GEOFF COLVIN: How are you doing on your shopping? It's the unavoidable issue this time of year, and the unavoidable place for many of us is the mall. Maybe you love it, maybe you hate it. A mall in California is offering free tai-chi lessons to counter holiday shopping stress.
But now a fast-growing number of americans are shopping more and more at a radically different kind of mall -- in fact, some say, not a mall at all. And that trend has billion-dollar implications for shoppers, retailers, and communities. I recently visited one of these new critters, known in the trade as lifestyle centers, with Jeff Gunning of the RTKL firm, which has designed many of them, including this one, called Pentagon Row, in Arlington, Virginia. And right off the bat, you can see this place is different.
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COLVIN: Now I've realized everything here has a purpose, so what is the purpose of the skating rink?
JEFF GUNNING: Most developments need some kind of a signature space and it tends to be the primary public gathering space that people associate with that development.
In this case, it's this public plaza, which includes a skating rink. It's really important when you're thinking about this kind of a project as to what the residents are going to be looking down upon. And in the case of a skating rink, it's an activity that's relatively quiet but it draws people, it's interesting to watch, there's great people-watching from above. So it's really the perfect kind of an activity to provide in a mixed-use environment like this.
COLVIN VOICE-OVER: That's right -- people not only skate at this mall, they live here. Three levels of apartments stand above the stores. And while malls have always been places where some people like to congregate and relax, these new centers are designed for exactly that.
GUNNING: The pergola here is very important because it gives you a place to sit down, have a cup of coffee, and watch other people walking by. People-watching is a really important aspect of these new retail projects that are being done today. So street furniture is important, outdoor lighting, a little bit of green, as this project has, is really important. That's the yard for these people. That's their yard. They look down on something green. But it's sort of an urban, it's an urban oasis.
COLVIN VOICE-OVER: For another big difference from the typical mega-mall, check out the parking picture.
COLVIN: Now in this portion of the development, we do have surface parking.
GUNNING: Right.
COLVIN: The same kind of thing that you of course have in a normal, typical mall, but it isn't vast. It isn't one of those endless expanses of cars.
GUNNING: Exactly.
COLVIN: Is that part of the design idea too?
GUNNING: That's part of the design idea. Most lifestyle centers today have a combination of on-street parking and some surface parking. A few of them, like this one, have below-grade parking.
COLVIN VOICE-OVER: Put all those elements together and you get a retail phenomenon.
COLVIN: In the world of retailing, this is the coming thing?
GUNNING: It is. This is what virtually every retail developer is looking at some variation on this kind of a format, open-air, street-oriented environment. Not to say there aren't regional malls being done today too, but even those have an aspect of outdoor that's being incorporated into them.
COLVIN: And in the trade, a regional mall means a great big mall.
GUNNING: That means a big mall like Pentagon City, just right over here behind this project. That's a regional mall, anchored by department stores.
COLVIN: All enclosed.
GUNNING: All enclosed, all air-conditioned, fields of parking or parking structures.
COLVIN: Is it an issue, a detraction, in a case like this that you don't have an inside? People may not realize when they look around here that this is the outside, but there isn't the traditional inside hallway like you have in a mall. This is where you walk around.
GUNNING: This is it.
COLVIN: Meaning if it gets chilly or if it gets really hot and humid or if it's raining, well, you're outside.
GUNNING: You're outside.
COLVIN: Is that a problem?
GUNNING: It's not really a problem. I think it was assumed for many years that it was a problem, and so you had to provide air conditioning and acres of free parking, and those sorts of things were enough for a long time. But today I think people are looking for a couple of things. They're looking for a sense of community, which these kinds of places provide, and it's also an aspect of convenience to these places. When you can park in front of a store, as you can in the back side of this project or on the other side of this project, you don't always find a space there, but you might. So there's that aspect that you may actually be able to park in front of the store where you intend to shop.
COLVIN VOICE-OVER: Imagine that. Shoppers love these places. They spend $84 an hour at them, on average, versus just $58 an hour at traditional enclosed malls.
Retailers and developers love them too. They bring in more revenue per square foot than enclosed malls yet cost less to operate.
COLVIN: Are the big traditional regional malls in trouble?
GUNNING: I wouldn't say they're in trouble, but they're definitely evolving, they're changing, they're incorporating more aspects of outdoor environments, as this one is. And the ICSC, or International Council of Shopping Centers, will tell you that there are fewer and fewer of them being built every year.
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COLVIN: Fewer being built every year -- is that bad news or good news for mall operators? How about retailers, shoppers, investors?
Stephen Sterrett is chief financial officer of America's largest mall operator, Simon Property Group, which has about 175 malls and about 70 lifestyle centers. He joins us from Indianapolis. Kurt Barnard is president of Barnard's Retail Consulting Group. He's been spotting trends in retailing for over 40 years and joins us from New York City.
Mr. Barnard, is the big enclosed mall a concept whose time has come and gone?
KURT BARNARD: I would agree with that statement completely. You see, when you go shopping these days, you don't just go to a department store. You don't just go to a specialty store. You go to a discount store, Wal-Mart, Target, low-price stores such as Kohl's, and you don't find those in shopping malls.
COLVIN: Well, Mr. Sterrett, your company is the biggest mall operator in the country. What do you think?
STEPHEN STERRETT: Well, Geoff, it's ironic that the footage that you just showed was shot at a lifestyle center that is literally right down the street from a very dominant, very healthy regional mall we happen to own.
COLVIN: It is right next to Pentagon City.
