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This article first appeared in Real Estate Media’s Debt & Equity Journal. Erika Morphy is that publication’s co-editor.

NEW YORK CITY-For the past few years, it has been clear that so-called lifestyle centers–an upscale retail concept that features an open-air design and a more intimate and picturesque environment–have become a leading driver in the sector’s development. Patrice Duker, a spokesperson for the New York-based International Council of Shopping Centers, says that such properties have developed significant traction since 1997 when they first became popular.

“We are seeing more lifestyle centers built than closed malls now,” Duker says. This year, for instance, 16 such projects opened in the US, versus just five of the more traditional enclosed malls.

Equity and mezzanine retail lenders have taken note over the last year and a half, offering aggressive terms and underwriting. Now, over the past six months, it has become clear the CMBS is following suit, says one industry insider.

“You can get triple or quadruple the rent with a lifestyle mall than you can with a stodgier mall based on anchor stores,” says Dan E. Gorczycki, senior vice president of Granite Partners LLC, a real estate investment banking firm with offices in New York and Houston that is also one of the largest sales brokers of malls in the country, explaining the business case for these developments.

“CS First Boston has been very interested in lifestyle center retail deals for some time, but now I think all of the big CMBS lenders as well as B-piece buyers have come to the same conclusion—there are not many delinquencies or defaults and the demographics support their growth,” he says.

Gorczycki saw first hand the value financiers place on such developments this past February as his firm, representing the Blackstone Group and Polaris Capital, helped arrange the sale of Tri-County Mall, 1.3 million-sf super-regional shopping center in Cincinnati. The transaction, a $180 million sale to Thor Equities of New York City, could have easily been derailed, Gorczycki says. “In the middle of the process, one of the main anchors, J.C. Penney, announced it was leaving the mall. A lot of buyers could have easily seen that as a negative, but Thor Equities said it was good news because they knew they could get several lifestyle-type tenants to locate there, and then triple the rent.”

The kicker, he says, was a number of conduit lenders were willing to do 90% financing at roughly 160 basis points over Treasury, which at that time was 4%. “That would have been unheard of a few years ago.”

While the lifestyle-center concept is catching on, not every lender is sanguine about a shopping center without a major anchor store or stores. Indeed, consolidation among department stores and grocery stores has been a concern in the retail industry.

“It is something I would think over very carefully,” says Dan Smith, senior vice president of GE Real Estate’s North America Debt, based in Houston. “You want to make sure that the shopping mall is among the very top providers of groceries and retail services in the area.”

One of the hallmarks of a lifestyle center is the absence of a big-box retailer to anchor the mall—a concept that flies in the face of conventional retailing. “The earliest lifestyle centers didn’t have traditional anchor department stores or grocery stores,” ICSC’s Duker says, “and many still don’t.”

Now, though, the model is changing, with newer centers attracting fewer traditional anchor stores that fit their upscale image. “Some of the high-end department stores have jumped on this concept,” Duker says.

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