Research

Podcast: The future of shopping centers

In the U.S. and around the world, the recession is forcing shopping center developers and retailers to re-think the design of the places where we spend our money. Some say the very nature of shopping has changed. Recently the International Council of Shopping Centers held a meeting of its North America Research Advisory Task Force in Phoenix. Mark Stapp, director of the W. P. Carey School's Master of Real Estate Development program caught up with Michael Niemira, ICSC's director of research, after the meeting. Listen as Stapp poses the key question.

2010-03-04

In the U.S. and around the world, the recession is forcing shopping center developers and retailers to re-think the design of the places where we spend our money. Some say the very nature of shopping has changed. Recently the International Council of Shopping Centers held a meeting of its North America Research Advisory Task Force in Phoenix.

Mark Stapp, director of the W. P. Carey School's Master of Real Estate Development program caught up with Michael Niemira, ICSC's director of research, after the meeting. Listen as Stapp poses the key question.

Transcript:

Knowledge: In the U.S. and around the world, the recession is forcing shopping center developers and retailers to rethink the design of the places where we spend our money. Some say the very nature of shopping has changed. After the meeting, Mark Stapp, director of the W. P. Carey School's Master of Real Estate Development Program, caught up with Michael Niemira, the International Council of Shopping Centers's director of research. Listen as Stapp poses the key question.

Mark Stapp: One of the questions I know that ICSC is concerned about is what the shopping center of the future will be and how you go about determining that, because I would think by its very nature it's an evolving, ever-changing situation.

Michael Niemira: That's true, Mark. In fact, it's not even one vision, and we're having this discussion in Europe. We're having it here in the United States and elsewhere around the world. The industry is in a different stage of development across the globe, so you really do have different answers to what that future will be.

In the U.S., I think the focus will increasingly be about examining what that tenant mix has to be in the face of some new technologies, responding to the space needs, what tenants will be the anchors of the future in that. That's an important part. How is the financing going to change? Where is the source of financing, internationally, may be increasingly more important.

We've certainly have seen the rise of REITs (Real Estate Investment Trusts) around the world more and more, and that will continue to be a big source of that. There are lots of changes that this last recession, this last global recession, have really made us think about sooner. They probably were always there. We always had to think about them long term, but the long term now is a lot shorter term than we originally thought.

Stapp: You know what's interesting is that you mention some of these elements of what the shopping center of the future may be. It makes me think about the fact that real estate is essentially social science — and you and I have talked about that a little bit. We wrap these social constructs around this physical asset that we call real estate, but that physical asset has to function for those social needs.

I think you've got housing, but next to housing the part of real estate that is probably more of a social science than anything else is retailing because it reflects not only our needs, but our wants and how are things changing across the globe and how, as you mentioned, technology and these other things going to reshape how we view these retailing experiences. What do we want from it?

You and I have talked about the fact that we could take this to an extreme where technology suggests we never have to leave our house to buy anything that we need or want. We know that that's not going to happen. You start backing off from there and saying, okay, what are these things that will affect us?

By that very nature, the collateral will change and … the financing people [ask] what is it that I'm actually financing? What is it I'm underwriting here? If the cash flow becomes less attached to a place, as it may be in an internet environment, and the shopping center maybe becomes more of a social environment, what are you underwriting?

Niemira: You know years ago, Mark, I worked at Merrill Lynch, and Merrill bought a small investment house, and you talk about what are you buying — this was not very successful because everybody left. [Merrill] had the company, but they didn't have the talent. What are you buying really is the appropriate question? I guess from the retail real estate side the starting point here is the consumer, obviously, is that driver of the retail real estate industry and there are clearly lots of changes, some that are pretty well telegraphed demographic changes are pretty well known.

We're increasingly trying to segment better to understand buyer behavior better and data mining is huge. It's a process that's changing, but in that change that have this technology change, how the consumer thinks, how the consumer buys and what the consumer wants. To often, I think, when you think about retail real estate, you think of merchandise, but increasingly I think the mix has to change, increasingly it has to have more of a service component.

