GUIDING LINES: Editor’s Note. The Price to Pay for a Mistake

A ‘professional’ retail center is not merely a multilevel structure with a roof but a building where each square meter works for the landlord earning maximum profits, along with a developed infrastructure and a wide range of services on offer to the public.

It is no coincidence that of late there has been so much talk of concepts – when market players meet the word is on everybody’s lips. The time came for Moscow investors who were the first to invest in shopping malls to reap the fruits of their labor. And for many the results have proved rather distressing.

According to credible assessments by market experts, out of the 976,000 square meters available for lease in shopping malls – as of late 2004 – only half, if not less, i.e. some 10-12 retail centers, operate successfully. They include Mega in Khimki, Atrium, Zolotoi Vavilon, and XL. But even those projects had teething problems.

The other retail centers in the city are in the red to a greater or lesser extent because of the gravity of mistakes made by developers. Investment in such projects does not pay for itself (the basic cost of retail construction in the city center is $1,000 to $1,400 per square meter). Landlords and investors at such centers are forced to spend extra on redevelopment – in most cases they try to alter the failed concept.

Moreover, that spells the loss of valuable anchor tenants – large department stores and hypermarkets – and a tarnished reputation for the mall itself, its management company, landlord and other entities involved in the project. It is no secret that attracting new anchors to failed complexes can be extremely difficult.

An example of a failed mall project often cited by retail market analysts is the Gvozd complex located at the intersection of the Moscow Ring Road (MKAD) and the Volokolamskoye highway. But that example is by no means unique. While Gvozd has received wide media coverage, on closer inspection similar problems are evident at other retail centers.

Gvozd’s owners changed the layout of the upper floors several times and actively sought new tenants, but all those attempts failed because tenants never took root there. The complex is located quite far from the metro station with buses running at lengthy intervals; the building also lacked convenient access roads.

Access roads are, of course, important. However, the gravest error occurs when clothes stores are opened in premises initially designed for a supermarket. This means the project is devoid of a concept, and it is clear that the investors or developers never sought advice from professional realty consultants. The concept of a shopping mall implies there is a uniform, thoroughly thought-out strategy taking everything into account – from the selection of a land plot and field research to the design of stairwells and advertising.

Another common mistake is made when landlords, seeking to squeeze maximum profits out of their properties, try to fill them up with as many tenants as possible. This, however, produces an imbalance, and such chaotic concentrations of retail outlets resemble street fairs that fail to attract customers, which in turn means a drop in revenues.

Quite often mistakes are made when selecting and placing tenants within shopping malls. In particular, sometimes anchors occupying the first and second floors deprive tenants located on the upper levels of income. For example, this is the case if the anchor stocks merchandise that the tenants on the upper floors specialize in.

What, then, is the point of going upstairs? And this is the reason why many tenants, deprived of customers, move out. At times, even the choice of anchors is unsuccessful. If the owners want a cinema hall within the entertainment zone it is better to invite an experienced operator, such as Formula Kino. If the investors want to invite a large foreign retailer to the mall it is worth making calculations to make sure there is enough space left for all the others.

For the time being Russian investors should not blindly follow the example of the U.S., where landlords accept the withdrawal of tenants calmly because the retail trade sector is highly developed and there are lots of companies on the same level. At the same time the western practice should not be underestimated either. U.S. developers usually seek advice from consultants on each and every issue – of a legal, technical or design nature.

Moscow developers have not yet got used to working like that. Moreover, there are not that many professional consultants well versed in retail real estate in the city. Professional developers are few and far between, too. A retail center requires specialization. Those developers taking part in large projects should already have built several projects, and the architects should be familiar with retail specifics and the general contractors should also have experience in the sector.

The retail property sector itself lacks transparency. Even if an investor finds a convenient site located close to transport facilities in a busy area, in most cases he cannot obtain any information on the plans of other investors with regards to the area, neither from the authorities nor market players. Quite often it is impossible to find out who actually holds the title deeds to a shopping mall, as many formally belong to offshore firms.

Indeed, it is not always possible to calculate how successful a mall is. There are malls which – regardless of how promising they may seem – never became popular with customers. This is what is happening now to the retail center at 31, Novinsky Boulevard.

Unsuccessful malls will slow the development of the shopping mall sector. Even today rental rates in popular malls are exaggerated, running up to $5,000 per square meter per annum. Famous brand names are queuing up to lease retail space in Moscow’s successful malls, which means landlords hike their rates.