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Industry Awakes to E-Commerce Threat

Two-thirds of respondents to Shopping Center World's second annual industry forecast identify e-commerce as the topic that will attract the most attention in the year 2000, marking a dramatic flip-flop from last year's survey results.

E-commerce climbed from fifth to first in the survey, followed by the redevelopment of aging centers and Main Street/urban renewal. The economy fell from the top spot to fourth place. (Figure 1)

More than 200 shopping center owners/managers and finance/investment professionals participated in the survey conducted between August and October (please see "About the Survey" below ).

Other key findings:

* A large majority (80%) believe e-commerce poses at least some threat to traditional shopping centers.

* The availability of capital is expected to be the same in 2000 as it was in 1999.

* REITs and private investors are expected to be the most active investors in shopping center development, acquisition and renovation.

* Cinemas and themed restaurants have proven to be the most beneficial in generating traffic and/or sales at centers.

* Nearly three-fourths of respondents believe there is an oversupply of retail space.

* Some 76% of respondents expect revenue growth from rents to be strong or moderate. Another 18% of respondents expect no change.

* Retailer bankruptcies are expected to be as prevalent in 2000 as they were in 1999.

* Over half of respondents believe that building consumer brand awareness at centers is not important.

E-commerce explosion What a difference a year makes, particularly in the cyber world. A year ago the general consensus among industry experts was that e-commerce would grow, but only incrementally. Today that line of thinking seems to be on the wane. Figure 2 reveals that 14% of respondents believe e-commerce poses a serious threat to traditional shopping centers compared with only 4% last year. Meanwhile, the percentage of respondents who believe e-commerce poses no threat has dropped from 28% to 11%.

Respondents from finance and investment firms are more likely than shopping center owners and managers to believe that e-commerce poses some threat or a major threat to traditional shopping centers (86% vs. 75%, respectively).

When asked, "Which of the following topics do you predict will attract the most attention in 2000?" the clear front-runner is e-commerce, chosen by 66% of respondents, followed by redevelopment of aging centers (46%), Main Street/urban renewal (39%) and the economy (38%). Two topics tie for fifth place: entertainment as a component of retail (30%), and mergers and acquisitions among shopping center owners and managers (30%).

Respondents list books as the retail category most vulnerable to e-commerce (39%), followed by electronics (23%), computers (17%), music (17%) and apparel (14%). (Figure 3)

Of the owner/manager respondents, 21% indicate they have developed a strategy to react to e-commerce, compared with 15% of the financial professionals. Developing a website or Internet presence is the most frequently mentioned strategy. "Coupon distribution, mall websites, retailer participation on mall's site," writes one respondent. "Focus only on A+ assets," writes another.

"Emerging Trends in Real Estate 2000," a newly released report compiled by Lend Lease Real Estate Investments and PricewaterhouseCoopers, concludes that e-commerce may actually be a blessing in disguise for the shopping center industry by putting a governor on development. "Some observers credit its looming specter with a very positive development - the slowdown in new retail construction," according to Emerging Trends.

"The problems with retail real estate are oversupply, shoppers' time constraints, suburban congestion and changing consumer tastes. E-commerce focuses concerns and potentially exacerbates the impact of these for-midable issues," the report adds.Availability of capitalIf anything, optimis m among owners/managers about the availability of capital in 2000 has increased significantly over a year ago. In 1998, 55% of owners/managers responded that they believed capital would be less available in the coming year, compared with 24% this year.

One explanation is that the cloud hovering over the CMBS market at this time last year has been lifted. A correction in the pricing of capital in mid to late 1998 caused in part by a financial crisis overseas effectively eliminated some of the players in the CMBS arena. The market has since rebounded.

Figure 4 shows that financing professionals as well as owners/managers have a rosy outlook on the availability of capital. When asked, "Compared with 1999, how do you expect the availability of capital for developers and owners of shopping centers to change in 2000?" the majority of respondents (63%) say it will remain the same. Another 22% believe capital will be less available, while 14% state that it will be more available.

Some 95% of respondents predict lenders' underwriting standards will be the same or somewhat more restrictive in 2000 compared with 1999. Those who believe capital will be less available are more likely to believe that lenders' underwriting standards will be more restrictive.