STERRETT: It is right next to the fashion city at Pentagon City, which is anchored by Nordstrom and Macy's and does over $700 a square foot in volume, which is a very dominant piece of retail asset and actually is located such that it's in the center of what's become a very vibrant economic district on the Virginia side of the DC marketplace.
COLVIN: Well, Mr. Barnard, in fact a lot of big regional malls still seem to be doing fine. You say the future for them is not good. Why?
BARNARD: It is really not good. You see you have to remember what it is that shoppers are really looking for. Picture the ordinary, run-of-the-mill mall that we are dealing with these days. You find that if a shopper goes there, first of all it's usually a long driving time that is necessary. Then you have to look for a parking space, which is not easy. Then you have to wend your way into the mall, and once you're in the mall, what do you find? You find 100, 200, maybe 300 stores, most of which, well, how do you tell them apart? The only way in which many of them can be told apart is by what? The name on the door, certainly not the merchandise that's being shown, simply because the merchandise is all pretty much the same stuff. If you want a pair of shoes, you go to a shoe store, and what happens? You don't like what you see, so you go to another shoe store and that other shoe store is at the other end of the mall, and of course on a different floor altogether.
So it is basically for the average shopper, shopping at a mall is an adventure, it's an expedition. And that may have been very interesting to the average woman say about shortly after the '50s, '50s or '60s, but not today.
COLVIN: Well, Mr. Sterrett, Mr. Barnard is talking about real changes in the way people live, and those changes are undeniable, which normally would require that retailers change what they offer. Do malls have to make changes, and can they make them?
STERRETT: Oh, I think not only do malls have to change, but they have been changing. I mean, for example, one of the systemic changes that is happening in our society over the last 10 years is that people are eating out more. And so you are seeing more and more food brought into the mall setting. I mean, for example, Cheesecake Factory, which is a very successful restaurant, is a chain that likes to be in a regional mall setting because of the traffic that is generated by a successful regional mall, and it's a strategy that's worked very well for them.
COLVIN: And it actually works very well for you as a mall operator, right?
STERRETT: Oh, sure it does. If you think about our business, the fundamental thing about the mall business is having good real estate locations. You know, retailers come and go, trends will change, fashions will change, but if you have great real estate locations, there will always be tenants who want to be in those locations.
And while lifestyle centers undeniably have a place in the retail culture of the United States -- and I think will play a role and a significant role going forward in terms of new construction -- existing dominant regional mall locations are as healthy as they've ever been. We are at all-time highs in terms of occupancy levels. Sales have been growing. And at the end of the day, for good, well-located regional malls, there are a laundry list of tenants who want to be in those types of locations.
COLVIN: Who want to get in. Now from the investor's point of view, the three largest Real Estate Investment Trusts, or REITs, in the retail industry are Mr. Sterrett's company, Simon Property Group, plus General Growth Properties, and Kimco Realty, and as stocks they are all up tremendously over the past year as the economy has improved.
That's great for them, but as an investor it makes you a little nervous about getting in at this point. Mr. Barnard, in general, the good times, are they going to continue to roll for these guys?
BARNARD: Well, within very restrictive limits. You see, we have to really look at what is it that made malls so very popular at one time, which goes back now many, many decades. It made them popular simply because they came about at a time when the average woman was basically what is generally known as a hausfrau, the woman who took care of the kids and who took care of the fact that the husband needed food when he came home after work. Today it's a different story, thank heavens. Today the woman is in the work force, she earns money, she doesn't have very much time. But her mother used to go to the mall on Saturdays, Sundays for entertainment. It was a break from the routine, which of course was very necessary, and she saw it as a form of entertainment and diversion I would say, and at the same time as a source of new ideas for the home. Today's woman doesn't do that. She doesn't need that.
STERRETT: Kurt, you are right in that our society has changed and that people are more time constrained, but I would argue that one of the things that has happened is that intent to purchase has gone way up. People don't just go browse as much as they used to, but one of the reasons that malls have been and will continue to be successful, a broad variety of offerings. Think about the mall as a million square foot distribution center. And for people who are time starved, there's no better place to go, if I'm going to buy a birthday present or an anniversary present and I don't know what I want, what better place to go than a mall that's got 200 stores and a million square feet of space in order for me to find that item?
COLVIN: Let me ask you about another element of this, which is the big stores that anchor a lot of the malls, namely the department stores, because they are going through massive changes as well. Mr. Barnard, which ones are doing it well and which ones are not adapting well?
BARNARD: I would say that a company such as Federated Department Stores does it very well and they are beginning to show the results of that also.
COLVIN: They have Macy's, Bloomingdales, things like that.
BARNARD: Absolutely. Macy's and Bloomingdale's and others like this. But I think what we have to really consider here is the fact that today's mall is not really all encompassing. You said if I wanted to buy something, if I wanted to purchase something, I go to a major mall. I cannot buy at a major mall a television set for the most part, I can't buy a computer. I have to go to a freestanding store, be it one of Best Buy or Circuit City or one of those companies, and they are not in malls. They are in freestanding locations.
STERRETT: Kurt, the people at Apple Computer will be very disappointed to hear that, because they have, as you probably know, started a program of placing retail stores in regional malls beginning about two years ago and have been very successful in terms of their results of selling computers directly out of good regional malls.
COLVIN: Gentlemen, this is a lively discussion about a topic at the very center of our lives. Stephen Sterrett, Kurt Barnard, thank you.
STERRETT: Thank you, Geoff.
BARNARD: Thank you, Geoff.
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