Whether it is in sustainable building initiatives or through an innovative design concept, Michael P. Kercheval, president and CEO of the International Council of Shopping Centers (ICSC), says retail contractors and developers have numerous opportunities to infiltrate the market. Kercheval predicts that this year, overall retail sales will rise by 4.5 percent, creating demand for new development. Mixed-use properties in particular, he says, have increased in popularity because they meet consumer needs by maximizing the value of their locations.

ICSC president and CEO since 2001, Kercheval is responsible for carrying out the association’s strategic objectives, including tracking the retail real estate market. Founded in 1957, ICSC is the global trade association of the retail real estate industry with more than 65,000 members in almost 100 countries.

Construction Today recently connected with Kercheval to discuss the changing landscape of retail construction and development and how this will affect the industry’s stakeholders.

Construction Today: What are some of the more significant goals of the retail construction segment in 2008? What types of obstacles will both contractors and developers face?

Michael Kercheval: In 2008, retailers and contractors will both be concerned about the overall strength of the economy and consumer’s ability and willingness to spend. The sub-prime housing meltdown has raised the cost of capital and reduced the availability of credit for a growing range of individuals and businesses. Also slower economic growth, rising energy prices and concerns of declining consumer spending are expected to hamper retail development in the coming year.

Shopping center and store construction starts are projected to drop 10 percent in 2008 to 270 million square feet, according to McGraw-Hill’s 2008 Construction Outlook. As a result, contractors will be competing for fewer projects while retailers will be dealing with consumers who are focused on discounts.

Overall U.S. retail sales slowed in 2007 by about two percentage points with housing-related softness dominating that performance. Exemplifying the source of the slowdown in 2007 was furniture and home furnishing store sales, growing minimally at just under 2 percent in 2007. Indeed, with the lack of home demand continuing to be a drag on the overall economy, it is no surprise that ICSC envisions housing-related consumer demand to continue to be a soft spot for 2008. Overall retail sales are expected to rise by 4.5 percent this year compared with a 4.2 percent gain in 2007.  

CT: What regulatory issues or policies will affect either owners or contractors in this segment?

MK: Green building standards are going to have an enormous impact on the ability to secure a permit for new or redevelopment projects. Many cities around the country have adopted new building code requirements based upon the U.S. Green Building Council’s Leadership in Energy and Environmental Design. These standards are only now being tailored to deal with the specific needs of the retail real estate industry. And any city that adopts these standards is effectively granting a monopoly to a single-source supplier since the certification process must go through a LEED-certified individual.

Furthermore, Congress has been tempted to tinker with storm water and wetland regulations. In particular, Rep. James Oberstar (D-Minn.) has proposed legislation that would significantly expand the authority of the federal government, at the expense of state authority,  over-issuing permits for activities impacting wetlands – which often includes roadside ditches, storm-water retention ponds and runoff from retail sites. Securing a federal permit could become both more common and more difficult if this legislation were adopted.

CT: What type of emphasis have retail developers and contractors placed on sustainability? In 2006, ICSC rolled out its Sustainable Energy and Environmental Design (SEED) program. What were some of the accomplishments of this program?

MK: Only a few years ago, green building practices were relatively unknown and mainly applied to public buildings and government offices. However, today these standards are being applied to private buildings as well, including residences, offices, retail stores and, of course, shopping centers. Partly in response to these new trends, ICSC launched the SEED program to bring together all of its existing environmental projects and to provide an institutional home for new initiatives at ICSC.   

For the past two years, ICSC and the U.S. EPA have recognized outstanding efforts by the shopping center industry to conserve resources, recycle materials and purchase recycled content products. The “America’s Marketplace Recycles” awards program is designed to increase public awareness of the benefits of recycling. Shopping centers generate a variety of materials that are prime candidates for recycling, including corrugated cardboard, mixed paper, glass, plastic, metals, food waste, landscape trimmings and shipping pallets.

This award program provides both the EPA and ICSC the opportunity to highlight those shopping centers and retailers who are leading the way in regards to recycling and it also gives us another avenue to get the word out about the importance of recycling and supporting green initiatives.

