A Feb. 3 Business article incorrectly described an Alexandria shopping center. It is Foxchase, not Fox Chase, and the grocery store in it is a Magruder's, not a Giant. (Published 2/4/03) ----- A Feb. 3 Business article incorrectly stated that mall developers Rouse Co. and Mills Corp. see few signs of demand for more mall space. That assertion should have been attributed to retail analysts, not to the companies. (Published 2/5/03)
Last week, workers began ripping apart the old Hechinger's building on Wisconsin Avenue in Northwest Washington, beginning a long-awaited transformation of the site into gleaming new big-box retail.
Also last week, in conference rooms in Indiana, executives of giant mall owner Simon Property Group plotted a hostile takeover of Michigan mall owner Taubman Centers Inc., an acquisition that would give the combined companies control of seven Washington area malls.
Designers are trying to figure out how to turn Fox Chase, a shabby looking strip shopping center in Alexandria into a modern place to shop.
All were isolated developments in the retail world. But taken together they illustrate what retail experts and mall developers say is a fundamental reconsideration of where Americans will shop in the years ahead.
For decades, retail development has been pretty simple. Developers built strip shopping centers, of various sizes, to accommodate small groceries and other stores. Bigger versions of those shopping centers, known as "power centers" in industry lingo, were built for stores such as Wal-Mart, Target or Home Depot. Bigger still were regional malls, with anchor department stores on the ends and food courts in their middles.
Developers and the retailers they serve are increasingly concluding, though, that so many shopping centers dot the suburban landscape that the market is saturated. Consumers can only buy so much stuff and retailers need only so much space in which to put it. Where the population is underserved, there is no the land available to build. So much retail development has occurred, especially since 1990, that to do much more of it would lead to a kind of cannibalization. "The bottom line is we have enough malls and shopping centers, and the only ones to get built will be because of geographic shifts of population or newer formats that make sense," said David M. Fick, an analyst who follows the retail real estate industry for Legg Mason.
How do retail developers grow if they cannot build new shopping centers?
In the Washington area, the answer has been a renewed emphasis on urban retail, consolidation of mall owners and renovation of rundown properties.
By many measures, the market for retail real estate is strong in the Washington area. High-quality malls and shopping centers fetched record prices when they were sold last year. Local vacancy rates rose to 4.8 percent in 2002, from 3.3 percent in 2001, according to research firm Delta Associates, but are still well below those in most other cities.
But other research from Delta offers some idea of how saturated with retail the Washington area is. Delta says there are 23 square feet of retail space in the Washington area for every resident, compared with the 17-square-foot national average, although some people familiar with the local market say the space is justified by the high incomes of people here.
Malls may be the biggest losers in the competition, analysts say. There has been extensive mall construction over the past 20 years, even as a consumers have shifted their buying from department stores to "big box" retailers such as Wal-Mart. Meanwhile, new shopping options such as "lifestyle centers," or outdoor shopping plazas, have been built, and growing numbers of people shop using catalogs and the Internet.
Mall builders such as Rouse Co. of Columbia and Mills Corp. of Arlington see few signs of demand for more mall space.
"New malls are simply cannibalizing older properties," said John C. Melaniphy III, a Chicago-based retail consultant. "We've seen it all over the country, where the newer mall is built on the interstate, and it's brand new and shiny and has the latest tenants, and it tends to displace sales that were at the older center."
Fick said: "The bottom line is we have enough malls, and the only ones to get built now will be because of geographic shifts of population or newer formats."
Shopping centers like Landover Mall, without high-end tenants and strong traffic, are nearly empty. As a result, mall developers are focusing less on new construction and more on increasing profits by consolidating, squeezing operating costs and negotiating with national retailers.
Simon Property's attempted takeover of Taubman, which is being resisted, is the latest example. If the two companies were to merge they would be the dominant mall landlord in the Washington area. Taubman owns Lakeforest Mall in Gaithersburg, Marley Station in Anne Arundel County, and Fair Oaks in Fairfax County. Simon owns half of Fashion Centre at Pentagon City, and all of Bowie Town Center, Forest Village Park Mall in Forestville, and St. Charles Towne Center in Waldorf.
Roadside Development in Washington plans to turn the former Hechinger's building in Tenleytown into a complex to include the District's first Best Buy electronics store and a Container Store, with about 200 apartments on top.
"Retailers have done their expansions through the suburban market," said Roadside Development principal Richard Lake. "It's not dead, but there's only so much retail you can put out there and wait for the population to catch up to it."
The Tenleytown project will be expensive and time consuming, Lake said, but will fill a market need that is absent in the suburbs. The same thinking is behind construction of a Home Depot in Northeast Washington and plans for a Target in Columbia Heights.
"What a delight it will be to never ever drive to Rockville again" to shop, D.C. Council member Kathy Patterson (D-Ward 3) said at a ceremony last week as work began on the Tenleytown project.
In the suburbs the glut of conventional retail space is driving landlords to renovate older properties. Given so many choices, retailers will logically choose the nicest, they reason.
"There's a real flight to quality going on," said John Germano, who heads the Washington office of Insignia ESG, a brokerage with a large retail operation.
Edmund B. Cronin Jr., chairman of Washington Real Estate Investment Trust, has focused on buying rundown strip malls in the Washington suburbs and transforming them into higher-end properties, rather than building new shopping centers.
"These older centers have been bypassed with all the new buildings in the outer suburbs," Cronin said.. "They were allowed to deteriorate, so we're coming back and revitalizing those."
The Fox Chase shopping center, which Cronin's firm plans to renovate in the next year or two, is a prime example. It has a Giant Food grocery store and a movie theater, and is well-located, but hasn't been changed substantially in decades. Cronin plans to tear down part of it and rebuild, then tie in the rest of the center to make it look like one continuous complex.
As others have, Cronin notes the relative affluence of the D.C. shopper. It's true, said Fick, the Legg Mason analyst.
"D.C. is the healthiest market in the U.S. for most commercial property types," Fick said. "And it should remain a robust market, as long as there's nobody building more malls."
Neil Irwin writes about commercial real estate and economic development every week in Washington Business. His e-mail address is email@example.com.