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A Golden Age for Lifestyle Centers

The race is on to cover the land with lifestyle centers in a build-out reminiscent of the mall expansion that took place between the 1970s and 1990s. But lifestyle developers are wagering that secondary markets will be as fertile as large metropolitan areas — and even more so.

Why? Smaller communities typically lack upscale stores and restaurants in open-air settings, and lifestyle centers don't require the dense population that malls need to succeed. Additionally, the properties generate average returns of 10% to 12%, which is comparable to malls, but the projects generally are smaller and less costly to build. Lifestyle center tenants also save about 15% in common area maintenance (CAM) charges compared with mall retailers.

The bottom line: Experts predict that as many as 30 new lifestyle centers could open annually for the next five years before saturation. In fact, some 140 lifestyle centers are now open, and experts predict that the existing aggregate square footage will double to some 70 million sq. ft. over the next couple of years.

“Lifestyle centers have been validated; they're no longer small projects developed by small regional players,” says Michael Ebert, a partner with retail developer RED Development in Scottsdale, Ariz. “In five years, lifestyle centers will be where the mall business is today, and opportunities will be harder to find.”

But it's unlikely that lifestyle centers will achieve the same critical mass as malls, which already dominate the retail landscape. So, lifestyle center developers typically pursue infill locations, which are fewer in number — particularly in secondary markets, says Ebert, whose company frequently targets towns with universities, state capitals or both. In May, RED Development and Omaha, Neb.-based Quantum Quality Real Estate completed the 600,000 sq. ft. Village Pointe lifestyle center in Omaha.

Gold Rush

To this point, locations have been plentiful enough to support fervent development. Developers have built nearly 100 lifestyle centers since 1997, or about six times the number developed between 1987 and 1996, according to the International Council of Shopping Centers (ICSC).

Unable to ignore consumer preference for shopping at lifestyle centers, large mall developers, too, are pursuing the properties in smaller markets — or at least adding lifestyle-type adjuncts onto new or existing properties.

Competition already is making opportunities tougher to exploit. Case in point: Developers have targeted Allentown, Pa., a metropolitan area with a population of some 750,000, with three lifestyle center projects. Memphis, Tenn.-based Poag & McEwen and Stanbery Development have teamed up to create the 700,000 sq. ft. Shops at Saucon Valley. (Columbus, Ohio-based Stanbery, in fact, abandoned its own lifestyle center proposal on another site, in part, because of competition.)

About 12 miles to the southwest, Birmingham, Ala.-based Bayer Properties and Forest City Enterprises of Cleveland, Ohio, are planning to build the 800,000 sq. ft. Summit at Lehigh Valley. Meanwhile, the nation's largest mall owner, Simon Property Group of Indianapolis, is considering expanding its enclosed Lehigh Valley Mall by adding up to 80,000 sq. ft. of outdoor, upscale shops.

“The concept is becoming more and more popular, so inevitably projects that shouldn't be built are going to get built anyway,” says Michael Baker, principal of Independent Retail Research in Syracuse, N.Y., a retail consulting firm. “Hopefully, that will end after a few failures.”

Development Criteria

Typically, lifestyle center developers build in affluent neighborhoods where at least 40,000 households have more than $75,000 in annual income, says Baker. That's more than $30,000 above median household income in 2003, according to the U.S. Census Bureau.

Assuming that developers meet the location criteria, other crucial keys to success turn on creating the right tenant mix and providing consumers with a “main street” shopping experience, says Baker, a former research director at ICSC, who also serves as national retail advisor for UrbisJHD, a retail consulting firm in Melbourne, Australia.

As a result, thriving lifestyle centers have incorporated architectural embellishments, ranging from courtyards and fountains to distinct exterior finishes for each retailer to create the illusion of separate buildings.

That kind of detail can cost $200 per sq. ft. or more, double the expense to build a typical neighborhood or power center. But so far, neither the specter of overbuilding, nor the cost, has dissuaded lenders from financing the projects.

“Every major real estate construction and permanent lender is going after lifestyle assets,” says Robert Zelina, senior vice president and Columbus, Ohio, district manager for KeyBank Real Estate Capital. That's a 180-degree reversal from seven years ago, he adds, when few lenders understood lifestyle centers.

David Durning, managing director of originations for Prudential Capital Co.'s Chicago office, agrees. Prudential's interest in financing lifestyle centers has grown over the last three years as the company has become more familiar with the retail concept.

“But you want to be in business with somebody who's experienced in that product and who has relationships with retailers,” Durning says. “Just as important is making sure the developments are in the right location.”

Opportunities and Challenges

Certainly developers are having a hard time ignoring the potential rewards of lifestyle centers. The centers generate sales per sq. ft. that are 22% higher than malls, according to ICSC research. The retailers are a driving force in lifestyle center development. In addition to the lower occupancy costs, lifestyle centers give national stores a route for expansion, says James Rosenfield, senior manager director of Cushman & Wakefield's national retail practice.

The conventional wisdom is that if Wal-Mart can profit in communities with a population of 50,000, lifestyle centers can also thrive in small markets, Rosenfield adds.

