Glut of New Malls Sets Off Alarms

In their bid to crush competitors and grab market share, the nation’s top retailers are opening scores of new stores in Southern California, driving a shopping center construction boom that some experts think is careening out of control.

Although some additional stores are needed for residents of far-flung new suburban neighborhoods, analysts say, most new centers are serving up the same kind of apparel, food and home-improvement outlets that already exist in abundance.

Since 1990, new construction has boosted the amount of retail space in Los Angeles County by 24.5%, according to construction information group F.W. Dodge. Orange County’s retail space has grown 15% in that time.

Local governments have been quick to embrace such development because of the hefty sales tax revenue it adds to their coffers, while publicly held developers and retail companies say they need new stores to boost earnings.

But all this development is setting off alarms with industry analysts who fear it’s too much at the wrong time: Clouds over the global economy and fading consumer confidence suggest that demand for consumer goods may slacken and cause some of these centers to falter, leaving a blight of empty shells behind.

Already some chains like Starbucks Coffee are popping up two stores to a street and home-improvement superstores are getting progressively larger, resulting in an abundance of retail property. The amount of retail space per person in the nation has grown by a third in the last decade, says F.W. Dodge economist Carolyn Hull. If you had two large bookstores in your neighborhood several years ago, you probably now have at least three to choose from.

The pace of retail construction in Southern California is not as frenzied as it was in the mid- to late 1980s, when easy financing from savings and loans saw mini-malls appear on what seemed like every street corner.

But today’s building pace is still overheated, Hull says. “There’s more retail construction coming than is actually [needed],” she says. “It’s not serving any pent-up demand.”

Although no data on current construction are available for most of Southern California, brokers say millions of square feet are being built, from so-called big-box power centers hawking discounted goods such as office supplies or linens to new, larger, supermarket-anchored neighborhood centers to urban entertainment complexes with restaurants, theaters and games. An additional 50 centers totaling 9 million square feet are planned from Los Angeles to San Diego.

Driving the building boom is aggressive expansion by such stores as T.J. Maxx, Borders Books & Music, Eagle Building & Garden, Wal-Mart, and Lowe’s Home Improvement Warehouse, which have already saturated markets in other parts of the country.

“These chains have got to get stores built and open. They are working on market share,” says Brian Bethea, senior vice president with brokerage CB Richard Ellis Real Estate Services.

Indeed, analysts say, many businesses are willing to sacrifice the bottom line in the short term to chase out competitors and corner a market.

Hardware giant Home Depot, which operates more than 50 stores in Southern California, plans to open 61 additional stores here by 2000, and officials are already scouting locations for more. The average Home Depot is 105,000 square feet under one roof, plus a 24,000-square-foot garden center. That’s enough space for a couple of football fields.

“At this point, we don’t know how far is up,” says Amy Friend, a Home Depot spokeswoman. Some of the chain’s stores are now just a few miles apart. In Northern California, it has two stores in the same shopping center--one aimed at contractors, the other at weekend remodelers.

Rival Lowe’s has said it plans to open 100 stores in the West in the next several years, mainly in Southern California. Such intense market penetration has earned large retail chains like these the nickname “category killers.”

“As the name clearly indicates, they are not content to exist with competitors, they want to kill them,” says Michael Beyard of the Urban Land Institute, a research-based real estate trade group.

Aggressive expansion by category killers has implications for cities as well as for other retailers, Beyard says. Many times these large retailers will open up more stores than a particular area can handle, just to overwhelm competitors. When other stores clear out, the chain shutters its own unprofitable outlets.

Shopping center developer Steve Hopkins of Newport Beach-based Hopkins Development Co. complains that consolidation among retailers, bankruptcies and the constant push to open bigger stores are driving tenants out of developments less than a decade old.

That means developers like Hopkins lose money, and when they need to find someone to fill a vacant building, there are fewer big players to turn to. For instance, where there used to be 20 large grocery chains operating in the Southland, he says, there are now only four or five because of a spate of mergers.

“It’s a problem that you are going to have to deal with for a prolonged period of time,” Hopkins says. Many of these big retail boxes sit empty for months or years. Hopkins estimates that Wal-Mart has 40 million to 50 million square feet of now-empty retail space available for lease around the country, yet the retailer last week announced plans to open almost 200 more new U.S. stores this year.

