Paid parking no ploy to redevelop Cherry Creek Shopping Center

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Cherry Creek Shopping Center
Sorry conspiracy theorists. Paid parking at the Cherry Creek Shopping Center doesn't signal the redevelopment of one of the nation's top shopping centers.

Ever since I broke the story last July that the Cherry Creek Shopping Center would begin charging for parking in 2017, shoppers and many tenants in Denver’s premier mall have been, shall we say, upset.

Last month, an ipetitions.com site was launched to try to convince Cherry Creek to once again provide free parking, as it has done since Taubman Centers Inc. opened the mall on 35 acres more than a quarter of a century ago.

Some people have even opined on social media sites that charging for parking, starting in the second hour after arriving, is just a ploy to drive tenants from the shopping center so the mall can be redeveloped into a mixed-use development. A month ago, a Denver Post editorial headline cried out “Don’t let a parking crisis turn Cherry Creek into a retail collapse.”

Cherry Creek Shopping Center
The lights in the ceiling in the Cherry Creek Shopping Center efficiently direct shoppers to vacant parking spaces.

I’m shooting holes in that conspiracy theory with this column.

“That is absolutely absurd,” said Nick LeMasters, the general manager of the Cherry Creek Shopping Center since 1990.

“That is categorically absurd,” LeMasters added for emphasis.

Indeed, despite charging for parking, plenty of tenants are eager to come to the Cherry Creek Shopping Center, according to LeMasters.ha

“Between now and 2018, you are going to see a lot of new names here,” LeMasters said.

One of them is Tesla.

The Tesla deal was finalized late Tuesday afternoon, LeMasters said.

“We are thrilled,” LeMasters said.

Tesla will take about 4,800 sf on the lower level of the Cherry Creek Shopping Center next to J. Crew. An opening date hasn’t yet been set.

LeMasters said he isn’t sure how big of a draw the Tesla dealership will be. However, he expects it will draw from a “very wide trade area” if it is anything like the rest of the Cherry Creek Shopping Center.

This will be the second Tesla dealership in the Denver area. The electric-car company opened the Lone Tree-Park Meadows Tesla dealership about six years ago.

Certainly, Denver and the nation have seen so-called dinosaur mall replaced with mixed-use developments with housing, offices and retail.

That is happening right now in Westminster, where the Westminster Shopping Center has been razed to make way for a new downtown for the city.  And where Belmar stands in Lakewood was once the Villa Italia Mal. Cinderella City was replaced by CityCenter Englewood.

Just last Friday, Robert S. Taubman, CEO, chairman and president of Taubman Centers had this to say to analysts during a conference call: “When we went public in 1992, there were about 2,000 regional malls in the United States. Today most people believe there are about 1,000. Surely that number will significantly decline over the next decade.”

Malls will fall, but the Cherry Creek Shopping Center will not be one of them.

“Anyone who thinks that is spending too much time at the bar at the Cherry Creek Grill,” Wall Street analyst Alex Goldfarb told me this week.

First, if you were going to close a mall to redevelop it, charging for parking is not the way to begin the process, he explained.

“That would not even make the top 10 list of ways to do it. It wouldn’t even make the top 20,” said Goldfarb, an analyst with Sandler O’Neill + Partners LP.

More importantly, in aggregate, Taubman owns and operates the most successful malls in the country.

And Cherry Creek is of the best performing in Taubman’s portfolio.

Late last week, Taubman reported that the average gross sales per square foot in its more than 20 malls is $776.

The Cherry Creek Shopping Center is easily one of the five best in Taubman’s portfolio, according to Goldfarb.

“We estimate their sales at $1,100 per sf,” for the nonanchor, inline stores, he said.

Cherry Creek Shopping Center
A snapshot of how Taubman properties, which includes the Cherry Creek Shopping Center, stacks up to competitors. Taubman released updated numbers for the first quarter last Friday.

That would equate to $675.4 million in annual gross sales at the shopping center, not including the sales generated by the anchors, such as Neiman Marcus, Nordstrom and Macy’s.

Taubman also boasts the highest average sales per sf of any mall owner in the nation. Taubman malls, overall, averaged lease rates of $62.47 per sf at the end of the first quarter, up from $61.07 at the end of 2016. While Taubman doesn’t break out the performance of individual malls, Cherry Creek Shopping Center is sure to be at the top of the enclosed shopping centers by that metric.

The other thing to consider is that a year ago, Taubman refinanced the debt in the Cherry Creek Shopping Center with a new, 12-year nonrecourse loan for $550 million.

The interest-only loan has an attractive interest rate of 3.85 percent.