Construction, renovation plans Over half of the respondents indicate plans for new construction or renovation on grocery-anchored strip centers. Nearly half indicate new construction or renovation plans for neighborhood shopping centers.

Figure 5 takes a closer look at the construction prospects in the coming year. When asked, "On what types of centers will new construction or renovation take place?" the largest percentage of owners/managers and financial professionals (53%) indicate grocery-anchored strip centers, followed by neighborhood shopping centers (47%), Main Street/urban centers (27%), big boxes/power centers (26%), regional malls (26%), freestanding stores (21%) and hybrid centers (12%).

As shown in Figure 6, nearly half (49%) of shopping center owner/manager firms plan to renovate aging centers in 2000. Additionally, 38% of owner/manager respondents plan to develop new centers, and 33% plan to acquire new centers.

As for finance professionals, when asked about their individual plans for 2000, 47% plan to acquire or finance acquisitions of new centers, 39% plan to finance renovations of aging centers, and 36% plan to finance development of new centers. (Figure 6)

>From an investor's perspective, the best investment opportunities appear >to mirror the construction trends. When asked, "Which of the following >types of properties will be most attractive to financiers in 2000?" the >largest percentage of finance respondents (59%) indicate grocery-anchored >strip centers, followed by neighborhood shopping centers (45%), big >boxes/power centers (30%), regional malls (29%), freestanding stores >(20%), Main Street/urban centers (18%) and hybrid centers (13%).

Are we 'under-demolished'? Some industry analysts are convinced that 20% to 30% of existing retail space is redundant, leading one Emerging Trends official to conclude that retail is substantially "under-demolished."

SCW's survey reveals that 71% of respondents believe an oversupply of space exists.

Figure 7 shows responses to the question, "With respect to supply (by center owners/managers) and demand (by retail tenants) how would you characterize the current situation?" Oversupply of all types of space is cited by only 7% of respondents; 33% believe there is an oversupply of certain types of space; 36% believe there is an oversupply of space in certain markets; and still another 21% believe that supply and demand are in equilibrium.

When asked, "If you believe that there is an oversupply of space, where is the problem most prevalent?" nearly 40% of respondents identify big boxes/power centers, followed by regional malls (26%), neighborhood shopping centers (24%), grocery-anchored strip centers (14%), freestanding stores (12%), Main Street/urban centers (9%), and hybrid centers (5%).

Similarly, respondents who believe there is an oversupply of retail chains were asked in which retail categories the problem is most prevalent. Apparel received the largest number of responses (27%), followed by computer hardware/software (23%), discounters (21%), drugstores (21%), home improvement (20%), bookstores (19%), office supplies (19%), department stores (18%), electronics (18%) and grocery stores (9%).

The entertainment factor SCW's survey reveals that three in 10 respondents expect entertainment as a component of retail to gain attention in 2000.

More than 20% of respondents indicate plans to add entertainment to centers in 2000 and beyond. Of those respondents, the largest percentages plan to add themed restaurants (53%), cinemas (51%) or bookstores (42%).

When asked the question, "Which of the following forms of entertainment are contained within shopping centers you own, manage or finance?" 34% say bookstores and 34% say music stores, followed by themed restaurants (30%), cinemas (28%), arcades (19%), amusements located in common areas (13%) and nightclubs (7%).

Interestingly, the largest segment of respondents (37%) reports no forms of entertainment in their centers. The size of the center may offer an explanation. Centers that average 100,000 sq. ft. or larger are more likely to offer entertainment options than centers that average less than 100,000 sq. ft.

When asked, "Which categories have proven to be the most beneficial in generating traffic and/or sales?" 37% of respondents list cinemas and 37% list restaurants, followed by bookstores (31%), music stores (18%), amusements located in common areas (12%), arcades (10%) and nightclubs (3%).

Although the conventional wisdom is that these various entertainment elements are crucial to the long-term success of many aging or ailing centers, the Emerging Trends report takes a more critical view of the proliferation of entertainment.

"Recently, some mall owners and stores have been placing bets on elaborate and expensive entertainment features - theme restaurants, multimedia walls, glitzy public spaces - to lure shoppers," states Emerging Trends.

"Most theme restaurants have been busts, the trendiness wears off quickly, and the food doesn't rate repeat visits," the report continues.

