Bucksbaum Retail Properties' John Bucksbaum discusses urban retail and mixed-use development
Overview
Suburban malls are a mature industry; future growth will come from urban and suburban mixed-use properties
The smaller sites and increased verticality of urban retail development creates a learning curve for developers and retailers about what can be successful
Tenants for suburban mixed-use properties seek an urban-style live/work/play development
Executive Summary
Around 2007, shopping center guru John Bucksbaum recognized a growth opportunity: cities were experiencing a regeneration of popularity, but retailers weren't yet well-represented there. Conversely, Bucksbaum's bread-and-butter property type — suburban mall retail — was a mature industry. Bucksbaum deftly pivoted from the suburban shopping center sector his family had pioneered nearly six decades earlier to instead pursue urban mixed-use projects. This change in focus has afforded Bucksbaum a unique perspective on the differences across retail real estate sectors, as well as the challenges of urban retail real estate and mixed-use development.
Traditional suburban mall developers, Bucksbaum explains, face new challenges when developing urban retail projects. Urban sites are smaller than suburban ones; they tend to be more vertical; parking is more difficult; security is more expensive; union labor can raise construction costs; and repurposing existing properties limits flexibility in design. In addition, retail tenants face a learning curve about how productive their stores can be in an urban environment whereas they have decades of experience in suburban malls.
Despite mixed-use development's patchy history of success, Bucksbaum believes that modern retail development naturally pairs with residential development, and that today's mixed use developments can avoid the pitfalls of the past. In older mixed-use development, all components — hotel, office, residential, and retail — were built at the same time even if the demand for each component was not the same. In addition, the projects were very large scale. Thus, if one piece didn't work, it would financially drag down the entire project. For example, even if the retail component was successful, an empty office or hotel could put great financial pressure on the project. Bucksbaum says that today's mixed-use developments can solve that problem by pairing just retail and residential components, or by developing at a smaller scale to more easily absorb the different facets of the project.
Transcript
Zell/Lurie: John, you and your family have been involved in the retail real estate industry for a number of years. Originally, you focused on the mall sector. Now, with Bucksbaum Retail Properties, you're pursuing urban retail mixed-use projects instead of malls. What made you decide to go that route?
John Bucksbaum: My father and my uncle started in the shopping center business in 1953. They built the first shopping center in the state of Iowa. Then in 1960, they created the first department store- anchored shopping center in Iowa. I started to work for the company in 1978, and ultimately became the CEO in 1999 and continued in this role through 2008. We grew to over 200 malls with over 200,000,000 square feet of space. As a company we were very ensconced in the mall industry.
Starting in 2007, I started to recognize that we were in a mature industry, and most of the retail expansion - or the best opportunities that were going to occur for the retailers were in urban environments. Cities were, and continue to have a regeneration of popularity and people have been moving back into the city for a number of years. Many retailers have not been well represented in the urban environment.
Following the recession, in 2010, I left General Growth Properties, the mall company, and felt that I wanted to focus on ground-up mixed use development, with retail being the driver of the activity. This is where I believed, the best opportunities were going to be and that the retailers would be looking for new locations in urban environments.
Zell/Lurie: So John, given your perspective, being in the traditional regional mall sector for a number of years and moving into more urban retailing settings now, how does the tenanting and design of urban and mixed use retail differ from the malls that you did with General Growth?
Bucksbaum: I believe all projects are challenging. The malls, generally have a 100+ acres and big parking lots. You can lay things out pretty much as you want too on a mall site. The challenge that you face in an urban environment, are that sites tend to be much, much smaller. If you are repurposing a building, it's generally not laid out in the manner that you would choose if you were starting with a clean canvas. Even when you are starting with vacant sites, because they are so much smaller, there's a verticality that's usually associated with the project. The column locations can be much different. The parking is certainly different. All of these things, not only are they challenges for the developer, but the retailers as well. I don't want to say the retailer has become comfortable in the suburban regional mall environment, but they generally know if they take 3,000 square feet of space, where the columns will be, and how the parking will layout. All of these things are much different in the city environment. And that can prove to be very challenging, both to the retailer and the developer. There's a learning experience that - on the retailer's behalf, they want to make certain that they can do the type of productivity that they need to do out of the store to be profitable and to afford the rent that they're being charged. They have a better sense of that in the mall environment. It's a new process for them in the urban environment. But a great many of them are figuring this out.
Zell/Lurie: So John, as you just said, many of your current projects are in relatively urban locations. So from the real estate developer's perspective, are there other challenges with working in more urban retail?
Bucksbaum: So I mentioned some of the development challenges, in terms of store layout, how that can be affected by column placements and the verticality of things. Parking is no longer five spaces per thousand square feet of leasable area, that kind of a thing. But also, for the owner/developer, once the project is complete security is a concern. While security is always a concern in a suburban environment, it can be even of greater concern in the urban environment.
The cost of building a project can also be much higher in an urban environment. In a place like Chicago, where I'm very active, everything you do has to be built using union labor making the construction costs much higher to do a project in the city of Chicago than what I might be doing elsewhere. All of these things contribute to what's already a hard business.
Zell/Lurie: Mixed use seems to be a rallying cry for retail development these days. In the past, mixed use was a dirty word. Why has that changed?
Bucksbaum: Especially in the urban environment, it's a combination of people moving back into the city, people having experienced a difficult housing situation during the recession and a lot more people who are inclined to rent today than own. Leading to the development of multi-family residential. I've always felt that residential and retail go hand in hand. And on these smaller sites that we're developing in the city, some of it is economic. You need greater density on the sites. With the demand for living space being as high as it is, incorporating for rent residential works with our retail projects, it's a natural combination. It's been working out very well. I believe people like to live in a vibrant environment. Combining retail and residential can bring that about.
Another example of a project that I've been part of, and it is a suburban project in North Cincinnati, called Liberty Center. Liberty Center opened in October of 2015. While it's a suburban location, the project was built with a great many "urbanesque" features to it. In addition to 800,000 square feet of retail space we have a 175,000 square foot office building, 250 apartments, and a 225-room hotel. The live, work and play environment is just as popular in a suburban environment as it i in the city. In the past, when we say mixed-use was a dirty word, I believe oftentimes the projects were built where the hotel, the office, the residential and the retail was all built at the same time and generally, the demand for all four sectors wasn't the same. So, you may have had a successful retail project, but you had an empty office and/or hotel, which put great financial pressure on the project. Today, in my case, where it's primarily just retail and residential - but having given the example in Cincinnati, where it does include all four facets of real estate - it's just a careful analysis of what the market can support. We understand in Cincinnati that the office may lag a little bit behind the other three but I think we've just become smarter about how we develop mixed use and in many instances, doing it on a smaller scale than what was done in the 1980's. If one piece wasn't working, that would be enough to drag the project down financially, so as to cause a failure, even though you may have had other pieces that were successful. Today, we can better absorb the different sectors of the industry that make up the mixed use piece.
(Not an exact transcription of video.)