Developers, Retailers Buying Into Town Center Concept

Defying the initial skepticism of some retailers and developers, open-air shopping centers that combine stores with apartments and office space are fetching higher rents, and in some cases reporting higher sales, than many competing shopping centers across the country.

Compared with commercial districts in older, established urban areas, “town center” projects are newly built projects, often in suburbs or new, master-planned communities that lack pedestrian-oriented shopping streets.

Considered avant-garde in the early 1990s, the town center concept has become widely popular in recent years.

The trend suggests that the town center formula, which provides a mix of retail and office space, housing and sometimes museums and other civic buildings, can be a potent recipe for retailers.

At Town Center Drive in Santa Clarita, a three-block, 708,000-square-foot shopping street opened in 1998 by Newhall Land & Farming Co., merchants are paying about $2.25 per square foot monthly, which is the highest retail lease rate in the Santa Clarita Valley, according to the developer.

Lease rates for office space (as much as $2.35 per square foot) and rents on apartment units (as much as $1.49 per square foot) are higher than their counterparts in the same city.

“I’m not surprised by the success but by the magnitude of the success,” said Newhall Land Chief Executive Gary Cusumano. His company will scatter smaller, neighborhood-scale, mixed-use developments throughout the 21,600-home Newhall Ranch subdivision, which the company plans to start building in 2004.

Another town center project is the Birch Street Promenade in Brea, where Los Angeles-based CIM Group built about 400,000 square feet of retail space and 62 loft apartments in 1999 along two blocks that already had a cinema complex. Lease rates for stores and restaurants run from $1.90 to $2.50 per square foot, with sales of $320 to $475 per square foot.

Although those numbers do not surpass the performance of merchants at a nearby regional mall, “we are beating the neighborhood shopping centers hands down,” said Jeff Kreshek, CIM Group leasing director.

The trend is not limited to California. Town Square in the village of Schaumburg, Ill., near Chicago, combines 136,000 square feet of retail space with a public library and a museum. Merchants pay $18 to $22 per square foot monthly, compared with $17.81 in other area stores, according to Paul Evans, a planner with the village. Only the local regional mall commands higher rents.

Regional malls are the largest of their kind, intended to draw shoppers from a distance of several miles.

Reston Town Center, a project built in 1990 in Reston, Va., that combines 300,000 square feet of stores and restaurants with 1 million square feet of office space and a 500-room hotel, is “absolutely outperforming the national averages in all asset classes--service businesses, cinema ticket sales, restaurants and fashion merchants,” said Thomas D’Alesandro, vice president with Reston-based Terrabrook, which owns part of Reston Town Center.

Commercial success at town center developments is good news to urban theorists, who have promoted the concept as a means to create a downtown atmosphere in suburbs lacking traditional Main Streets.

Some merchants, however, resist leaving the proven environment of an enclosed mall.

When developers proposed the Reston Town Center in 1988, “a lot of merchants would not touch it,” recalled D’Alesandro. Although some merchants--including Ann Taylor, Talbot’s and Banana Republic--were willing to pioneer the concept, “the other merchants did not come on until the property opened” and proved successful, he said.

Though mixed-use retail centers can be more profitable than simple malls, they are also harder to build, real estate observers say.

Mixed-use projects are still unusual and require more time to secure building permits and other entitlements from local building departments, said D’Alesandro. Such projects are also more difficult to finance, because few lenders have experience with mixed-use development. Developers then need higher returns to offset the added costs.

The value of such investment, however, is that locals can support the merchants around the clock, according to CIM’s Kreshek. “For people who work there or live there, [Birch Street Promenade] becomes ingrained as their primary place of shopping and dining,” Kreshek said, “and that is a significant component that other projects really lack.”

Town centers create 24-hour markets for merchants, because the centers are essentially neighborhoods, according to Marlee Lauffer, a spokeswoman for Newhall Land.

“In the morning, you’ve got people window shopping as they get their cup of coffee and go to the office, and at 11 o’clock at night, they’re having beer and pizza at BJs,” a restaurant on Town Center Drive, she said.

Terrabrook’s D’Alesandro put it another way: “While most people think it is the office that supports the retail, it is really the reverse: The retail creates an environment that is exciting to office tenants.

“A lot of our office tenants tell us, ‘I don’t want to get in my car to go to the bank, or to the office supply store, or to a restaurant to entertain a client.’

“Instead, those tenants say, ‘I want to be right in the center of things. I want to be close to a deli, a white table cloth or fast food,”’ D’Alesandro said.

Those amenities set town centers apart from hotels and offices that have no neighborhood atmosphere, D’Alesandro said. “You can leverage off the right mix of merchants. People are willing to pay a premium to participate in that environment.”