Overdevelopment can lead to lower prices for consumers, says Al Gobar of Placentia-based Alfred Gobar Associates. Merchants have to lower prices to remain competitive when too many retailers are vying for the same customers. An excess of space also means landlords must lower rents to attract retail tenants, Gobar says, meaning retailers can afford to lower their prices because of lower overhead.

But when big retailers close stores, cities take a financial hit, losing the kind of tax revenue most try hard to court. Although the buildings themselves are suitable for warehousing or manufacturing, brokers say, their locations on main thoroughfares make those uses unappealing. Nearby merchants also are affected by the loss of spillover traffic from these shuttered big stores.

Analysts see a danger of overdevelopment in central Orange County and Hollywood. Several large entertainment and retail projects are planned for Orange County’s core, especially around Disneyland and Anaheim Stadium, including the massive Sportstown project. Pointe Anaheim, an outdoor mall, is expected to open in 2000. The Block at Orange, a Mills Corp. retail and entertainment center that includes a 30-screen theater complex and more than 20 restaurants and food vendors, will open next month.

Hollywood also has major retail projects planned or underway, including TrizecHahn Corp.’s $385-million development at Hollywood Boulevard and Highland Avenue, a retail expansion at Pacific Theaters’ Cinerama Dome on Sunset Boulevard, and a large retail center planned by Beverly Hills-based Regent Properties at Sunset and Vine Street, in addition to projects on the Sunset Strip in West Hollywood.

“I’m concerned we have a lot of development going on in areas without a strong residential base,” says broker David Lachoff of Grubb & Ellis Co. in Los Angeles. “You can’t depend on people who come to look at [Mann’s Chinese Theater] footprints to do major shopping. You just don’t see a lot of people walking around with bags.”

Los Angeles City Councilwoman Jackie Goldberg acknowledges that the number of projects planned for Hollywood is high. Yet she says new development will not only draw tourists, who now have few desirable places to shop, but residents of such nearby neighborhoods as the Hollywood Hills, Hancock Park and Silver Lake.

“People in these areas are tired of going to Glendale every time they want to shop,” she says.

Still, municipalities that approve retail centers to increase their tax bases are risking traffic congestion, air pollution and extra pressure on existing local businesses, Beyard says. And once these large stores have whittled down the competition, they’re free to raise the low prices that attracted customers in the first place.

“Cities need to be clear what the demand is for these centers,” Beyard says. “And, maybe this is too much to ask, but they should consider the impact on surrounding communities too.”

Such regional cooperation would be ideal, says Derrill Quaschnick, assistant director of the Glendale Redevelopment Agency, but he says it’s impractical because most cities are scrambling to preserve their economic bases.

“We’re all competing for the sales tax dollars,” Quaschnick says. “It’s hard to imagine other cities agreeing to share that.”

Others, like former mini-mall developer Robert Champion, think a retail shakeout is inevitable as consumers’ tastes change. New competition forces owners of older shopping centers to keep their stores attractive, Champion says, and pushes small retailers to stock merchandise that is in step with buyers’ tastes.

“I’d agree that there is more retail square footage per capita than we need,” he says, but he adds that a lot of it is obsolete. To ensure his centers in Pasadena and Brentwood make the cut with shoppers, Champion has begun giving local residents a say on the design and kind of tenants in newly built space.

Other developers, including Arlington, Va.-based outlet mall operator Mills, have changed their focus and are building centers that offer a range of entertainment. Ontario Mills in Ontario has several attractions, and Mills’ latest project, the Block at Orange, will feature not only theaters but a skating park and adult game rooms.

“We believe most retail is over-copied. This [concept] allows us to provide something new and unique to the marketplace,” says Jerry Engen, development director of the Block.

But market experts say that considering the amount of new development planned, it’s often not a matter of building a better mousetrap, but knowing when to quit.

Retail broker Bethea says that although many of the new centers are providing something shoppers want, in some areas they may be providing too much of it, especially theaters.

“We seem to be building screens at a rate that says I would go to a movie four or five times a month, and I guarantee that is not the case,” Bethea says.

And now, with consumer confidence cooling and national retail sales growth expected to slow this quarter to a 2% annual rate from 5.9% earlier in the year, analysts are wondering how Southern California can support so many stores.

“If discretionary spending drops dramatically due to a recession or a depression, it will all be too much,” says L.A. Councilwoman Goldberg. “It all really depends on what happens to the economy.”