It doesn't take much to step back and look at the share of consumer spending that's been going into services, not only in the U.S., globally. You need to have a bigger and bigger service component because that's unlikely to be affected by internet demand or any of the electronic services if you have to be there in order to get the service … I've raised this with the industry for a number of years and one of the things that I've always been told, well, the problem with service is you don't get as much rent. You know what? That's not the only part of the equation. Obviously, it's also what about the traffic and that's important too.

Stapp: That does go to the point of what are you underwriting when you're looking at valuing property. When these models begin to change and we don't have comparables because these are things that happen — an incremental aspect of the business is it doesn't all change at one time. One person does it. You look at the success. You judge things. Other people begin to see the opportunity and begin to reshape when they're doing.

It throws a lot of what has been traditionally done and how it's been traditionally done up in the air, which really makes it a relevant subject for us to be talking about now and looking at how we'll come out of this recession, if we've learned anything and how that knowledge is beginning to impact what we're doing.

The value of information is its ability to affect a decision, and being the director of research it's you, or the person who's controlling that information, that helps that industry make better decisions. Are you finding it difficult to get some of the industry leaders to understand the critical questions they should be asking versus relying on old habits?

Niemira: Well, there are some that get it. There are some that are thought leaders in the industry and those are the ones you want to align yourself with, because they can move the whole industry. We have formed some committees to just do that, to actually get the broader discussion going, exploring lots of potential for the property use and how to get the best use of the property. It's multi — I think your term was multi, not faceted, but you had a word for.

Stapp: Transdisciplinary.

Niemira: Transdisciplinary, okay. Essentially, that's really — you need to bring a group that has that kind of perspective. It is important to talk about these issues collectively. Our industry leaders have said, yeah, it's the right time and we not only need to talk about it now, but we need to continually talk about it, which was a surprise for me that they said that kind of response. It's not that … we talk about the future once and then move on, it's like we need a quarterly discussion about this and what's changing, are we positioned strategically for that change.

Stapp: Evolution.

Niemira: Evolution, exactly.

Stapp: It's not a singular event. It's evolving, so the dialogue needs to evolve.

Niemira: Right.

Stapp: The use of the term transdisciplinary has become really important to our institution, to ASU, as we look at opportunities to take disciplines that have historically dealt with the same subject, but not done it in a coordinated manner, and bring them together and try to establish a more holistic understanding of some of these issues, and particular social issues and things that impact what we're doing as a society.

The ability to work with ICSC is really important to us as we look at how we embed ourselves from an educational standpoint into the industry itself. This dialogue is one that we can continue for a long time.

Niemira: The other thing that I would love your thoughts on, Mark, is about the whole mixed use wave, that more and more this distinction between the segments, which we do very well here, becomes blurred. It'll become increasingly blurred even within the segments.

What's a shopping center 25 years from now? We may not have these nice, distinct boxes that we've created now. We probably won't. It'll be a hybrid of some sort, but it's also, aren't we moving increasingly more towards some hybrid properties that has a little of this, a little of that, a mixed use?

Stapp: That's what people and I believe we should be doing. That maximizes the use of space and maximizes the social opportunity that exists whether it is traditional mixed use, which we may think of as vertical mixed use, the same use is in a single building or whether it's multiple use, which is buildings that are physically separate but adjacent to each other around a common theme.

That's an example where in order for that to happen you have to change the financing constructs that we know live with because as much as we segment our buyers and we segment real property uses, we've segmented financing. They have different underwriting criteria, which makes it very hard to get those kinds of projects done. I think land use planning from a regulatory standpoint is starting to change as we look at the more popular use of form-based codes versus the traditional kinds of zoning codes.

It will be important then to begin changing not just the zoning codes, but also the building codes. The design of those different uses sometimes makes them hard to be physically connected because of the building codes. When you've got ground floor retail, which you love to have, and it's got a restaurant because that's a very social use that you'd like to liven the street, you've got venting problems. You've got fire safety issues. It makes it very hard to have anything above them.

You and I have talked about before the evolution of space, because as it becomes physically obsolete or socially obsolete, it makes it very hard to then convert those uses also. I think that's where the planners, that's where the architects and I think that's where even the retailers would like to go, it's just going to be hard as we change these other social constructs to get us there.

