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One-Stop Shopping

You couldn't walk more than 10 steps at the spring convention of the International Council of Shopping Centers in Las Vegas without tripping over a mixed-use project proposal. Yes, industry pros have been talking about this concept for a couple years now. But when Simon Property Group, the largest retail real estate owner in the country, is contemplating building apartments, office space, hotels and even self-storage, then you know the trend has fully arrived.

Simon has launched a $1 billion asset intensification program, aimed at squeezing more dollars out of its existing land holdings. It is talking of putting high-rise apartments atop, or in place of, anchor space. Its recent $72 million St. Johns Town Center in Jacksonville, Fla., included the first hotel at a Simon Property since the 1980s. The Indianapolis-based REIT has plenty of available land at the back of its parcels where self-storage centers could fit quite nicely.

The idea is now so pervasive in the retail real estate world that nearly every developer, from Simon down to the smallest strip center REIT, is talking about mixed-use.

Of course, there's still some debate on what truly constitutes mixed-use. Does it simply mean adding another layer — say some apartments or second-story office space — to any development? Or does it have to be something more grand?

True mixed-use focuses on walkable, work/live/play communities that create convenient urban living centers. “A lifestyle center with some apartments above the stores wouldn't necessarily fit that definition,” says Robert Stark, CEO of Ohio-based Stark Enterprises and developer of the $420 million, 1.6 million sq. ft. Crocker Park in Westfield, Ohio.

Developers also are engaged in a debate over the best way to put these projects together. On one hand, mixed-use is forcing retail firms to form alliances with other commercial developers. But on the other, it's leading some companies to conclude that they should broaden their internal capabilities so they don't always have to rely on others.

That's a big change for the industry. Until recently, the few diversified developers — Cousins Properties, Forest City Enterprises and Vornado Realty Trust, for example — were often viewed separately from the majority of companies that specialized. The alternative for some companies has been to remain private, like Streuver Bros. Eccles & Rouse, which has been content to quietly rebuild much of the Baltimore waterfront and other areas outside Maryland, from residential to office to retail, on its own. Its latest venture is a $50 million redevelopment of Heritage Harbor along the waterfront in Providence, R.I., with offices, retail and residential.

You don't have to convince Joel Murphy, retail division president of Atlanta-based Cousins Properties, that diversification is a good idea. “In the beginning of REITs, there were a few things the industry viewed as taboo, but we did them gleefully,” says Murphy, referring to Cousins' diversification of product type. For decades, Cousins has developed office, industrial and retail buildings. In the late 1990s, it began developing Avenue lifestyle centers in metro Atlanta and other Sunbelt cities.

Historically, analysts chided diversified developers for not focusing on a core property type. New Plan Excel Realty Trust, for example, in recent years finished a makeover that saw it dump all of its garden apartments and outlet centers in order to focus exclusively on community and neighborhood shopping centers. And Federal Realty Trust based in Bethesda, Md., was roundly slammed for its massive flameout at Santana Row, which even led to the ouster of then-CEO Steven Guttman.

But today, there is no developer hotter than Vornado, largely because of its entrepreneurship and ability to switch between property types. Companies long known for being the kings of one property type are branching out.

In a prelude to its talk of entering into other commercial real estate sectors, Simon Property Group, the regional mall behemoth, gobbled up companies specializing in community center development and outlet centers. Similarly, Kimco Realty Corp. is buying car dealerships in Canada through a joint venture partnership with Capital Automotive REIT, adding apartments to a few strip centers and taking part in a massive military base redevelopment.

Building and expanding

Santana Row, the high-profile $455 million project in San Jose, Calif., suffered from horrific cost overruns and a devastating fire before its planned opening in 2002. However, today it enjoys 90% occupancy and generates retail sales of $600 per sq. ft., and its 255 apartments are 98% leased. And the company recently decided to convert the apartments to condos and add new phases to the development.

“On the retail side, you're seeing mall developers looking to add apartments or multifamily components to existing malls or lifestyle centers,” says retail analyst Lou Taylor with Deutsche Bank in New York. “But we don't expect office developers to become retail developers.” Taylor adds that he is not ruling out the possibility of other types of cross-format mergers.

In a possible bellwether deal, Cousins recently acquired Atlanta-based Gellerstedt Group, a privately held niche player that builds multi-family urban units. Gellerstedt also specializes in construction management and build-to-suit services in Atlanta. The deal will enable Cousins to tackle residential as well. Previously, Cousins and Gellerstedt Chairman and CEO Larry Gellerstedt III had worked in joint ventures.

