RECon panelist: Be mindful of costs to replace systems, meet code

From "lipstick" remodels to complete horizontal and vertical expansions, bringing new life to an underperforming shopping mall can be an unexpectedly expensive undertaking, a Los Angeles architect said Tuesday at the International Council of Shopping Centers' Real Estate Convention.

It could open Pandora's box of hidden costs to bring an older property up to building code, including replacing the mechanical and electrical systems and strengthening utility infrastructure, said Ronald Altoon, ICSC trustee and partner of Altoon + Porter Architects.

With retail vacancy around 13 percent nationwide, there's little demand for ground-up development in the near future. At the same time, there's no shortage of distressed retail properties such as the Sahara Pavilion North shopping center that was part of an advertised $1 billion commercial auction in Las Vegas.

Altoon said foreign investors are seeking solid investments with enhanced capitalization rates at a location with improving demographics.

That sounds ideal, but they need to be careful in assessing the financial aspects of a project, he said during a breakout session at RECon, a four-day trade show that drew more than 30,000 shopping center professionals to the Las Vegas Convention Center.

"What isn't in the numbers?" Altoon asked. "When you buy a C property and you want to turn it into a B property, or a B property into an A property, there may be code and zoning issues. You have to look at the physical condition and merchant viability. What about department stores going out of business?"

An investor paying $100 million for a distressed shopping center will probably have to put $35 million into it, Altoon estimated. If $25 million is for meeting building code requirements, the visual return on investment is going to much less than expected, he said.

Among the case studies presented by Altoon and his business partner, Gary Dempster, was the Fashion Show mall in Las Vegas, a Rouse Co. property that underwent a major renovation in 2001.

"It didn't really say it's Las Vegas. We wanted an icon to tell people you're in Las Vegas," Altoon said.

Rouse invested $14 million in audio and video equipment that could project advertisements onto "the cloud," the distinguishing feature of the largest mall on the Strip.

Many department stores and malls reinvented themselves during the recession, said John Bemis, director of leasing and development at Jones Lang LaSalle. They're offering more excitement, fresh merchandise and new concepts to receptive consumers.

Macy's is expected to post its best annual sales increase since 2005. Nordstrom saw a record $9.3 billion in sales for the year, an increase of 13 percent.

"Despite these improvements, department stores are still closing poor-performing locations, which has led to a unique opportunity," Bemis said.

About one in every four malls now leases to at least one unconventional anchor, he said.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.