Press

August 05 , 2005

Sold on the prospects of retail real estate

Sold on the prospects of retail real estate

August 5th, 2005 - The retail sector for some time now has been a "360-degree" market in the Metroplex, growing in all directions encouraged by consistent job growth and steady housing demand. But the past 12 to 18 months also have seen a flurry of activity with money chasing retail real estate deals, increased retail competition and new and redeveloped retail properties further changing the landscape. The Dallas Business Journal recently invited some of the area's top retail-sector real estate executives to participate in a roundtable discussion of local trends. Taking part were: Vaughn Miller, president of the commercial retail division at Henry S. Miller Commercial; Seth Brown, vice president of store development for Sprouts Farmers Market; Mark Reeder, senior vice president, Staubach Retail; Gar Herring, executive vice president, The MG Herring Group; Steve Lieberman, CEO, The Retail Connection; and Lou Miranda, principal, United Commercial Realty. SETH BROWN: I'm vice president of store development for Sprouts Farmers Market. We are a specialty grocery operation based in Scottsdale, Ariz., and we like Dallas-Fort Worth. We opened our first unit July 13 in Plano, at the corner of Coit and Legacy. We'll be opening our second unit in Flower Mound in early November. GAR HERRING: Seth, how big is your prototype? BROWN: Prototypical, if it were a build-to-suit, is 28,000 square feet. Most of the buildings we're taking are about 30,000 square feet. It just so happens that some of the old Winn Dixies etc. that we're involved in seem to be around 64,000 square feet. So right now our first two stores in Dallas are 32,000 square feet; they're just cut in half. MARK REEDER: I'm vice president Staubach Retail, a retail broker. We do tenant rep. Also, I personally do disposition of retailers' former prototypes and surplus real estate. STEVE LIEBERMAN: I'm CEO of The Retail Connection. We run brokerage advisory and investment platforms, all focused on retail real estate. GAR HERRING: I'm executive vice president of The MG Herring Group. We develop, lease and manage regional malls and lifestyle centers throughout the United States. VAUGHN MILLER: I'm president of the retail division of Henry S. Miller Commercial. We specialize in retail property brokerage and tenant representation, project leasing and management and so forth. We're based here in Dallas. LOU MIRANDA: I'm principal at United Commercial Realty in Dallas. We specialize in brokerage, third-party work for retailers, whether it's finding new stores or getting out of old locations, and we do a lot of land. DBJ: What do you think is the general outlook for retail real estate in the Dallas-Fort Worth market and what are some of the hot spots and up-and-coming hot spots for retail growth? MIRANDA: I think the outlook is very good. The fundamentals are strong. We have job creation, population growth, low interest rates, housing starts, road construction, and they're all very positive, which results in a lot of expansion on the retail side. HERRING: I guess you'd say it's our day in the sun -- and you've got to make hay when the sun shines. Things are great all over. And it's really kind of a 360-degree market, because there's expansion north, south, east and west -- everywhere you look. For us, the growth south of Interstate 20 in the cities of Cedar Hill, Duncanville, DeSoto and Lancaster has been strong. It's been a little bit of a secret here in the Metropolex because people have been reluctant to look south of Dallas. But there's enough density and high income down there now that we're developing Uptown Village at Cedar Hill, which will be a large lifestyle center. REEDER: I concur. There's a very positive outlook for the near term. Gar mentioned Cedar Hill, and that's certainly no longer a secret. I know Frank Mihalopoulos developed a center down there and now there's Weitzman and Cencor and (Herring's) development, so it's got quite a focus. But in addition to that, the crescent across the top of Tarrant County, Frisco, Little Elm, McKinney and Allen has a lot of the residential growth that fuels the retail growth. Tarrant County has its hot spots -- northeast Tarrant County, Colleyville, Euless -- and then, down south, Mansfield has had a lot of activity. BROWN: I think we're about to be involved in a boom we don't even know about. One of the biggest reasons is that in most places there are more development dollars chasing product than there is product. We have so many developers chasing product that every time I turn around, rents are going up by another buck. Right now, rents from a retail box standpoint are about 50% to 60% of what you would have to pay in Phoenix and less than half of what you would have to pay in Los Angeles. The thing that makes Dallas so good for retailers is the tax structure -- it's a business-friendly environment. Retailers look very favorably at it being a right-to-work state. And at some point, you have to look at the net cost of doing business. Education and the spendable dollar in Dallas -- especially in those areas you talked about in North Dallas -- make the future here pretty bright. LIEBERMAN: I would echo what everyone else has said. The sustained housing formation in Dallas and the job growth continue to underpin our market. Our vacancy rates have stayed flat for years, at about 11%. Our rental rates are at an all-time high, but they're still much lower than elsewhere