Big deals alter face of mall industry

Acquisition of Rouse typifies trend toward consolidation

Regional concept `on an absolute tear'

After a decade, 3 giant players stand astride the business

August 22, 2004|By Andrea K. Walker and Lorraine Mirabella | Andrea K. Walker and Lorraine Mirabella,SUN STAFF

In the late 1980s, developers were breaking ground for new shopping centers in the United States at the rate of four a day.

In 2004, only three regional malls are expected to open the whole year.

That vast quieting of jackhammers is at the root of the billion-dollar deals transforming the face of the shopping-center industry. The latest was Friday's announcement that General Growth Properties of Chicago, the second-largest U.S. mall owner, plans to acquire the Rouse Co., the retail pioneer in Columbia, for $7.2 billion in cash.

The reasons mall developers are swallowing rivals like bait fish these days are many: Less space to build new malls. The need for publicly traded companies to boost share value. Huge pools of investment capital that have fled the shaky stock market. And record levels of consumer spending.

"Regional malls are on an absolute tear," said David Fick, a managing director with Baltimore-based Legg Mason Wood Walker Inc. "The fundamentals are better in the mall business than any other commercial business in the United States. Demand for malls is at an all-time high. The mall is an irreplaceable, fortress-type asset these days because malls aren't being built."

Rouse, whose enclosed shopping malls, downtown "festival" marketplaces and planned residential communities set the standard for the development trade for more than a generation, was an obvious prize, analysts said. Rouse was noted for having financially sound, well-managed and well-designed properties in ideal areas that drew heavy consumer traffic.

Its high-profile projects include Harborplace in Baltimore, Faneuil Hall in Boston and, in Las Vegas, the Summerlin retail-residential community and the redeveloped Fashion Show Mall, which boasts the most anchors of any center in the country. The company owns all or part of about 50 retail properties. "This is not a portfolio that was going begging," said Geoffrey Booth, a managing director at the Urban Land Institute in Washington, which tracks retail development trends. "This was a portfolio worth having."

Friday's news concerned only the third major mall sale this summer.

Last week, Arlington-based Mills Corp., owner of Arundel Mills and other huge discount malls, agreed to buy a 50 percent interest in nine malls from General Motors Asset Management for more than $1 billion. The properties include Marley Station in Glen Burnie and Lakeforest Mall in Gaithersburg. In June, Simon Property Group Inc. of Indianapolis, the largest shopping mall owner, agreed to gobble up Chelsea Property Group Inc., the biggest owner of outlet malls, for $3.5 billion.

Accelerating trend

Consolidation in the industry began in the late 1990s but has accelerated recently. Developers are hungry to increase their portfolios to leverage their power to borrow cheaply and to attract and negotiate with national retail tenants. The deals are getting much larger - and the jockeying for them more heated.

Simon Property and the Los Angeles-based Westfield Group spent a year trying to gain control of Taubman Centers Inc., based in Bloomfield Hills, Mich. They didn't retreat from their hostile takeover attempt until October last year, after Michigan's governor signed a bill changing the state's takeover laws in response to heavy lobbying by the Taubman family.

In fact, Simon talked with Rouse this year about its interest in the company, but the two were unable to negotiate a sale or a merger, said Billie Scott, a spokeswoman for Simon.

Rouse's successful suitor, General Properties, owns or manages about 170 shopping malls. It is paying $67.50 per share in cash for Rouse, a premium of about 33 percent over Thursday's closing price of $50.61 per share.

"All these major developers are acquiring other companies, so it's not unexpected for a company like Rouse, with an outstanding portfolio," said Mark Millman, president of Millman Search Group, a national retail consulting and executive search firm in Owings Mills. "Rouse was up there, in the top four or five mall developers in this country, well-respected, well-positioned and well-managed. General Growth saw a lot of opportunity and put a deal on the table that could not be refused."

So long, `mom and pop'

The shakeout among mall developers has paralleled trends among the retailers to whom they lease, with "mom and pop" shops all but edged out by national chains. Almost a decade of acquisitions has left three key players in the shopping center industry: Simon, General Growth and Westfield Group.

Most shopping center development companies got their start as family enterprises. The Bucksbaum family started General Properties. James W. Rouse, who parked cars to make ends meet during the Great Depression, started the Rouse Co. as a mortgage banking firm with a partner in 1939.

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