Score One for Challenger
In Phoenix's Mall Bout
When Related Cos. embarked four years ago on a plan to bring its unconventional style of shopping centers to Phoenix, it stepped into the ring with Macerich Co., the heavyweight that owns the malls that have dominated the region's retail scene for 40 years.
Last week, the brash out-of-towner landed a roundhouse punch: Macerich said it was shelving its 16-year-old plans for an upscale regional mall three miles away from where Related is close to opening the first phase of CityNorth, a 76-acre project in Phoenix's affluent Northeast Valley.
Macerich's retreat was partly the result of Related's speed in securing development rights, lining up tenants -- including Phoenix's first Bloomingdale's -- and throwing up obstacles to its rival's development plans.
But Macerich's pullback also illustrates how the storm clouds forming over the economy and the evaporation of credit are playing out in regional commercial real-estate markets, putting the brakes on development, intensifying competition for tenants, and spurring developers to find new ways to go after each other.
The pressure to slow down is particularly intense in Phoenix, a once-booming market that is now suffering from one of the country's highest foreclosure rates, according to Foreclosures.com, as well as a hangover from overbuilding in the retail sector. Retail sales volume in the area justified only 27% of the space built last year and 7% of that slated for completion this year, according to Property & Portfolio Research Inc.
Art Coppola, Macerich's chief executive, deemed CityNorth's signing of the department stores the critical blow that doomed plans for its Palisene regional mall. "The market has decided there are not enough department stores around to populate another one-million or two-million-square-foot regional shopping center just two miles from CityNorth," Mr. Coppola says.
Even so, Macerich's decision to scrap plans for Palisene doesn't mean that its slugfest with Related is over. It's just moving into another phase. "They're still going to compete, and it will be intense," says Rick Murphy, a retail-property broker with CB Richard Ellis in Phoenix. "They'll try to grab each other's tenants."
Macerich has taken the unusual step of teaming up with a rival developer, DMB Associates, to build a smaller luxury shopping center adjacent to the Palisene site. Related, meanwhile, is pulling out the stops to attract luxury tenants while forging ahead in obtaining $570 million in equity and debt financing for its second phase of CityNorth. Slated to open in fall 2009, it will include department stores and 250,000 square feet of small luxury shops. But cinching the financing might prove tricky in the current market, which is seeing an exodus of investors from all forms of real-estate debt.
Despite Related's recent victory, Macerich still has the upper hand in the broader market. The Santa Monica, Calif.-based real-estate investment trust owns 11 of the Phoenix's area 12 malls, many of which it inherited in its 2002 purchase of Westcor Realty Limited Partnership. Its two-million-square-foot Scottsdale Fashion Square is considered the region's must-have address for luxury retailers, with venerable names Neiman-Marcus Group, Nordstrom Inc., Tiffany & Co. and LVMH Moët Hennessy Louis Vuitton operating stores there. A wing under construction will add a Barneys New York and a further 100,000 square feet of smaller luxury shops next year.
Macerich executives warn that Related's project will open before the housing market in the Northeast Valley is mature enough to support it. "I hope that they're successful," Mr. Coppola said of CityNorth, "because it's not good for Arizona for someone to bring [forward] a much-publicized project and for it not to work."
Related executives counter that the market could support CityNorth even if its growth halted entirely. Related's optimism stems partly from CityNorth's location off the newly completed State Highway 101 loop. "We have the momentum," said Ken Himmel, CEO of Related Urban, a unit of the New York-based parent company, waving off Macerich's claims of jumping the gun. "They don't have a project yet."
As Related and Macerich square off over tenants and development sites, their fight also contrasts concepts in mall development. Macerich and many of its peers are known for building the traditional, enclosed malls that emerged as a dominant format in the 1970s and 1980s. This decade, shoppers and developers have embraced so-called lifestyle centers, which offer an open-air atmosphere where shoppers can drive to the entrance of any store and congregate at central plazas or parks. Only three of the 30 major retail centers built in the U.S. in the last three years were enclosed malls.
Related's Mr. Himmel is considered one of the pioneers of the new retail strategies that try to make shopping centers destinations that people want to visit even if they don't feel like buying. His projects have helped to revitalize downtown areas in Chicago, Boston and West Palm Beach, Fla. Most recently he designed the retail space in Related's Time Warner Center in Manhattan.
At Phoenix's CityNorth, the "sense of place" will stem from two parks, one with a water fountain and a cascading "water curtain." In addition, CityNorth's central boulevard will bracket a row of restaurants with rooftop dining and adjacent plazas. Tree-lined streets will crisscross the site. The goal: about $700 per square foot in sales, roughly the rate at Macerich's Scottsdale Fashion Square. All told, CityNorth will include offices, condominiums, hotels and more than one million square feet of retail space.
But Macerich is no stranger to the rough-and-tumble battles over tenants that make the difference between life and death for shopping centers. From 1994 to 2003, Macerich bested luxury-mall operator Taubman Co. by luring tenants from Taubman's high-end Biltmore Fashion Park in Phoenix to its Scottsdale Fashion Square and steering new-to-market tenants away from Biltmore. In 2003, Taubman sold Biltmore to Macerich.
Related has so far avoided the same fate partly through its alliance with Thomas Klutznick, whose Chicago-based development firm controlled CityNorth's site and more than 5,000 acres surrounding it. Mr. Klutznick knew Mr. Himmel from their work together in the 1970s on Chicago's iconic Water Tower Place redevelopment. As Related readied CityNorth, Mr. Klutznick's company helped to delay Macerich's Palisene by filing administrative protests and then a lawsuit challenging the state's efforts to auction the land lease Macerich needed on Palisene's 112-acre site.
"We wanted to make sure that all the players were being treated fairly, that the land was being appraised properly and that the rules are being followed," Klutznick Vice President John Klutznick says.
Meanwhile, Related intensified its leasing efforts. Mr. Himmel, who worked with Nordstrom Inc. on previous high-profile projects, met with the Nordstrom family and sold them on CityNorth's concept. Nordstrom's endorsement then helped CityNorth land Bloomingdale's, foiling Macerich, which had attempted to snare Bloomingdale's for itself. After scrapping its regional-mall plan, Macerich has switched to planning Palisene as more of an office and residential development.
Macerich is now battling Related for luxury tenants, trying to lure them to One Scottsdale, the shopping center it's developing with DMB. A prize targeted by Related is Tiffany, which operates its only Phoenix-area store at Scottsdale Fashion Square.
Email your comments to rjeditor@dowjones.com.