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1999 Industry Forecast

Ever-evolving but always resilient, the shopping center industry finds itself facing several challenges as the sun begins to set on the millennium: the ongoing perception that the nation is overstored, consolidation among retailers, the redevelopment of aging malls, the Internet as a competitive form of retailing and the availability of capital, just to name a few issues.

The 20th century witnessed the birth, maturation and metamorphosis of the shopping mall. And along the way, there has been some carnage. That harsh reality is noted in "Emerging Trends in Real Estate 1999," a report recently drafted by Lend Lease Real Estate Investments and PricewaterhouseCoopers.

"Six years ago, 'Emerging Trends' shocked industry pros by suggesting that 15% to 20% of all malls in business in 1990 would be out of business in 2000," the report states. "Now many believe the percentage will be higher. Risk-adjusted return profiles have not improved. Both malls and power centers are rated low-return/high-risk investments."

But like death and taxes, shopping malls will always be there. Admittedly, they have had to reinvent themselves, but in doing so they have generated excitement and new opportunities -- many of them awaiting just ahead in the new year.

To investigate what shopping center owners and managers predict will be the hot topics for 1999, Shopping Center World recently conducted a survey of 202 shopping center executives nationwide. The survey also explores some of the respondents' upcoming plans. Following are highlights of the report.

'It's the economy, stupid!' That now-famous political phrase may hold more true than ever in a global economy where real-time information can send shock waves throughout world markets in a hurry.

Figure 1 shows responses to the question, "Which of the following topics do you predict will gain the most attention in 1999?"

The economy was cited by 87% of respondents, followed by redevelopment of aging malls (77%), entertainment retailing (63%), consolidation among retailers (62%), changing demographics of society (60%), and the Internet as a competitive form of shopping (57%).

Furthermore, when asked if the current volatility in the capital markets will affect their ability to obtain financing, 53% of respondents say it will have a moderate effect and another 20% say it will have a considerable effect on their ability to obtain financing.

And on the issue of whether the long-running honeymoon between borrowers and lenders -- and the easy money it's provided -- has subsided, the answer is an emphatic "yes."

SCW's survey reveals that over half (55%) of respondents believe that capital will be less available for developers and owners of shopping centers in the coming year. Only 9% of respondents believe capital will be more available in 1999. Still another 31% believe it will flow about the same.

The Internet factor The conventional wisdom among industry experts -- many of whom have addressed this topic at various roundtables, trade shows and educational forums attended by SCW in 1998 -- is that Internet retailing is growing in popularity. (Note the success of in the online book business and Peapod Inc.'s expansion in the online grocery business.)

But, experts stress, the growth in popularity is only incremental.

SCW's research appears to reinforce that viewpoint. While 57% of respondents believe "the Internet as a competitive form of shopping" will gain attention in 1999, it is not expected to be a major threat (Figure 2). Only 4% remark that it poses a major threat, while 66% indicate that it poses some threat. Another large segment, 28%, weighs in with its opinion that it poses no threat.

Consolidation A scorecard has come in handy over the past three years to stay on top of both the plethora and velocity of mergers and acquisitions in the shopping center industry. But that trend may be waning.

When asked to predict the rate of mergers and acquisitions within the shopping center industry in 1999, 11% of respondents say it will continue to increase rapidly, while 42% say it will increase somewhat. Nearly half of the respondents, 45%, believe that M&A activity will level off in 1999.

Meanwhile, nearly nine out of 10 respondents believe the consolidation of retailers will continue at its present pace or increase. Only 8% believe the pace of consolidation will drop.

Figure 3 shows responses to the question, "In which categories do you expect the greatest consolidation among retailers?" Grocery stores were selected by 62% of respondents, followed by electronics (47%), apparel (43%), computers (42%), drugstores (39%), discounters (36%), department stores (28%), home improvement/home stores (5%), sporting goods (5%), and office supplies (4%).

The REIT factor When asked to predict the pace of property acquisitions by REITs in 1999, 46% of respondents say they expect property acquisitions by REITs to subside somewhat. An additional 20% expect a dramatic drop in acquisitions. Another 12% predict the pace to increase, but only 2% expect a significant rise in acquisitions by REITs.

What is the reason for this apparent retreat? "Emerging Trends," the report issued by Lend Lease, reports that, in general, "REITs got slapped around in 1998, a healthy correction. They ran out of gas when investors realized the high-flying growth strategies weren't in sync with leveling-off market fundamentals -- notably rents stabilizing in the face of development."

REITs facing stagnant stock prices are finding it difficult to obtain the capital they need to grow their portfolios. It puts them between a rock and a hard place.

"Emerging Trends" refers to the comparatively poor performance that equity REITs posted in 1998 compared with the S&P 500.

"We continue to raise concerns about regional mall REITs." the report warns. "Many analysts aren't factoring into their calculations the significant capital calls for these properties. Mall REITs were among the most avaricious buyers of property packages from insurers and pension funds that were unloading holdings. They bought some dogs."

Renovation reigns king Perhaps there is good reason that 77% of respondents to SCW's survey believe the redevelopment of aging malls will gain attention in 1999.

This belief is based on respondents' own plans, as 74% report they will renovate centers in their own portfolios within the next year (Figure 4). Another 67% indicate they plan to develop new centers.

Also, 55% of respondents say they will acquire new centers, while 45% indicate they will sell centers in 1999. Lastly, 39% of respondents remark that they plan to maintain their portfolios with little or no change.

Interestingly, while the majority of respondents predict capital will be less available next year, the majority also plan to develop (67%) or acquire (55%) new centers.

Grocery-anchored centers and neighborhood centers are most frequently mentioned as the type of stores that will be constructed and renovated.