“We wanted to bring that expertise in-house,” Murphy says. “Now we can do any kind of residential.” Cousins partnered with Gellerstedt's previous company, Beers Construction Cos., to jointly develop a 117-unit condo complex in Atlanta's Midtown section, when Cousins acquired the company.

“It makes sense for Cousins to have all the arrows in their quiver to develop mixed-use properties,” says analyst Cedrick Lachance with California-based Green Street Advisors. “Cousins knows how to apply the development recipe.”

Cousins will develop its newest mixed-use project — Terminus — in the heart of Atlanta's trendy Buckhead neighborhood with about 600,000 sq. ft. of office space, 75,000 sq. ft. of retail and 60,000 sq. ft. of residential. In the transaction, which closed in June, the company picked up an in-town tract of land.

After 50 years of humiliation and defeat at the hands of suburban sprawl, urban centers provide something that the suburbs cannot: true mixed-use density in more authentic and compelling ratios of mixed-use over retail, Stark says.

Breaking out of the mold

Like other developers, Sembler Cos., a power center titan in the Southeast, is redefining its niche. “In a few years, people won't just call us a retail developer,” says Jeff Fuqua, president of Sembler's development division. “We'll be called a mixed-use developer.”

For years, the St. Petersburg, Fla.-based company focused on developing power and grocery-anchored shopping centers. Now, its attention is on mixed-use and developing residential atop its retail in several projects in Florida and Atlanta.

“We usually bring in developers and make them partners,” Fuqua says. “But we wanted to give it a try and learn it. We've gotten very good, and we are going to do our own.”

In Sembler's Edgewood retail district, a mixed-use project close to completion several miles from downtown Atlanta, the company hired consultants to help develop plans for 32 condo units atop stores, while it honed its expertise. The project, with 600,000 sq. ft. of retail, is among the first where Sembler dabbled in building its own apartments.

But the company seeks partners on larger projects, including Perimeter Place near Perimeter Mall, which includes a high-rise condo with 220 residential units and a six-story apartment complex that houses retail on the bottom floor.

Lincoln Properties, a residential property manager and developer, is building the retail space for Sembler, Fuqua says. “We own the rights below for the retail. Deals are very complicated but we're rewriting deals to protect retailers.”

David Marks, president of Marketplace Advisors in Maitland, Fla. says there is a real synergy. “As sophisticated developers learn from their partners, we see them getting into different types of land use.”

That concept, however, still remains at the cutting edge. Partnerships, or joint ventures, is the way most developers are handling it now, recruiting home builders and commercial developers to build the non-retail space.

And that's the way it should be, according to Federal Realty. Though Santana Row has succeeded in the end, Federal Realty is not too shy to talk about what it learned from the project.

“Some people mistakenly said we were unlucky with respect to the timing,” says Don Wood, president and CEO of Federal Realty. “But it would have been more prudent to lay off some of that risk.”

Today, the 700,000 sq. ft., $500 million project, an urban redevelopment with 66 stores, 18 restaurants, five spas, a hotel and residential units, is viewed as the company's most ambitious, and a blueprint for the firm's future.

Lessons learned

In the end, however, the risks, and how they were overcome, taught Federal Realty “a ton,” says Wood. For instance, as Federal Realty plans more mixed-use projects, it will mitigate risks with joint ventures and public-private partnerships.

Federal Realty's latest project is a mixed-use development at the site of an old mall Assembly Square and adjacent power center with Bed Bath & Beyond, TJ Maxx, Sports Authority and other tenants in Somerville, Mass.

The company recently acquired the 330,000 sq. ft. enclosed mall and power center for $100 million with plans to assemble a total of 50 surrounding acres. Wood says that while the company works on redevelopment plans, it's generating a 7% return on the property from rents at the power center. Federal Realty is talking to residential and, potentially, office partners for the project.

Joint ventures, however, aren't without their own problems. For one thing, they add new layers to deals. Michael Beyard, a senior fellow with the Urban Land Institute, a Washington, D.C.-based nonprofit research and educational organization, says joint ventures raise ownership questions, operational and finance issues, environmental conundrums, and even parking problems.

“It adds to the complexity of deals,” Beyard says. “For instance, how do you finance a condo deal if retail is underneath?” In cases where retailers require specific prototypes, design issues can occur when condos or rental units are built above. Parking is another problem.

And some analysts think consolidation won't be as big a trend as joint ventures. “I'm hearing more developers are going to partnerships,” says analyst Merrie Frankel with Moody's Investors Service, a provider of credit-risk management solutions in New York City.

But most say the line between retail developers and other types of developers will nonetheless continue to blur. Says Beyard, “It might solve some of the difficult dilemmas that arise out of joint ventures.”

Renée DeGross is an Atlanta-based writer.

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