in the country. And, as far as the market being a 360-degree market, literally every direction you look, we're pushing into the suburbs, past what were major hubs before, creating new retail nodes. I think that's going to continue to provide strong expansion opportunities for the retail chains that have always favored Dallas-Fort Worth and Texas as a whole. MILLER: I agree. We've had consistent job growth and housing demand in the last five years. It's been continually strong, it's been continually going upward. That's going to drive retail, that's going to drive product, that's going to drive retail sales, and I think there's no end in sight to that. HERRING: As long as housing stays strong, retail stays strong. It's still one of the most affordable metropolitan housing markets in America. It'll stay strong as long as we don't see any fundamental shift that would cause a weakness in housing. DBJ: Does the big spike in mortgage foreclosures in the last round give you pause for concern at all? MIRANDA: Not too much. It's really more that the financing on the deals we were getting done was a lot higher loan-to-value -- a lot of interest-only loans, a lot of adjustable-rate mortgages -- so I think what's happening is maybe people get caught in the trap. DBJ: A function of financing rather than marketing issues? MILLER: Right. You have to look at our growth in home sales. We have one of the strongest home-sales markets in the country, according to the National Association of Realtors. One of the most active Realtor bases in the country is here in North Texas. And if you look at the statistics, we're consistently in the top 10 markets in the country. So while there may be some foreclosures, those homes get reabsorbed and resold and the lenders usually made whole. So while it's bad news, it's really not bad news. LIEBERMAN: The other thing is that D-FW will add another 75,000-plus jobs this year. There's ongoing demand for housing product, so we're in a very unusual interest-rate environment. Whether it's on the residential or the commercial side, as long as we have the job formation that we do, housing will fall in line. REEDER: You mentioned the higher foreclosures, but at the beginning of the year I was at a symposium and they were saying it looked like home mortgage interest rates were going to be 6.5% to 7% by the end of the year and they were talking about a fear of foreclosures. There have been some more foreclosures, but the interest rate spike hasn't come along. I think we do have a bigger supply of homes on the market here as far as months' supply. I think we're eight months versus the nation at maybe four months, so we have a bigger supply and that hurts our appreciation and home values. The bubble in investment could benefit our continued growth of retail rental rates. Here, those are half of what they are in Phoenix or L.A. Our housing is a lot more affordable. Maybe we're not getting that 10%, 15% year-to-year appreciation in our homes, but there is continued growth -- 50,000 jobs last year. They thought it was going to be 30,000 jobs. I've heard that it will be 60,000 to 75,000 this year. Job growth and residential growth fuel retail real estate and so I don't think foreclosures are a big concern. BROWN: If interest rates begin to rise you may see a drop nationwide, but the places that have a strong economic environment and a friendly governmental structure are going to see a rise. Not a lot of developers are going to go out of business. They are going to be seeking product in a place that is safe. LIEBERMAN: I think you also have to look at where debt is overall. It's at a 40-year low. LIBOR (London Interbank Offered Rate) is sub-4. You have to also look at some of the trends ahead. The first baby boomers are now entering their retirement years. And baby boomers historically have shown they like dividends and mortgage-backed securities. They like secure investments, and I think that's going to stabilize our market. I think that's part of the reason we're seeing the cap rate compression we're seeing and the underlying factors that are driving the overall market conditions we're enjoying right now across the board. DBJ: Maybe this is a good time to talk about the state of funding for retail developments. HERRING: There is a whole lot of money out there chasing retail real estate. It's absolutely incredible the billions of dollars that are sitting on the sidelines unable to find product to invest in. At the same time, I think we shouldn't be scared about things getting out of whack like they did in the '80s because the fundamentals for the lenders are still there. They're still requiring strong equity and good covenants, and so a lot of the weaker retail product isn't getting developed or sold in ways that will hurt us in the long run. LIEBERMAN: It's basic supply and demand. The supply of capital so far exceeds the developers that have a need for that capital or the number of sellers out there with product for sale, that it's continuing to compress the rates, whether it's cap rates or the rates that are being charged for these same dollars. Retail is definitely the favorite asset class among the investment community right now, so that's having a very positive effect on our market. We are seeing some negatives. Construction costs are up. There are elements that are driving the equation up, but the low interest rates and the lower yield requirements we're seeing from the competitive environment we're in are keeping pricing down on a relative basis. MILLER: Yeah, but