and medical components.

The creators of live-work-play environments, says Hurwitz, are inviting retail to join mixed-use projects to create something more than the sum of its parts. Municipalities are more interested in the concept than they used to be, and more importantly shoppers are as well. “People are looking to get more things out of a single trip, even in the suburbs,” he says.

The race to reconfigure

From the largest shopping center REITs to private owners with a handful of properties, redevelopment also remains a top priority. “Antiquated concepts are being eliminated as fast as owners can undertake redevelopment plans,” says Hurwitz.

In the case of the mall REITs, redevelopment often means acquisition and reconfiguration. The No. 1 and No. 2 shopping center owners, Simon Property Group and General Growth Properties, inked deals to do just that this spring. Mall giant Simon struck a deal with Federated Department Stores to acquire seven former department store buildings, all adjacent to malls already owned by Simon.

One or two may be re-tenanted, according to Simon, but most of the buildings will either be razed or radically redeveloped into lifestyle components that include boutiques or specialty stores fronting pedestrian-friendly plazas.

General Growth also acquired seven former Federated locations, with essentially the same game plan: Re-tenant with a department store if possible, but otherwise go lifestyle. “These store locations are prime real estate for us to transform them into destinations,” says Jonathan Bucksbaum, CEO of General Growth.

Survival of the fittest grocer

In the grocery-anchored segment of the business, a kind of balance has emerged in many markets. Wal-Mart has won the discount segment of the grocery business, while grocers with strong brand recognition are winning over customers at higher price points. The lesser brands, however, are on the fast track to nowhere.

Those grocers who succeed generally understand their markets more intimately, and don't dictate everything from headquarters, notes Doron Valero, president of North Miami Beach, Fla.-based Equity One, No. 24 on this year's survey with a 20 million sq. ft. retail portfolio, primarily grocery-anchored shopping centers in Florida and the Southeast.

“Publix and the other successful brands let their customers tell them what they want, and then they provide it,” Valero says. In that way, they capture the large share of consumers who are disinclined to go on a regular basis to Wal-Mart or other hypermarkets for groceries. “Even some of the smaller chains, three to five stores, are doing well by specializing in lines that the big stores don't do well, such as Hispanic or Asian groceries.”

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