The funding was provided by Metropolitan Life Insurance Co. and Prudential Insurance Company of America.

“Anytime you put debt on a property, you have to have the NOI (net operating income) to cover the loan and the debt service,” Goldfarb said.

“There are stipulations in the loan documents telling you what you can and cannot be done to the asset,” he added.

In other words, you have to have a source of income to pay back the debt.

If you didn’t have any cash flow, the lenders would want their money back. It doesn’t make any sense to pay $550 million to launch a time-consuming and expensive redevelopment project.

The other piece of the puzzle that could complicate any redevelopment of the Cherry Creek Shopping Center is that Taubman’s 50 percent partner in the mall is the nonprofit Temple Hoyne Buell Foundation.

Commercial Real Estate Direct, a trade journal, estimates that the foundation receives $2 million a year in annual ground lease payments from Taubman. In addition, it probably receives a percentage of sales, Goldfarb said.

The foundations latest filing with the Internal Revenue Service said it received $12.67 million in annual rental income, although it did not break out the source.

“The only thing I will say is that you couldn’t ask for a better partner than the foundation,” LeMasters said.

“The foundation shares our long-term outlook,” he added.

Cherry Creek Shopping Center
This graphic shows the parking rates in the Cherry Creek Shopping Center.

Cherry Creek is one of three malls in its portfolio that charge for parking. The other two are in Stamford, Connecticut and Los Angeles.

“They are urban centers, like Cherry Creek is,” LeMasters said.

“Some people still think of Cherry Creek like it is a Denver suburb. It is not. It is urban. You know all of the development that is happening in Cherry Creek, as far as what has opened and is what is under construction and on the drawing board. And it is not over.”

With all of the development, construction workers were increasingly using the free parking at the shopping center, as were tenants in nearby apartments.

LeMasters knew that his decision to charge for parking would be unpopular.

“But we were getting very close to a critical mass where shoppers would not easily have been able to find parking,” he said.

Some tenants, he said, have been disproportionately hurt by the parking fees, which start at $3 in the second hour. The first hour is free. Up to three hours is $4 with an additional $2 per hour after that. The maximum daily charge is $16.

“I have actually talked to some tenants who have seen an increase in business, which, frankly, we did not anticipate,” LeMasters said.

Some loyal clients are spending more money at their favorite stores now that they aren’t frustrated by hunting for parking, he said.

Cherry Creek Shopping Center
Nick LeMasters is the longtime general manager of the Cherry Creek Shopping Center.

That doesn’t surprise analyst Goldfarb.

“If you are going to spend $200 in Cherry Creek, are you really not going to shop there if you are probably going to pay less than $5 to park?”

A

Cherry Creek Shopping Center
Paid parking isn’t keeping new tenants from coming to the Cherry Creek Shopping Center. Tesla inked a deal for 4,800 square feet in the Cherry Creek Shopping Center this week, for example.

Analysts Goldfarb understands why a developer would charge for parking.

“I’m going to defer to Taubman,” as far as the need for paid parking, he said. “I’m sure they studied mall traffic and the potential implications.
That said, there are a lot of reasons to charge for parking in urban areas, especially those like Cherry Creek, where a lot of development is underway.”

Charging for parking is a growing trend for urban malls, he said.

“First, free parking is not free,” Goldfarb said. “It costs $30,000 to $50,000 per space to build structured parking and that is a cost that is borne by the tenants in the charge of higher rent. And if people are parking in Cherry Creek and not shopping in the mall, but walking across the street to other restaurants or retailers or to work at a construction site, tenants are paying for parking and getting no benefit.”

Cherry Creek Shopping Center
This social media site hopes Taubman will stop charging for parking at the Cherry Creek Shopping Center.

At the same time, he understands why people are upset by paying for parking.

It’s human nature.

“As a people, we are full of contradictions,” Goldfarb said.

“We say that we like things like driverless cars and Uber, but we still own cars and drive to malls. And when we get there, we don’t want to pay for parking if we didn’t in the past.”

If you scratch the surface of just about any deal, there is a story behind it. The Rebchook Real Estate Corner looks at the what and who that make the Colorado commercial real estate industry spin every Tuesday and Thursday online at CREJ.com. The people behind the deals are passionate about what they do, whether they focus on offices, apartments, industrial, retail, land or lending. They also are passionate about their clients. Given the cyclical nature of commercial real estate, those who prosper in it have plenty of stories to tell. I hope to share them with you. 

This column includes news stories, in-depth looks at deals, profiles, Q&As and pieces on the latest trends. Contact John with story tips at JRCHOOK@gmail.com or 303-945-6865.

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