we're seeing a tremendous amount of investor interest in this market and in retail, and that's helping lenders. For example, we just syndicated 21 acres in Little Elm with our syndication group, HSM Securities Group. Actually it's the descendent of Henry S. Miller Trust, which was the first realty trust started in the 1960s. We're still doing that today. And what we're finding is a tremendous number of equity investors wanting to fund projects. So on top of the debt that's chasing the deals, we have investors chasing the deals, and they want to find quality deals. They look to firms like ours, like Staubach, like Retail Connection, United Commercial Realty and so forth, to help them find those deals. One of the vehicles we use is syndicating product. This was actually a land syndication at a hard corner across from a brand-new Wal-Mart and we sold it out in 30 days. MIRANDA: Also, on a micro level, you're seeing bank expansion coming to D-FW, and you've got to believe they're having to place a lot of money if they're going to be building branches. REEDER: There are local lenders anxious to lend in the market, but there are also Wall Street and institutional lenders that are very active. Vaughn mentioned the equity. There's the crazy Californian equity investor rushing to buy a drugstore or bank at a 6.5 cap. There are the local banks, there are the Wall Street debt lenders and there are local investors that will gobble up $2 million, $3 million, $4 million in 1031 tax-free exchanges. Right now there's no end in sight. As long as we can provide the product there are buyers for it. LIEBERMAN: The experts are forecasting that we're going to see cap rates continue to go down and that the environment will sustain itself for at least 18 to 24 more months, and who knows where beyond that. But from a trend perspective, they're talking in terms of decades. Because, again, when you look at the baby-boomer generation and how that all cycles through, we start talking about decades at a time versus 18 months and 24-month periods. So this could be quite a shift we're in the midst of. DBJ: A few years ago there was a basic strategy: Get the loan, build, stabilize, sell within a three- to five-year horizon. Is that changing at all? Are they holding the properties longer? MIRANDA: I think they want to turn them quicker. HERRING: We're seeing a a lot of desire to invest in developments. But because the yields are getting squeezed, they're looking to sell the product faster in order to get their internal rate of return higher and faster and take that money and put it somewhere else more quickly. It's hard to find long-term holders. LIEBERMAN: You're seeing projects now where the money is coming and saying "You put the deal together, we'll pre-buy it ahead of it actually being built." The demand is incredible. There are tax consequences and those come into play and everybody looks to figure out a way to turn it into long-term capital gains. At the same time, depending on the prototype that's being built. If you're talking about generic boxes in generic intersections in suburban markets where there's always going to be another intersection in another box, then, to a certain degree, you've got to be careful owning that product. There's a band of investors that wants it very badly and so you let them have it because they'll pay a premium for it. As a developer it's very rewarding to keep on cycling through those opportunities. The other thing that's happening is that development is still tenant-driven. If you look at most of the product that's being built, it's big boxes. I think two-thirds of the major projects under way right now are box-driven. And so you're not forcing the market ahead of itself. You're not creating an environment where you're going to have a lot of surplus, and that keeps the balance in favor of the development community. DBJ: What about the retailers? Is there a difference in what they're looking for in terms of real estate? BROWN: There is no difference in any market. It's not rocket science, what we do. We know what demography works for us. We find the demography, then it's just a function of deciding where the best place to go is in that market and going out and getting it. LIEBERMAN: The retailer looks for a reproducible retail environment -- something they understand, something they've had proven success with so they can benchmark it against other retailers in that same environment. And the retailer is having numerous opportunities to expand around the country, particularly in markets like Texas and Phoenix and Colorado. So they're not getting ahead of themselves forcing unique situations that are risky, they are looking for unique retail environments. One of the trends we're seeing is toward lifestyle centers that have a better mix of restaurants and entertainment features and office. Since we've replaced the malls, the retailers still can look at other retailers they are used to benchmarking off of and see how they perform and be very comfortable making the decision to go into those environments. MILLER: The great thing about our market, too, from the retailers' point of view, is our ability to absorb vacant space. Very rarely does a box or a large anchor space stay vacant very long. Something retailers consider when they're looking at this market is whether they have an exit strategy if their concept doesn't work here. And Dallas has got to be one of the best markets in the country for that. HERRING: If there's been any shift in the way some retailers have been