Niemira: It's funny from my standpoint. I've reached out many a time to the planning — American Planning Association and others, without much interest, to have that connect. It's sort of like, well, they're doing their thing. They don't really need to be connected with us, but I think we need to know what they're thinking and in turn help them to rethink what they're proposing.

Stapp: You make an interesting point because there is a professional organization that's pushing an agenda that may be completely disconnected from the reality of the users and that just makes it, although the intent may be there, it may be misaligned.

Niemira: Yes, yeah.

Stapp: That's a problem. I can see where that happens because there isn't the crosspollination and it is based upon maybe some altruistic thought process that may exist with the planners about creating space, not realizing the creation of that space is based upon the same social issues that the retailers are most interested in.

They want people there and they want people to engage and have a positive experience, so that they return or stay longer. If you don't have that connection, you don't — you may unnecessarily create further barriers or not remove barriers you want to get rid of.

Niemira: How are you handling that problem at ASU?

Stapp: I will say that we are doing this based upon a platform that our president had put out, which was called A New American University. Its focus is to be socially connected and relevant, community embedded and to be transdisciplinary. The encouragement is for all of us to reach out and find those others within the university, within the community, that we can bring together to deal with these problems, so we don't have as they call them these old silos of knowledge or education.

Our program, the Master's of Real Estate Development, was really one of the first examples of that within a new American university that really did this in a significant way, by bringing the college of law, the college of design, the college of construction and engineering and the college of business together and sharing that faculty.

Now, we're reaching out beyond that to the sustainability folks, to the public policy folks, and trying to use that to enrich the educational experience from our student's standpoint, but also make us more relevant to the community and more relevant to the professional organizations that these students go out and are a part of.

Niemira: We certainly embraced sustainability as an issue too. From a research standpoint, we internally didn't have the expertise that's why we had a research scholar kind of address that.

Stapp: It's an interesting subject that covers so many different areas, that the term is so hard to define. It is, in fact, about life, in sustaining life. Wildlife biologists have used the term for a long time and it has to do with the quality of the habitat to support a species. We've adopted that now into looking at human environments and we're a complex organized system and that makes study of sustainability very, very interesting and covering a lot of different areas.

[The term] gets used in all sorts of ways. The term sustainable gets used a lot of different ways. In retailing it starts to take on all sorts of interesting sidelines regarding the value chain, regarding the products themselves, regarding reuse of the products, regarding the distribution of the products and how retailers begin use that to create market differentiation and branding, whether it's purely opportunistic in order to differentiate themselves and increase volume or whether it is altruistic. It really doesn't matter as long as you get to the same spot.

Niemira: Right. Actually, there was a study that was just released about a month or so ago that consumers basically will not pay, as a group, will not pay more for something that's more environmentally friendly, but they want it.

Stapp: Given a choice between two products of —

Niemira: Of the same price.

Stapp: Offering the same value proposition, the same price.

Niemira: Yes.

Stapp: Yes.

Niemira: We're evolving. From the developer or the owners of center' standpoint it was always not embraced because it was not necessarily something that you could pass that cost along. Now, it — I think, developers are seeing the value that it just holds down their cost, recycling water and things like that. The developer in this case may have a very different perspective than the retailer.

Stapp: Yes.

Niemira: Slowly, they're coming together.

Stapp: Slowly, they're coming together and I think the developer as we advance our understanding of “sustainable building systems” and beginning looking at the value of those from the standpoint of life cycle costing and what we do with buildings. I do think that part of this dialogue has to be about changing our view on life cycle for buildings and materials, because at the end of that life cycle what do you do with them.

We've seen some of these life cycles become shorter as trends have changed. We had a trend in retailing that caused a particular form or typology that now we're finding isn't conducive, and what do you do with it. If there were other kinds of building systems that allowed that to be more easily manipulated, to not cause waste, to be cheaper to change, it may be a different conversation than simply saying, okay, I know what the retailer needs. Let's go find out the easiest way to financing it, design it and build it.

Niemira: That's important, how you design for future needs and not just for today.

Stapp: Which is the shopping center of the future.

Niemira: Exactly.

Stapp: Thank you.

Real Estate