“Because of its focused attention to retailing and its size, a lifestyle center should be able to survive in a smaller town better than a mall, which needs a bigger population base to support its 1 million sq. ft. But Rosenfield offers this word of caution: “Developers better not delude themselves about who the customers are and their buying ability.”

Of course, with some lifestyle centers approaching 1 million sq. ft., they could face the same challenges as malls — and more. For example, lifestyle centers generally sign tenants for five years, while malls lock in leases for 10 years or longer. The shorter leases expose lifestyle centers to competitors entering the market and stealing tenants.

But by adding big-box components to lifestyle centers — or even building power centers or neighborhood centers, or both, nearby — developers can limit potential competition. Thus, hybrid lifestyle centers are emerging. RED Development's SummitWoods Crossing in Lee's Summit, Mo., for example, features a cluster of upscale tenants within a larger development ringed by a Lowe's, Target, Kohl's and other power center retailers.

“Adding those types of tenants opens you up to a larger trade area and generates more traffic,” says RED Development's Ebert. “The goal for every shopping center is to be busy seven days a week — morning, noon and night.”

Retailers Play Hard Ball

In communities where lifestyle centers are competing, the battle for tenants may ultimately take its toll on rents, even if only one project ultimately gets built. “Retailers are only going to one project in a marketplace,” says Terry McEwen, principal of Poag & McEwen, which built its first lifestyle center in the late 1980s and is considered a pioneer of the retail product. “So, they'll take advantage of the competition and just beat up the developers.”

Poag & McEwen is facing off against Bayer Properties in the Fort Collins and Loveland, Colo., area, a fast-growing region with about 252,000 people. Retailers in that market have signed onto both projects.

In August, Poag & McEwen and Loveland-based McWhinney Enterprises broke ground on the 688,000 sq. ft. Shops at Centerra in Loveland, and tenants such as Dick's Sporting Goods, Barnes & Noble and Foley's Department Store have leased about 61% of the center. The project is part of a 3,000-acre development that will include an additional 1.3 million sq. ft. of retail, as many as six hotels, 10,000 homes and offices.

Meanwhile, Bayer has yet to break ground on its 450,000 sq. ft. Summit at Front Range in Fort Collins, but it has pre-leased 50% of the project, and tenants include Dillard's, Borders Books & Music, Cost Plus World Market and Wild Oats Markets.

“The enclosed mall industry was very competitive 20 or 30 years ago, and I'm not sure anything has really changed except that we're talking about lifestyle centers today,” says Jeffrey Bayer, a principal of Bayer Properties.

Retailers will decide between the two Colorado projects, in part, by determining which development strategy they like best, Bayer adds. Bayer Properties has selected an infill site near affluent neighborhoods, for example, while developers of Centerra hope to draw regional shoppers to its site at the intersection of Interstate 25 and U.S. 34.

But there's a wildcard. Mall developer General Growth Properties, which acquired the 600,000 sq. ft. Foothills Mall in the market, is considering redeveloping the mall site as an open-air entertainment village.

New Entrants to the Game

The lifestyle concept is even attracting developers who possess no lifestyle center experience. Houston-based Creekstone Cos., for example, is developing the 440,000 sq. ft. Towne Center at Cedar Lodge, its first lifestyle center, in a mixed-used development covering 90 acres in the heart of Baton Rouge, La.

Creekstone already has opened a 300-unit apartment complex in Towne Center and has rezoned 28 acres for office development. The lifestyle center, which will feature a Whole Foods, will open next spring. But PF Chang's China Bistro, Carraba's Italian Grill, Bonefish Grill and Fleming's Steak House will open in December on pad sites.

Creekstone Cos. began developing commercial projects, primarily apartments, in the mid-1990s. A few years later, lifestyle centers piqued the curiosity of Creekstone President Stephen Keller, who traveled around the country visiting and researching lifestyle projects.

In Baton Rouge, Keller eventually targeted 440 acres that had been owned by the same family since the 1800s. The city grew up around the land; for years the owner had no interest in selling and would-be buyers faced the arduous task of rezoning the plot. Creekstone worked slowly with the owner and surrounding neighborhoods when planning the development, Keller says, and eventually bought 90 acres.

“To my surprise, the first tenants we went to were very familiar with the site and had looked at it for many years,” says Keller, who grew up in Baton Rouge. “We think our customers will come to Towne Center for a shopping experience that they haven't had in Baton Rouge until now.”

Joe Gose is a Kansas City-based writer.


Lifestyle centers are generally defined as open-air shopping centers that mix national retailers with local boutiques that aim to provide upscale shoppers with convenience, but the concept is evolving.

  • In the last couple of years, the average size has grown from 330,000 sq. ft. to 400,000 sq. ft., and many lifestyle center projects now under development exceed 500,000 sq. ft.

  • Big-box retailers traditionally found in power centers are beginning to show up in lifestyle centers. In addition, lifestyle centers are becoming integral parts of planned mixed-use communities.

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