looking at things, it's been their willingness to look at urban environments and sites that are a little bit out of the box. We see that a lot more in urban markets where you're out of land, like Southern California. But tenants know that in order to get into a certain market they're not going to be able to plop down a prototype with their typical parking and typical access because sites are harder to find. But they've been able to go back into urban areas and find vacant space and are willing to fill it and make successful centers out of it. DBJ: Seth, let me direct this question to you. How is the grocery store competition in the D-FW market? How does it compare with other cities around the nation? BROWN: Interestingly enough, it's sort of Murphy's law. We're in Phoenix, and the only other market in the United States that I know that's as competitive in conventional grocery is Dallas. Certainly, in the conventional grocery scenario, Wal-Mart has an awful lot to say about what happens in Dallas. I think that the conventionals in general are struggling with their own business plans and how they're going to thrive in this new environment. Some have gone in and changed the name of an existing chain they bought and it hasn't worked out well for them. Others have gone in and taken on an existing chain and embraced the name. Some of those have been successful, some have not. The specialty grocery business is a bit different. It's driven by an educated, affluent shopping base that basically has the time to shop more than one store. They still may go to whichever their favorite conventional store is on a day-to-day basis, but they have the time and inclination to go somewhere else. The more affluent and the more educated the market is, the more prevalent that is. Central Market, Whole Foods and Market Street have all done very well in Dallas-Fort Worth. We'll be very lucky if we can do as well as they have. We really don't compete with the conventional. I'm not even sure that we really compete with those others. It's sort of our own little niche. REEDER: As long as I've been in retail in Dallas -- 15 or 20 years -- Dallas has always been one of the most competitive grocery markets in the United States because we have the big three here, Kroger, Safeway and Albertson's, and then Wal-Mart coming on from virtually nowhere five or 10 years ago to now having the biggest market share in both Dallas and Fort Worth. I think the latest numbers we saw were 25% of the share in Dallas and 31% in Fort Worth. Albertson's had been the leader and they still have relatively strong numbers, 15% Dallas, 18% Fort Worth, but they're losing market share. I think the conventionals, or the big three, have to find a way to separate themselves from Wal-Mart, because Wal-Mart is now putting supercenters five miles apart instead of 10 miles apart and they're growing in the marketplace. The conventionals will have to figure out how to separate themselves. They either do that by gourmet selection or customer service or depth of product, something a little different than Wal-Mart, or become a specialty. LIEBERMAN: Probably the best example of a grocer repositioning itself is Kroger. They realize that they can't go and fight the value fight with Wal-Mart. They're upgrading the stores and they seem to have turned the corner, as did Safeway, and actually showed some positive comps in this past period. I think Albertson's has some real challenges ahead. To be a value player and want to differentiate yourself on service and then go compete with Wal-Mart, which is the monster, is going to be a tremendous ongoing challenge for these guys. REEDER: I think Albertson's is a great operator but we've seen other Texas markets where HEB has come in and gotten a foothold, and Albertson's has eventually left those markets. HEB now has three stores, looking at a fourth with their Central Market, and it's just a matter of time before they get bigger. LIEBERMAN: The interesting thing is that typically you would think an HEB could come and acquire an Albertson's and it would be a natural way for them to penetrate the market. But HEB's new prototype is 100,000 square feet going on 150,000 square feet. They're testing some 150,000-square-foot Super-HEBs right now. These old 60,000, 70,000-square-foot grocery stores are not big enough to accommodate that plan so they're forcing the HEBs of the world to come into a market like D-FW organically versus through acquisition, which makes it a much more difficult proposition. They can surround the suburbs which is what they've historically done, and sort of work their way in. But with the size of their new prototype, a major acquisition that lets them come into the market and be a force that can compete right away is going to be difficult for them, which, in a way, provides some safety for the other players. MILLER: What's amazing about Wal-Mart is now they've got supercenters two miles apart along the George Bush Turnpike. And all their store sales are up and they're putting in a brand-new one at the Tollway and Park. It's pretty amazing. HERRING: Compared with other markets around the nation, it's safe to say that Dallas-Fort Worth, over the last five to 10 years has been the biggest bloodbath for grocery store competition anywhere. But it's just been a preview of what's to come in other markets. It's just that here the competitors have been able to find sites and Wal-Mart has been able to find sites two miles apart because land is still available and it's relatively cheap. Wal-Mart