Don’t count Westfield co-CEO Steve Lowy among those who think department stores no longer have a role in anchoring a successful mall.
The executive, who spoke to Fortune this week at the Shoptalk conference in Copenhagen, Denmark, noted that the Australian mall developer’s $1 billion overhaul of the Century City Center in Los Angeles, recently inaugurated, made it home to a brand new Nordstrom (JWN) store and that Westfield is also adding a Bloomingdale’s (part of Macy’s (M)) at an upcoming shopping center in the San Diego area.
“There are not four or five department stores in these malls anymore,” Lowy said. He added: “You take one or two of the goods one, then look at the Inditex (Zara parent) stores.” He noted that a developer can easily fill the 100,000 square feet vacated by a department store with an H&M, a Zara, and a Uniqlo. Some 28% of Westfield’s revenues now come from department stores, down from 42% a decade ago, according to the company’s latest financial statements.
Westfield, like its much larger peers General Growth Properties (GGP) and <a href="http://fortune.com/simon-mall-landlord-real-estate/">Simon Property Group</a> has been navigating the current turmoil in retail by shedding weak properties and focusing on the high end, replacing struggling retailers with upscale restaurants, gyms, and other features to break out of the same-old same-old that has proven catastrophic to the shopping center industry. The company has lined up tenants like Tesla and Shake Shack, which were absent from malls only a few years ago.
In the first half of 2017, net property income was up 13% at Westfield, while funds from operations (FFO), a metric that tracks cash flow for real estate investment trusts, rose 4.5%, showing that it is weathering the retail storm. Westfield has a pipeline of about $9.8 billion worth of projects.
Lowy sat down with Fortune at Shoptalk to talk about the state of retail, its Century City and World Trade Center projects, among other topics. The questions and answers have been edited for clarity.
Fortune: Why bet on Nordstrom and Bloomingdale’s to anchor new projects? (Both chains have seen declines in comparable store sales lately)?
Lowy: You take a long term view, you make your bets on who you think will be relevant in the future. They’re (Nordstrom) an important retailer for important real estate. I would bet on the long term of Nordstrom and Bloomingdale’s.
Are shorter leases becoming the standard practice given all the retail turmoil of late?
Retailers are concerned about long-terms leases but it depends on the real estate. There’s a general trend of retailers being more cautious. But leases are not materially shorter. If you don’t have it long enough, you can’t amortize it (the millions spent on building the store.)
Mall developers all tout the growing role of restaurants in their properties. Yet many national restaurant chains are reporting weak same-restaurant sales. Is there a risk restaurants could be a bust?
We’re really focused on the types of restaurants that we’re putting in. They’re not these old-style family restaurants, these are cool place where we would all like to go. Every project, bar none, has a heavy emphasis on restaurants, some family, but also cooler, hip restaurants that do very big volumes.
(By way of example, Westfield has two Eataly restaurants at its malls, and the Century City has twice as many restaurants as the mall’s previous incarnation.)
Why is good dining and entertainment so crucial to shopping center’s well being today?
We’re fixated on food, leisure entertainment because you cannot do that on this thing (points to smart phone.) You go there to enjoy with your friends and family and it keeps you there longer thats what it’s about.
You just have to get out of the commodity business. If you’ve got a commodity, you’re going to be smashed by the internet.
Earlier this year, the Wall Street Journal had a story suggesting the Westfield World Trade Center project in Manhattan was having some difficulties. Is it living up to your expectations?
The answer is yes, we’re happy. But a number of things are going on: the place is not finished, Tower No. 3 is a year late, some of the finishings of the subway connections are late.
Effectively we’re 70% finished, so everything else is a year late. We’re excited about it but it’s not finished- it always takes a number of years for a building to get known by its community.
The onus is on us to continually adjust the tenancy mix. I think you’ll find more food going in there and those things will catch on quicker.