Mall Developer Kimco Intensifies Growth Plans in Mexico
Emerging Middle Class Down South Is Targeted As U.S. Market Fills Up
By KRIS HUDSON April 30, 2008 IN “RETAIL TRAFFIC”
Kimco Realty Corp., which over half a century grew into one of the largest shopping-center developers in the U.S., is shifting its focus south of the border, where an emerging middle class has fueled demand for suburban-style retail property.
Kimco expanded into Mexico six years ago and now has 34 shopping centers there, compared with 809 in the U.S. But its development emphasis has shifted as many U.S. markets have become overbuilt with retail. Today Kimco has 24 Mexican shopping centers being planned or constructed, accounting for nearly 40% of its $2 billion construction budget, up from 20% in 2005.
Mall-Deprived?
The Mexican market presents an intriguing scenario for retail-property developers: Mexico’s developing economy is gaining momentum, yet the country’s malls and shopping centers are few and far between. There are fewer than 1,000 malls and shopping centers in Mexico, which has a population of about 110 million. In contrast, there are more than 50,000 in the U.S.
“A lot of the new business investments we’re doing these days are oriented toward Mexico rather than the U.S.,” David Henry, Kimco’s chief investment officer, said. “Development in the U.S. is rather limited today.”
Kimco, of course, isn’t the only retail-property developer looking for opportunities outside the U.S. as the market at home cools because of curtailed consumer spending and a scarcity of financing. Mall owner and operator General Growth Properties Inc. has postponed its planned renovations of several U.S. malls due to the sluggish economy, but the company has continued building new malls in Brazil and Turkey, “where the markets are robust,” said Chief Executive John Bucksbaum.
Luxury-mall operator Taubman Centers Inc., which owns 24 malls and opens but a single new venue each year, is building a massive mall in Macau, China, and another in Seoul, South Korea. CEO Robert Taubman foresees eventually opening two malls a year: one each in the U.S. and Asia. And Kimco owns 39 shopping centers in Canada, a mature market where it prefers to purchase rather than develop its properties.
Meanwhile, in the U.S. new retail development is slowing. Developers are expected to complete construction of 131 million square feet of retail space in the top 54 U.S. markets this year but only 82 million next, according to market-research firm Property & Portfolio Research Inc.
“I do think we could have a decade of little retail development” in the U.S., said David Simon, CEO of mall owner Simon Property Group Inc., in a conference call with investors Tuesday.
As it established itself in Mexico, Kimco, a real-estate investment trust based in New Hyde Park, N.Y., found the market similar to the U.S. in some ways and divergent in others.
In the U.S., Kimco mostly develops shopping centers housing several stores, large and small, each with front-door access to a common parking lot. In Mexico, most modern shopping venues are small, enclosed malls with a movie theater at one end, a large retailer such as Wal-Mart de México at the other and a food court and smaller shops in between. A rare amenity in Mexico — air conditioning — draws families to these venues to shop, eat and linger. The properties range in size from 200,000 square feet to 600,000.
Still, much of Mexico’s retail scene is made up of bodega grocery stores, street vendors and mom-and-pop stores. Mexico’s retail space cumulatively amounts to 1.5 square feet a person, as opposed to the U.S. ratio of 20 square feet per capita, according to investment-advisory firm Green Street Advisors.
“The yawning gap in retail supply speaks to the development opportunities ahead,” Green Street analyst Jim Sullivan wrote in an April 23 research report.
Meanwhile, Mexico’s gross domestic product, heavily dependent on exports to the U.S., grew 3% last year, in comparison to 2.2% growth in the U.S. Mexico’s per-capital GDP has increased 5.1% in the past year to $8,914 and 19.7% since 2005, according to the International Monetary Fund.
Recognizing the trends, American retailers are flooding into Mexico, either by opening their own stores or investing in Mexican retailers. U.S. retailers opened 507 stores in Mexico from 2005 to 2007 and anticipate opening another 640 this year and next, according to retail-research firm Management Ventures Inc. of Cambridge, Mass. Wal-Mart Stores Inc.’s Mexican division, Kimco’s largest tenant, plans to open 205 stores and restaurants this year alone. RadioShack Corp. intends to open 12 Mexican stores this year; AutoZone Inc., 12; and Home Depot Inc., eight. Also expanding are Mexican retailers such as Organización Soriana SAB de CV.
Local Touch
As it does in the U.S., Kimco recruits local developers in Mexico to scout locations and shepherd projects through government reviews. In return, Kimco finances the projects and takes a majority ownership stake.
While overall development costs for shopping centers are similar in the U.S. and Mexico, their components differ. For example, vacant land outfitted with infrastructure such as roads and plumbing is rare in Mexico, so some land costs are higher than in the U.S. But construction costs, namely labor, are cheaper in Mexico. Currently, developing shopping centers in Mexico produces profit margins of 30% to 35%, while doing so in the U.S. averages 25%, according to Green Street.
Mexico’s allure for retail developers has several of Kimco’s U.S. peers taking a look at the market.
“It takes a while to find the right partners, the right sites and the right retail anchor tenants,” Kimco’s Mr. Henry says. “We think we have a little bit of a head start.”
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