When asked, "On what types of centers will construction and/or renovation take place?" a whopping 72% of respondents who plan construction or renovation in 1999 cite grocery-anchored strip centers, followed by neighborhood centers (64%), open-air centers (48%), power centers (39%), regional malls (31%) and entertainment centers (21%).

The "Most Favored Nation" status given to grocery-anchored centers is not surprising, given the comparatively low financial risks associated with developing such centers. In roundtable discussions hosted by SCW throughout the country in 1998, shopping center owners have repeatedly stated that even in times of recession people need to buy groceries.

Consequently, the grocery-anchored center is a highly prized commodity among shopping center owners.

At the same time, however, SCW's research shows that respondents believe the greatest amount of consolidation among retailers will occur in the grocery category.

That trend raises the question: Will consolidation spell doom for older, poorly located grocery-anchored centers, and what does that portend for acquisitions or new development?

Revenue growth When asked the question, "Among the shopping centers you own, what is your projection for revenue growth from rents in 1999," 71% of respondents indicate moderate growth, while only 6% anticipate strong growth. Still another 14% of respondents predict no change in revenue growth from rents. The pessimist camp is a small one: Only 5% predict a moderate decline. Furthermore, 0% predict a sharp decline.

Entertainment: '90s style When the retail industry reflects someday on the 1990s, it will likely ruminate at length on the explosion of entertainment options at shopping centers, ranging from movie megaplexes to giant bookstores and record stores to state-of-the-art arcades to an endless array of amusements. There are literally dozens of concepts being proposed and launched, but the industry appears to be sorting out which ideas will generate both traffic and retail sales.

Among the survey's findings, 94% of respondents indicate that entertainment options are contained within their centers and 52% plan to add entertainment in 1999.

Another 45% of respondents do not plan to add entertainment in the coming year and beyond. Currently, music stores and cinemas are the most frequently mentioned forms of entertainment included in centers.

Figure 5 shows responses to the question, "Which of the following forms of entertainment are contained within your shopping centers?" Music stores were cited by 79% of respondents, followed by cinemas (73%), large-scale bookstores (65%), themed restaurants (54%), arcades (32%), amusements located in common areas (27%) and nightclubs (16%).

A somewhat similar pattern emerges when respondents are asked what forms of entertainment they plan to add in 1999 and beyond. The majority, some 66% of respondents to that question, select cinemas, followed by themed restaurants (55%), large-scale bookstores, (31%), music stores (22%), amusements located in common areas (14%) and arcades (14%).

Additionally, cinemas, large-scale bookstores and themed restaurants have proven to be the most beneficial entertainment options for generating traffic/sales at centers, according to respondents who offer entertainment options in centers. As shown in Figure 6, cinemas are cited as most beneficial by 58% of respondents, followed by large-scale bookstores (40%), themed restaurants (31%), music stores (24%), amusements located in common areas (5%), arcades (4%), and nightclubs (3%).

The majority of respondents (60%) measure the success of entertainment additions by both traffic and sales. A surprising 12% of respondents either do not measure the success of an entertainment addition or do not know how the success is measured.

As for the overall value of entertainment, 66% of respondents see a correlation between the addition of entertainment options at retail centers and same-store sales, either across the board (22%) or with certain types of stores (44%).

Are we overstored? Nearly 19 sq. ft. of retail space per person exists today, up significantly from 10 sq. ft. several years ago, according to industry data. As shown in Figure 7, while the majority of respondents (73%) believe the increase in retail space per capita is a sign that supply is catching up with demand, the majority (61%) also believe that the country is overstored. Additionally, 44% of respondents say the current configuration of stores is not efficient. Respondents indicate that the problem of excessive or poorly configured retail space is most prevalent in big boxes/power centers.

Branding: How important is it? One of the buzzwords on the lips of industry pros in the past few years has been "branding." The idea is to increase awareness among shoppers about which company owns a particular group of malls. One approach is for shoppers to earn points by frequenting select malls and subsequently receiving discounts.

However, when specifically asked to assess the importance of building brand awareness at their shopping centers so that shoppers recognize the owner of the center, 61% remark that it is not important at all, another 29% say it is somewhat important (Figure 8). Only 9% of respondents believe it is very important.

The naysayers to branding's importance may reflect the harsh reality that it is difficult to brand shopping centers. Indeed, it's highly probable that most shoppers don't even know or care who owns a particular center. Shoppers tend to be more preoccupied with the retailers and their merchandise.

One industry figure who believes branding doesn't work for his company is Frederick Evans, president of Irvine Retail Properties Co., based in Newport Beach, Calif. In the September issue of Shopping Center World, Evans stated:

"We want to be part of the community that a project is in. If it is a particular neighborhood center and it is in Woodbridge, we want that to be Woodbridge's place, not the Irvine Co.'s place. Our attitude has been to make those things secular geographically and to stand alone geographically as much as possible."

About the Survey Methodology and analysis for the 1999 Industry Forecast were conducted by PRIMEDIA Intertec Corporate Planning and Research. The study was designed to gather information from top shopping center owners and managers with regard to expectations and predictions for 1999.

RDI, an Ohio-based market research firm, conducted the telephone survey. Calls were made between Oct. 21 and Oct. 27 to professionals with the title of vice president and above at 473 top property owner/manager companies. Up to six attempts were made to contact each person.

In all, 202 usable surveys were collected. The database of company names used for this survey originated from Shopping Center World's Top Managers Survey, which is conducted annually by PRIMEDIA Intertec's Directory Department. The median space managed by respondents to the forecast survey is 2.9 million sq. ft.

The survey included 20 questions covering a variety of topics: the economy, redevelopment, entertainment retailing, consolidation among retailers, mergers and acquisitions in the shopping center industry, the importance of brand awareness, Internet retailing, and the increase in retail space per person.

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