With Howard Hughes Corp. dusting off plans for the Shops at Summerlin, it might seem like a bit of a mystery as to how it can afford to build a massive retail complex in Las Vegas’ battered real estate market.
Simply put, the company obtained the center at such a discount, it can finish the project despite the likelihood of low rents from future tenants. The developer likely will spend hundreds of millions of dollars completing the shopping plaza, but its overall development costs will be lower than what former owner General Growth Properties would have spent.
“They can build a successful project that makes good returns for them and their shareholders at lower rents,” said Wilkes Graham, a building industry analyst with Compass Point Research & Trading.
The stalled retail hub has been a constant reminder of the valley’s building bust. Slated to be more than 1 million square feet, construction on the project stopped four years ago under then-developer General Growth. The mall's steel skeleton has remained ever since, unfinished and exposed to the elements.
Then, Howard Hughes announced Sept. 19 that construction was back on track with a Macy’s department store as the first anchor tenant. The center in northwest Las Vegas is scheduled to open in late 2014 with more than 125 stores on a 106-acre site that will include at least one hotel and a nine-story office building.
Macy’s was supposed to be a tenant before the project, then known as the Shops at Summerlin Centre, was tabled by General Growth and was supposed to be joined by Nordstrom and Dillard’s. While the Shops at Summerlin eventually will have three department stores, according to Tom Warden, a company spokesman in Las Vegas, he declined to say if Nordstrom and Dillard's will again commit to signing leases.
Chicago-based General Growth spun off Howard Hughes as a separate, publicly traded company roughly two years ago as it was emerging from bankruptcy. It gave Howard Hughes control over numerous commercial and residential projects, including Summerlin Centre and the broader Summerlin master-planned community.
Many of the inherited projects had received substantial investment from General Growth, but their values declined amid the national real estate meltdown.
For instance, the company put $150 million into Summerlin Centre. As a partially built project, it was worth about $200 million during the boom years but plunged in value to $31 million during the bust, Graham said.
Warden declined to comment on project financing or the estimated construction costs for the revamped Shops at Summerlin.
Generally, developers will build a project only if rents are high enough to secure a profit, Graham said. In Las Vegas, retail rents dropped in recent years as tenants throughout the region closed their doors.
The valley’s retail vacancy rate is now 11 percent, up from 3 percent in late 2007. Over that time, average asking rents fell from $2.17 per square foot to $1.40 per square foot.
Howard Hughes executives weigh a number of factors when pursuing projects, including market demand and long-term growth and viability, Senior Executive Vice President of Development Chris Curry said.
“We’re restarting them when it makes sense to restart them,” he said.
The Dallas-based company is moving ahead on other projects, as well.
It is redeveloping Pier 17 in New York City’s South Street Seaport tourist hub, a project that’s expected to start in 2013 and finish in 2015.
In Texas, a company subsidiary plans to build a 66-acre development called Hughes Landing at Lake Woodlands. That project will include up to eight office buildings, retail space and multifamily housing, with construction of the first office building scheduled to start this fall.
And in New Orleans, Howard Hughes plans to spend $70 million to turn a 26-year-old waterfront shopping mall into an “upscale” outlet center known as the Outlet Collection at Riverwalk. Construction on that project is expected to begin later this year and be completed in late 2013.