"Many entertainment amenities are costly to install and maintain. Attention spans for these gimmicks are shorter than ever. The more successful entertainment promotions have been lower-cost draws - antique or car shows, and traveling museum exhibitions," Emerging Trends concludes.

Mergers and acquisitions Three in 10 respondents to the SCW survey expect M&A activity among shopping center owners and managers to gain attention in 2000. Half of the respondents expect the M&A rate to increase somewhat in 2000 compared with 1999.

Meanwhile, three-fifths of respondents expect the rate of M&A activity among retailers to increase in 2000 compared with 1999.

When asked, "In which retail category do you anticipate the greatest number of mergers and acquisitions?" 40% of respondents select grocery stores, followed by computer hardware/software (37%), apparel (30%), drugstores (29%), electronics (29%), office supplies (23%), department stores (22%), bookstores (19%), discounters (18%) and home improvement (16%)

Bankruptcies to abound Don't expect retail bankruptcies to disappear from the headlines anytime soon. Half of the respondents to the SCW survey believe the rate of retail bankruptcies will stay the same in 1999, while another 43% believe the rate will actually increase. One reason for the current spate of bankruptcies may be that the market is oversaturated with product.

Retail space per capita increased 34% in 12 years, rising from 14.7 sq. ft. in 1986 to 19.7 sq. ft. in 1998, according to Emerging Trends.

When asked, "Which categories of retailers do you expect to experience the most bankruptcies?" 38% of respondents list the apparel category, followed by computer hardware/software (34%), electronics (30%), bookstores (21%), discounters (18%), office supplies (16%), department stores (14%), home improvement (11%) and drugstores (10%).

REITs remain a force Although retail REITs in particular have struggled to boost their stock prices on Wall Street in 1999 and there is a pervasive belief that consolidation in this sector will accelerate, don't write the obituary on REITs just yet.

When asked, "Which of the following do you expect to be the most active investors in shopping center development, acquisition and renovation in 2000?" the largest percentage of respondents (46%) indicate REITs, followed by private investors (44%), pension funds (35%), insurance companies (24%) and banks (18%).

During the past decade, REITs have captured about 40% of all regional shopping centers, dramatically shifting ownership away from institutional and private owners, according to Emerging Trends. "The integration of ownership and management aligns interests for investors. Large REIT companies can leverage off their best properties and engage retailers with leasing strategies for multiple sites," the report states.

Branding: Too much ballyhoo? Simon Property Group of Indianapolis launched a multimillion-dollar branding campaign in 1999, most notably through radio and television commercials. The world's largest shopping center company, Simon aims to create an emotional bond with consumers and to raise the profile of its portfolio. An increasingly prominent brand has made it easier for Simon to form lucrative tie-ins with Visa, Pepsi and other companies.

Although the issue has gained considerable attention, SCW's research shows that most respondents remain indifferent to branding of shopping centers, as shown in Figure 8.

When asked, "How important is it to build consumer brand awareness at shopping centers so that shoppers recognize the owner of the center?" 53% of respondents say it is not at all important, 30% answer that it is somewhat important, 15% believe it's very important, and 2% have no answer. The results are basically unchanged from a year ago.

Several industry experts have told SCW that shoppers simply don't care who owns the mall, that it is the retailers that shoppers come to see.

SCW's survey reveals that shopping center owners/managers are more likely than finance and investment firms to say brand awareness is not at all important, 61% compared with 44%, respectively.

Methodology, data collection and analysis for the 2000 Industry Forecast were conducted by Intertec Corporate Planning and Research. A total of 1,000 surveys were mailed to Shopping Center World subscribers.

The survey was sent to 500 shopping center owners and managers in addition to 500 finance and investment professionals with the title of CEO, president, partner or owner. Data was collected between August and October 1999.

In all, 208 completed surveys were returned, resulting in a 21% response rate.

This study was designed to gather information from both SCW owner/manager and finance/investment subscribers with regard to expectations and predictions for 2000, and to compare any differing opinions between the two groups of subscribers.

The survey included 30 questions covering a variety of topics: the economy, availability of capital, e-commerce, development opportunities, lenders' underwriting standards, entertainment as a component of retailing, rents, consolidation among retailers, mergers and acquisitions in the shopping center industry, oversupply of retail space, and the importance of brand awareness.

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