Shopping Center Development in the 1990s: A Product of the 1980s
Schmidt, David W.
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To date, the 1980s have been viewed as a period of great economic prosperity and growth. Shopping center development during that time was by no means an exception to this generalization. Between 1982 and 1990, banks, savings and loan associations, pension funds, insurance companies, foreign investors and limited partnerships pumped almost 1.5 trillion dollars into commercial development.l This surge in real estate development came mainly from generous tax advantages that created many willing real estate investors, and the deregulation of S & L industry along with the growth in available credit. These factors which created the real estate boom of the eighties have in turn depressed the development market of the 1990s. Today's developers must fight to survive in a over-saturated market. The average national vacancy rates for strip centers and regional malls are 12.3% and 6.5%, respectively. These percentages may not appear very high; however, if compared to the the gross leasable area for all shopping centers across the nation of 4,507,412,647 square feet, the total amount of available space is a staggering. Strip centers alone account for almost 3,105,052,234 sq. ft. of the total space while 1,402,360,413 sq. ft can be attributed to regional malls. This equal approximately 382 million square feet of space available in strip centers and 91 million square feet in regional malls.2 To combat such statistics, developers must offer free occupancy, reduced rent, many tenant improvements, and often pay relocation costs to entice a retailer into a center--all of these actions create a greater financial strain on developers and their mortgage financiers. The added pressure to merely lease vacant space due to financial pains has led to a drought in the shopping center finance market. Banks, S & L's and other institutions have been forced to foreclose on many projects along with restructuring loans to compensate for delinquent payments. Resulting from this dilemma has been the drying up of financing pool for new projects. Realizing that continued production in this cyclical market may additional lenders in the same boat as the S & L's has helped to pull the plug and drain the financing pool, also. In order to cope with this change in the finance market, developers have been forced into a newer phase of development--one of survival. Instead of grandiose plans for developing new shopping centers, developers have shifted their emphasis to asset management and acquisition of existing centers. With fewer available new investment opportunities and the decrease in the real estate financing pool, developers must evaluate the properties that already exist in their portfolios and in others. Many of these centers are 5, 10, 15, and 20 years older than the newer centers which have multiplied in almost every community during the 1980s. Only through renovation, the altering of the tenant mix, and catering to the needs of anchor tenants in a changing market, can shopping center developers create a center which has synergism among its tenants and draws shoppers away from competing centers. For developers who wish to grow in the 1990s, the acquisition of existing centers will need to be pursued. These centers, which are usually older, can be bought a the "right" and renovated to compete with newer centers, too. Developers with strong capital backing should be able to take advantage of current depressed property values which exist in the market today. After acquisition, the developer may need to renovate, change the tenant mix, and/or control expenses so that the center can compete others that are younger. A corporation which is pursuing these avenues is the Kimco Development Corporation. Through my work at this firm, the goal of continued growth and modernization of existing centers became evident. Both the present market conditions and my exposure to the development industry seem to point to asset management and acquisition as the roads which must trodden if developers wish to survive this cyclical downturn.