the Insiders


October 14, 2008 4:11 PM

Business, Retail

The Developer Squeeze

Donald Trump for years has been the poster child for the confident developer. The Donald may be more bombastic and boastful than most, but he shares with other developers a high tolerance for risk and the audacity to believe his...

Donald Trump for years has been the poster child for the confident developer. The Donald may be more bombastic and boastful than most, but he shares with other developers a high tolerance for risk and the audacity to believe his multibillion-dollar projects will succeed. But developers and real estate executives don't seem so self-assured these days. With the global economy in free fall, their world decidedly changed from one of plenty -- available capital, myriad retail concepts, willing partners -- to one of scarcity. "The deals we hear about are dying," said a Manhattan-based retail broker. "My clients' sales are off. They don't want to go forward with anything now."

Gap, Talbots, Ann Taylor, J.C. Penney and Zale's are among the chains curtailing expansion or downsizing. Steve & Barry's, Boscov's, Goody's and Mervyns have sought bankruptcy protection. Meanwhile, Bombay Co., with 360 stores, released its entire real estate portfolio into the market. More bankruptcies are expected.

According to the International Council of Shopping Centers, retailers announced closings of 5,770 locations so far in 2008, a 25 percent increase from the amount in 2007. This glut of retail real estate will add more than 16 million square feet of space to the market, creating a perfect storm that might have a lasting effect on the industry. New retail concepts may not be able to find financing. Developers and landlords are no longer searching for the most interesting tenant or the store that would best complement the existing assortment. They're looking for any brand that's creditworthy.

Yet most developers are forging ahead, albeit on a delayed timetable, with plans for new projects.

"We're going to make sure every project has all the components that will ensure its success," Webber Hudson, executive vice president of Related Urban Development told me. Hudson said phase one of CityNorth in Phoenix is on schedule, but phase two will be delayed to 2010 from 2009.

Related isn't taking anything for granted. "We want to make sure we're not caught off guard in January or February when [the other] shoe drops," said Hudson. "There's going to be something. We have on our wall a listing of the leases we've had signed, but I've got names below each one of those retailers in case there's a problem."

The Grand, a $3 billion, 3.6- million-square-foot development in downtown Los Angeles, has also been delayed. "The retail community is hoping for a 2010 opening," said Hudson. Previously very self-confident,  Hudson sounded equivocal. "That could change for reasons beyond our control," he said. "I need to be able to sign two or three critical deals that will give us credibility in the credit markets. Being able to say we've got square footage signed to these retailer [anchors such as Nordstrom, Bloomingdale's and Macy's West,] has helped us in Phoenix."

Lon Rubackin, a former Forest City Ratner executive who recently became managing partner of GFI Retail Group, which buys distressed shopping centers, is developing three hotels, including two in Manhattan, and building a 1-million-square-foot mixed-use project in Fort Greene, Brooklyn. "Things are changing so quickly," Rubackin said. "Wherever you are in this kind of cycle, as a developer, you're getting squeezed."

Meadowlands Xanadu, the $2 billion, 4.8-million-square-foot retail and entertainment complex in New Jersey, delayed its opening to summer 2009, from November 2008. Real estate experts believe the delays were prompted by the economy and Xanadu's inability to lease a portion of its space. To make matters worse, tenants with signed leases may be using the delay as an opportunity to drop out of the project. This scenario is likely playing out at projects across the country.

Even high-end centers are no longer immune. "Up until very recently, everybody thought that the very wealthy wouldn't be affected," Rubackin said. "That ain't the case. Luxury isn't really needed these days. The Palazzo [in Las Vegas] was slow in getting off the ground and numbers are still very disappointing. Since May, certain people have backed out and others aren't moving ahead."

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