CT: How has globalization affected the retail segment?

MK: Global retail development is in overdrive as abundant and highly mobile capital combined with growing populations and disposable incomes on all continents are fuelling a boom in construction of new shopping venues and the redevelopment of existing ones.

Not only is capital mobile, but industry skills and brands are, as well. Developers, architects, consultants and retailers are crossing borders to take advantage of new opportunities outside of the mature markets of North America and Europe. This should mean that the general level of development, design and management of shopping centers would rise globally. It should also result in a greater homogeneity of the retail product.

World-class shopping centers can be found on virtually every continent. Just 40 years ago, ICSC’s first CEO, Al Sussman, predicted that in years ahead there could be as many as 10,000 shopping centers built. Today, some 50,000 traditional shopping centers exist in just the United States alone. Worldwide, we estimate that there are over 100,000 shopping centers.

Not only has the shopping center concept become global but this unique trans-national platform has given merchants and retailers the opportunity to greatly expand their reach.

CT: How is the retail real estate format changing in the United States? Are there certain designs that are emerging as the more popular choice?

MK: Retail is the necessary and sometimes even the sufficient catalyst for successful real estate development. A renaissance of mixed-use development reflects demographic and lifestyle shifts mandating more efficient resource allocation. The need for consumers to balance experience, value and convenience has never been greater. And just as suburban malls met the demographic and social needs of North America’s shifting populations in the 1950s, ‘60s, and ‘70s, the adaptation of Asia’s and Europe’s successful mixed-use development format is becoming commonplace today.

We are discovering that far from being a simplistic bundling of land uses, a successful mixed-use project embodies a thoughtful tailoring of consumer lifestyle needs within a structure that maximizes the value of its location. A mixed-use project is more than the sum of its parts. It is a complex algorithm with compounding properties and potential pitfalls. One wise person said, “A project of multiple uses also means there are multiple ways for it to fail.” A failing hotel, office, residential or even retail component in a mixed-use development can and often will bring down the whole project. The other reality is that every successful true mixed-use project must have retail as its core. So rather than seeing mixed-use as a threat to the retail property business, it is seen the next opportunity.

CT: What regions of the United States do you see an influx in new retail construction? What about a leveling out/slowdown? What are the drivers behind this?

MK: In 2007, new retail construction per square foot decreased by 11 percent compared to 2006. The Midwest experienced the greatest slowdown as total new retail construction pre square foot dipped by 12 percent. The South experienced the smallest decline at -1 percent. The slowdown in the economy, the sub-prime housing crisis and rising energy cost are to blame.

CT: What are some ways in which developers can overcome the challenges of over-saturation in specific geographic markets?

MK: One complaint I often hear is that shopping centers all have the same stores. There is some truth to this as developers have a reliance on national and regional retailers to create new concepts. In order to be successful, a developer needs to distinguish their center from the competition. This can be accomplished through design and leasing. Consumers wanted visually appealing centers that are unique. The old “build it and they will come” philosophy no longer applies.

Today’s successful centers have to be architecturally appealing, easy to get to and offer a variety of tenants. The hardest part is finding unique tenants. Developers are seeking out restaurants and specialty food retailers to fill the void. In the enclosed mall world, developers try to develop new retail concepts through temporary tenant programs more commonly known as kiosks. This is a way to test a new retail concept without a great deal of startup costs. Ultimately, it is the goal to grow temporary kiosk tenants into in-line stores.

CT: How are architects impacting the retail segment? Where does building design rank compared to location, for example?

MK: Good architecture can contribute greatly to the overall success of a retail project. For instance, Horton Plaza in San Diego is not famous for its retail tenants but rather for its design. Similarly, consumers flock to the Forum Shops in Las Vegas for the retail but also for the entertainment elements that are incorporated in the overall design. However, there has to be a balance between appealing and unique design and the functionality of the retail space.

No matter how visually appealing a center may be, if it is difficult to shop then it will not be a success with consumers. And consumers have a multitude of places to shop today. A good design is a balance between architecture and marketing/merchandising. It is not as easy as it seems and that is why there are architects that focus exclusively on shopping center design.