is not going away, it's just a matter of time until they wedge themselves into enough sites that they will compete with those traditional grocers. And the traditional grocers, still haven't figured it out. They're still getting beat up by Sprouts and Whole Foods and Central Market on the top end and their cost structure is not built to compete with a Super Wal-Mart. Until they figure that out, they're going to have a lot of problems in the next five years. BROWN: This is nothing that these majors don't know. There are some pretty bright people in those companies. One of the issues is that the grocery business for years has been based around only two things, convenience and price. They basically all sell the same product and they are governed by the distribution agreements they have on what size box they end up with. If you close your eyes, you know you're in a Kroger or a Tom Thumb. They're not that much different. Kroger is still the 800-pound gorilla of the grocery industry and I they they'll do just fine. I do believe that some of the other grocers are going to have to examine what they do and I'm sure they are. MIRANDA: Yeah. We've talked about Wal-Mart, but it's not only Wal-Mart that's causing challenges, it's the drugstores, the dollar stores. They're all extending and they're offering to sell grocery-type products. And Seth's comment about segmentation is very true in our household because 90% of the time we shop on price, 10% we shop discretionary and we'll go to Whole Foods or Central Market or somewhere like that. So I think Seth's company fills a very good niche to allow them to compete. DBJ: What about the grocery-anchored shopping centers? How would you say they're performing? What are the implications for future growth? MILLER: The grocery-anchored centers are still performing very well. They're still the preferred investment of choice by most investors, but they are also looking at problems. We're seeing cap rates rising and not going down on some of the centers that have the weaker grocery stores in them. It's going to be interesting to see what happens in the next two to five years. BROWN: Five years ago, if someone had told you that Fleming, which was a $15 billion company, was going to be gone and Winn Dixie would be totally out of the market, I think some of you might have suspected it a little, but you wouldn't have known for sure this was going to happen. I think one of the issues with a lot of grocery-anchored centers is that investors need to make sure who the anchor is. REEDER: Yeah. One would certainly prefer to own a Kroger Signature-anchored shopping center than a Winn Dixie shopping center in North Texas. They were the darling of the investment industry. But now, the big three, or the conventional ones, have gotten bigger. We've seen Albertson's and Kroger go from 30,000, 50,000 square feet to 63,000 or 68,000 square feet with pharmacies and drive-throughs. And as they've brought in photo developing and in-store banking and pharmacy drive-throughs, they have taken over many of the neighborhood service opportunities that were in the shopping centers. So now, if you go build a Kroger-anchored shopping center, you no longer necessarily have the neighborhood hardware store and the junior-anchor fashion tenant in there as well. At this point it's mostly small shops and the national franchises that go in and fill up the remainder of the space. LIEBERMAN: Some of the leaders in the industry, like HEB, their prototypes are now to 150,000 square feet -- they're effectively pursuing the Wal-Mart model. They're providing everything under one roof, and they are shopping centers in and of themselves. That's going have a real impact on the kind of real estate they go into and the number of smaller developments in infill locations. DBJ: What effect do you think the opening of these major outdoor malls and lifestyle centers is going to have on the retail landscape? MIRANDA: There are many on the drawing board. We'll see which ones actually happen. Right now, there are no malls being built. I think only two malls got built in the last year or so. Today, there are about 100 to 120 lifestyle centers compared to about 1,800, 1,900 malls, so that's going to be the growth vehicle. You mentioned Fort Worth. There are four big developers trying to compete to get one lifestyle center. It's probably going to be the one has the best relationships with the anchors. HERRING: There are two enclosed malls opening in the United States this year. We opened Imperial Valley Mall in El Centro, Calif. It's an enclosed mall because it's 118 degrees out there. The other is one is in Charlotte. The lifestyle center -- and even to some extent where it blends into the mixed-use center -- is not just a fad. It's a major shift in product that the market only experiences maybe every decade or so. And it will have the same kind of implication on the market that malls did when they were being built in the '60s and '70s. The funny thing is that we developers think we're bringing something new and exciting to the market when in reality we're just trying to create Highland Park Village, which is the oldest shopping center in America. We've kind of come full circle with that. There are a lot of products out there right now -- a lot of people that think they can build lifestyle centers -- so it will be interesting to see if they actually happen. But with all the growth that's going on, especially in Dallas, there are still a lot of available sites, and so you see multiple projects pop up in