Numerous REITs and real estate companies have recently re-entered the formerly downtrodden downtowns to build complexes that combine Main Street Retail with entertainment, residential and office uses. Four primary factors are pushing urban retail: 1) Heightened suburban store competition and the residential movement to downtowns, 2) Government tax incentives, 3) Enhanced entertainment venues offering a wide array of restaurants, sports, museums, and educational facilities, and 4) Smart Growth initiatives. From a credit perspective, this trend is positive for REITs with the capacity to capitalize on it as urban retail diversifies REITs' real estate portfolios, provides further brand identification for property companies and retailers, and furnishes increased growth opportunities. However, such retail formats have their own particular development and management challenges—challenges that not all retail REITs may be able to handle.

Urban Stores Escape
Suburban Concentration
Suburban sprawl has created greater consumer interest in one-stop shopping in a pleasant and different ambiance. Developers and retailers are being steered toward the urban core by growth-limitation sentiments in the suburbs and small towns. Moreover, as national retail chains saturate the suburban malls, expansion downtown becomes more appealing. Retail tenants like the idea of entering areas that have unique contexts and history, e.g., Times Square and Union Square in New York City, and Michigan Avenue in Chicago. As more people move back to urban areas, they want to be closer not only to their workplaces, but also to urban amenities such as restaurants, entertainment and culture. They also need to shop. Along with population density, cities offer potential customers who spend more than the overall population on apparel, furniture, consumer electronics, tableware, and entertainment than does the average consumer. Consequently, sales volumes from dense populations can compensate developers for additional city-based operating expenses for security, rents and staff.

Government Incentives Provide Alternate
Funding Sources
Federal and local government incentives, including tax concessions, grants for purchasing land and utility discounts are often provided to build downtown. Historic building tax-credit subsidies or tax increment financing (TIF) infuse public funds into the projects. With TIFs, sales taxes generated by the property pay the bond interest. These incentives can make development more appealing to REITs and other property firms.

New Entertainment Venues Urban developments that combine retail, entertainment, dining and various cultural activities in or adjacent to a city's central business district (CBD) are cropping up all over the USA. There are diverse examples of the urban retail/entertainment concept.

• The Forum Shops at Caesar's Palace in Las Vegas.
• Federal Realty's "Main Street Retail" program, through which the REIT is acquiring select retail buildings in established downtown shopping areas. To date, Federal Realty has an interest in nearly one hundred Main Street retail properties located in over 20 cities.
• TrizecHahn is working on two retail/entertainment projects in North America—Hollywood and Highland in Los Angeles, a retail/entertainment project that will include a theatre that will host the Academy Awards presentation, and Desert Passage at Aladdin, in Las Vegas, a retail and entertainment complex which is part of a $1.3 billion hotel and casino redevelopment project. In Europe, it is working on West End City Center in Budapest, Hungary, a retail/entertainment, office, hotel and conference center. Olympia Brno in the Czech Republic, a retail/entertainment complex which opened in October 1999, includes a hypermarket, multiplex theater, retail component and restaurants.
• Post Properties has committed to mixed-use developments in a number of cities. The REIT is contemplating a strategic alliance with TrizecHahn to redevelop an old mall in Pasadena into a mixed-use project, as well as a redevelopment opportunity in Long Beach.

"Smart Growth"
Initiatives Spur Urban
Retail Development
"Smart Growth" initiatives are aimed to provide local and state governments with the resources to redirect development towards cities and other urban concentrations in an effort to preserve and enhance open space, reduce automobile dependency and make optimal use of in-place features, such as museums. Smart Growth characteristics include being economically viable, preserving open space, maintaining and enhancing existing infrastructures such as historic buildings, encouraging redevelopment, and recognizing the importance of traditional downtowns to the economic health of a region. A major feature of the "new urbanism" movement includes adaptive re-use, whereby older buildings are put to new uses, thus revitalizing older neighborhoods and making the most of under-utilized structures through the conversion of office, hotel, industrial and residential structures. Some companies, such as Federal Realty, have formed public/private partnerships with host cities, which pay for infrastructure developments.

Urban Retail Challenges
While urban retail is appealing and provides growth opportunities and some measure of barriers to entry for first-movers, this property format also has challenges that differ from those of regional malls in suburbs and community centers. Not only can physical structures be old and not built for this purpose, but political and community issues tend to loom large, creating incremental risk and requiring active involvement from owners. In addition, easements can be complex and, for mixed-use projects, there is the matter of balancing the needs of disparate tenants. Not all REITs or REOCs will want or be able to develop the special skills required to be successful in urban retail. However, for those with the desire, the opportunities can be attractive.