these areas. A good example is McKinney, Fairview, Allen. There are four projects on the board right now and maybe only one will happen. Circle T, I think is a definite deal and it's more a matter of when, not if. And that's a good thing because the retailers, to some extent, are dictating when that product gets built so they don't open too early and have sales that suffer, and that's helping the product long-term, not hurting it. LIEBERMAN: The nice thing about retail is it's a sophisticated environment. Retailers, consumers and the cities are all demanding more from developers. And what they're demanding these days is these lifestyle environments. They're convenient to park at, they're interesting from a design standpoint, they allow a greater range of retail-related activities and they're what the consumer is looking for. I think it will be an ongoing trend. As Lou said, there's tremendous headroom when you look at the number of lifestyle centers in the United States versus the number of malls. REEDER: The key is that consumers are supporting lifestyle centers, and it's because of the mixed-use aspect. You very often have pedestrian friendly walkways to restaurants, entertainment, upscale shopping. And in many cases you've got either office or multifamily at the top which brings a captive target market for the shopping center. So consumers are bringing the interest. All the city planners want a lifestyle center in their backyard, so they're developer friendly when a developer comes in and wants to build a lifestyle center as opposed to a Wal-Mart Supercenter. But it's not one-size-fits-all. It's not the right thing for every corner. That's what consumers tell us when they continue to shop at a Wal-Mart Supercenter or Target-anchored community. MILLER: Right. But lifestyle centers are tricky developments. It typically doesn't accommodate itself to a large box. Usually it's small shops or medium-sized shops with residential integrated somehow into the mix. So you have to get a unique anchor, like Robb & Stucky in the case of The Shops at Legacy -- the big furniture store on the corner to really kick the center off. Then there's a Marriott, nice hotel, so there's a unique mix. You have a hotel anchor, you have a high-end furniture store anchor, very unique, and that's what led him (Fehmi Karahan of The Karahan Cos.) to be able to develop the rest of the center. There's some vacancy but for the most part it's a very successful project. HERRING: In the lifestyle centers we're working on now, we still do department store-anchored centers. The anchor doesn't always have to be a department store, but we feel that having an anchored lifestyle center attracts a superior mix of tenants. It has better long-term viability and it gives you an advantage over your competition, especially when you're in areas that have three or four alternative people trying to develop lifestyle centers. Unanchored lifestyle centers are the ones that have the most risk. But even though we're talking about a shift in the retail landscape, we're not talking about a shift in retail fundamentals. It's still location, location, location. And it doesn't matter how big your fountain is or how lush your landscaping is or how pedestrian friendly it is -- if it isn't located in the right area with the right demographics and access and visibility, it will ultimately struggle and be out-positioned by the competition. REEDER: We've been talking about lifestyle centers, but the developments we're seeing across the country are not usually just pure lifestyle centers or pure power centers, they're a blend. It's JCPenney's off-mall concept, maybe a Dillards or a Kohls as far as apparel big boxes, and there may be a small row of power center anchors and then there's the lifestyle component, as part of the overall development. HERRING: I think you're right. We got stuck in a cookie-cutter environment in the '90s of cranking out the same-looking thing over and over again. An exciting thing about both mixed-use and lifestyle is that you are tailoring it specifically to that market and that site as far as its size and its tenants. But school is still out on the design. There are a lot of different philosophies, especially on parking. Do you have just an open-air pedestrian walkway, do you have parallel parking, do you have angled parking, do you have Highland Park Village-style parking inside? As these products are developed, we'll figure out which ones work and which don't. It will be very interesting in the next 18 months or so when all the products that are on the drawing board finally open up. LIEBERMAN: I think parking is one of the greatest challenges. The most successful projects these days are big. You have to have the right tenant mix. But, assuming that you've got the right fundamentals, you've got the right access and visibility and the right tenant mix, providing your customer the ability to drive up to the store and park is critical. Stacked parking and forcing the female consumer to go into a parking garage where she knows she's more vulnerable than almost any other place in the world is a challenge. I think the real challenge is going to be on projects where people are trying to create an urban lifestyle. Mixed-use, open-air projects that are out in the suburbs, have plentiful parking fields and allow the consumer to park outside and drive on one level or bring their cart out on one level to their car, I think are going to succeed extremely well. DBJ: How are the existing malls going to compete with all this activity? MIRANDA: I think you're going to see them do some renovations, conversions and add a lifestyle component. NorthPark (Center) is doing it, Hulen Mall has been talking about doing it forever, so that's what you're going to see. They already have the anchors, it's just a matter of creating that lifestyle feel. DBJ: How do they do that? Do they go out into the parking lot? MIRANDA: Yeah, go out into the parking lot and maybe build parking decks, but typically they have an amount of land to do it. LIEBERMAN: A number of these malls left themselves expansion space. They counted on bringing in additional anchors. And you're going to see these malls get turned inside out. Irving Mall -- Irving is not a very strong retail market, but you've watched it evolve with Barnes & Noble and Old Navy and now Circuit City. You're going to bring these power retailers into the originality that the mall has to offer and yet give them highway visibility. That's what the malls are going to need to do to stay relevant. REEDER: They must reinvent themselves. But there are a few malls that are always going to be golden. NorthPark probably could have survived for a long time, but they were proactive in planning the expansion. But for the most part, if they don't reinvent themselves they're going to continue to lose market share. They're going to have to renovate. Some malls have some anchor tenants that are not bringing much to the party any longer. They're going to have to be aware that they may get some of those anchor spaces back. They've got to start planning how to deal with those anchor spaces. The other thing is, they closed all the movie theaters 10 years ago because they didn't want them. Well, now they're bringing movie theaters back to the malls and putting in stadium-seating movie theaters like Valley View did with AMC and like NorthPark is going to do as well. So they have to reinvent themselves. They've got to bring back some entertainment and make it an entertaining experience for shoppers or they'll go to the lifestyle centers. HERRING: Let's clarify that. The idea that malls are going to suddenly become these old dinosaurs that are simply going to go away is just wrong. It's really no different than any other product type. Malls that have a good location and owners that are willing to spend the money to keep attracting top tenants will be very successful. NorthPark just remodeled, Galleria just remodeled. But those malls that are outpositioned or in locations that are weaker will either have to reinvent themselves into something else or become a different product type entirely. LIEBERMAN: Malls are just like shopping centers. There are malls that should have never been built in the first place. When you've got a lot of capital driving developments, things happen that shouldn't happen. I think we're in a market right now where the fundamentals are sound. We have continued growth, we're pushing the edges and creating new product and exciting product, but it's tenant-driven product that's coming on-line preleased. It's not being forced. It's demand-driven. And I think that's going to lead you to see positive activity. MILLER: Exactly. The better malls and shopping centers are getting better. The worst malls and shopping centers are getting worse. There are definitely haves and have nots. Look at the Galleria, look at NorthPark, those two are great shopping experiences. Southlake Town Square, Highland Park Village, those centers just keep getting better. REEDER: We've been talking about Dallas-Fort Worth, but you've got smaller mid-markets where it used to be that the mall was the community center and that's where the teens went for social activities, that's where everybody went for shopping. But now, it's a mile down the street where Target, Wal-Mart, Sam's and Home Depot are clustered at four discount boxes at an intersection and there are a lot more sales being driven at that intersection with those discount boxes than there are inside the malls. DBJ: How will the recent mergers and acquisitions -- Sears and K-Mart come to mind immediately, Toys 'R Us getting out, Federated and May -- how is that going to play out in this market? MILLER: I don't know. I'm still trying to figure out the whole Sears/K-Mart merger. MIRANDA: There's one really smart guy, Eddie Lambert, who saw a estate play and I guess he's the one who's been able to turn K-Mart around, not as a retail company but as a real estate company. I guess his hope is he'll do the same thing with Sears. In this market, though, K-Mart has already gone dark and been absorbed. So as far as the impact in this market, I don't know. Maybe the only impact is that Sears is more focused on other markets instead of Dallas-Fort Worth and may not expand other stores here. REEDER: Mergers create opportunity. It goes across the spectrum. There's Chase and Bank One. You wonder what's going to happen. But they've still got a very strong brand and they're continuing to expand. And then Wachovia came to this market and bought South Trust. And the same thing -- very strong brand and they're continuing to expand. There are usually opportunities when there's a merger. There's consolidation, there are empty boxes, but that creates opportunities for Sprouts to come in with a different kind of retail that's going to be very well received, I believe, by customers. They're going to come in and offer something in 32,000 square feet -- half of the Winn Dixie -- that people will beat a path to. So now the challenge is to find the other 32,000-square-foot tenant. But, in a good-quality location that space will be absorbed and new retailers will come in with new ideas. LIEBERMAN: It's an evolution that we're going to continue to see with the older format stores. The reality is that the K-Marts, Service Merchandises, the Montgomery Wards etc., a number of the Sears and some of the older Toys 'R Us stores, will first, I think, be in operational play and then will become a real estate play. I think what you're seeing is that the real estate is worth more than the operation. K-Mart is a holding company. K-Mart is not much of a retailer any more, and the play there is a real estate strategy. Those locations -- excellent locations around the country that have a very low basis -- can be redeveloped into Barnes & Nobles, Borders Books, Bed, Bath & Beyonds and Circuit Cities. Now they have a diversified portfolio of locations with superior retail chains that are very vibrant in the current market. Where you've got older-format stores you're going to continue to see this evolution. I think that you're also going to see natural market changes. Wal-Marts are going to continue to grow. Circuit City continues to re-position the size of its stores to be more efficient and to capture more sales. You're going to have some chains that run into challenges. Ultimate Electronics may not be able to compete in a market where Conn's can, so maybe you'll see one go out and one come in. That's just part of the dynamic nature of retail, and it's going to continue to evolve. HERRING: I agree with Steve. On the Federated/May deal, Macy's only has two stores in the market here, Stonebriar and Galleria, so you're not going to see a glut of department store space on the market. And even with Sears, I don't believe they're closing anything in regional mall spaces, so most of the malls are safe. But one thing to remember with that merger is that the decision about what happens to those stores will probably be played out on a national scale rather than on a site-specific scale. For example, the Stonebriar store may end up being a pawn in the negotiations over what happens to the stores in California. So there are factors there that none of us can understand at this point. Sears right now is concentrating on taking K-Mart stores that are in good locations but may not be performing well and converting them to Sears Essentials, which is really combining the best of both brands. But how the marriage of Martha Stewart and Craftsman Tools is going to work I'm not sure anybody knows. They've got a lot of work ahead of them. REEDER: Someone's surplus space is another's opportunity. We've seen it with CVS and Eckerds. A lot of old Eckerds are being closed as they build new prototype drugstores on the corner. But those former Eckerd stores become the dollar stores and auto-parts stores -- so what's someone's old prototype is somebody else's opportunity. LIEBERMAN: Not only that, but when you have a major chain with a number of locations in a market that's been very hard to penetrate go out, you create a tremendous market penetration opportunity for another retail chain. It becomes a tremendous opportunity and in some cases creates a premium on the real estate, because chains that might have been looking at the market, but thought they needed a critical mass to compete with the dominant players, can move in. So if one of the dominant chains goes out, the ability to pick up all their locations, particularly older stores that are in protected infield markets, is a fantastic opportunity. MILLER: It also creates opportunities for local or start-up retailers to enter a market they wouldn't have otherwise. Look at the antique mall that took the old Target store at Preston and Park, one of the best intersections in the North Dallas area. They had an opportunity they would have never had otherwise at a corner like that. DBJ: How is that performing, by the way? MILLER: I understand pretty well. But it just opened, so ... DBJ: Is there anything we didn't touch on that we really should have covered in this discussion? BROWN: I'd just like to add one thing. There were 41,000 people at (the International Council of Shopping Centers convention) this year. ICSC gives you a pretty good idea of where we're going to be 24 months out, because the playing stage is well in advance of when it's delivered. I can honestly say I've never in my 25 years-plus in this industry seen a more vibrant and a more upbeat ICSC than I saw this last May. MILLER: Seth, let me ask you a question. How many stores do you guys plan for the Dallas-Fort Worth area? What does Sprouts see that this market can handle? BROWN: I think, at full penetration, we're probably talking 16 to 20. MILLER: That's great. LIEBERMAN: I've always felt that ICSC gives us a good two-year window of what's ahead. And I agree with that wholeheartedly, at least for the next two years. I think it's going to go well beyond that, but certainly for the foreseeable future the prospects for retail and our markets overall are exceptionally strong. HERRING: I'm not trying to throw around clichés, but, like I said in the beginning, it is our day in the sun. We've got money, we've got growth, we've got tenants. All the ingredients are there for success. And you've got to make hay right now, because if you're not making deals right now then you're in the wrong business. LIEBERMAN: It's a great time to be in the retail real estate business in Texas, that's for sure. DBJ: That's a good note to end on. Thank you all for participating today.