Richard Weberberger OVIEDO MARKETPLACE
List of Exhibits:
1. Accumulated Household
Income in Orlando MSA
2. Oviedo Marketplace: Time
Table and Risk Distribution
3. Oviedo Marketplace: Distribution
of Rentable Area
4. Oviedo Marketplace:
Finance
5. Capitalization Rates
Indeed it had been a wonderful day, Mike could feel the spring sun-rays on his skin when he stepped outside the Citrus Center. The reactions to his presentation had been overwhelming, yet people where hesitant to announce formal commitments to Oviedo Marketplace. Anyway it was more than a satisfying rehearse for the national convention in Las Vegas.
Next day morning Mike headed to the airport. He advised the cab driver to pass by the Marketplace site, where Mike could inspect the preparations for the site work. In the airplane to Maryland Mike reviewed his situation. He took a deep breath, when he imagined, how the experienced senior Rouse executives will challenge the risks, which the Oviedo Marketplace project is exposed to. He remembered his real estate professor at a well known eastern design school always forcing the students to make a clear decision, and not being too risk averse. Mike made had made up his mind. He definitely wanted to go for the project. Of course he wanted to back up his decision with profound arguments. For these moments of professional uncertainty Mike always carries his professor's casebook in his briefcase. He opens page 333 and begins to examine the development strategy of the Oviedo project once more:
A.) Acquisition:
Obtaining to the land is in this project almost an ideal case: (The additional infrastructure cost are not included in this point) A limited partner brings in the land at no initial cost for Rouse. The former owner, Viera/Duda has knowledge of the area, and even went through an approval process once. The project was different then, but Viera knows the specifics of the approval entities, which helps Rouse to decrease legal risk. Viera can provide additional land in the area, if the partnership for the Marketplace project succeeds, and Rouse wants to continue business in the region. The $10 Million costs for closing occur at a time, when the land use approval is obtained, and all other decisions and commitments will have been made in favor of the project. Hence the acquisition process does not represent a problem in the Oviedo project.
B.) Analysis:
Mark had to take two main aspects into consideration, when he conducted his research: Demand and supply. He pulled out his laptop and entered the data, which he obtained from the Semiole County Planning Office into a spreadsheet. To reinforce his arguments he multiplied the number of Households with average income, in order not to be mislead by a mere look one of each the data. Finally he drew a diagram, which proved him right (Exhibit 1): Northeast Orlando is the area to place the new project. It became most of the buying power of the 400,000 population increase, and this trend will continue in the near future. The proposed Winter Memorial hospital will bring additional prospect shoppers close to the site of the Oviedo Marketplace.
The supply side is the most vulnerable point of the Oviedo Marketplace project: This market risk is less affected by the existing malls, but by other new mall projects, on top of them the Waterfront Lakes Proposal by the Simon Group. Simon had demonstrated its absolute willingness to defeat Oviedo marketplace by its selection of tools to undermine Rouses approval process. Both competitors know, that the ability to sign the first tenants as well as the reputation of these tenants will trigger herd behavior and have other tenants to follow, while avoiding the competitors project. Whoever loses this "race" in the beginning, will either have a high occupancy or get second tier tenants, which would contradict the Oviedo Marketplace project.
Mike has drawn a diagram, which includes a timetable with a risk estimate for each month according to the events, which affect the risk exposure of the project (Exhibit 2). Drawing a line of today shows Mike that he mastered almost all of the legal risk so far (except for the bridge approval), as soon as he executes the options of committing the two anchor tenants, he will have passed the peak of the marketing risk. He draws another diagram to visualize the proportions in size of rentable area. (Exhibit 3) A look at this diagram tells him that he has to consult Rouse's leasing experts whether he should dedicate more space to the restaurant area. If he would develop in Asia or Europe, he certainly would do so.
C.) Organization and Marketing:
Today's meeting with the senior executives does not only serve the purpose to getting approval for the Oviedo Marketplace Project, moreover Mike has to use this occasion to make sure that he can allocate the necessary (human) resources within Rouse.
He has to make sure that he will get assigned some of the developers, which are a scarce source after Rouse's long abstinence of mall development activities, and that at the moment it is more important to pay attention to the Oviedo project than to research on development opportunities on the recently acquired undeveloped land of the Hughes Corp. in the southwest of the country.
Secondly and at least as important: Mike has to secure enough marketing personnel in this crucial phase of the Oviedo project. He knows that this project can only succeed, if he manages to sign leases NOW, before Simon can get ahead.
D.) Design and Construction:
Besides the "regular" work of selection, supervision of the architects work for the mall, it is crucial to the project to keep in time with the bridge, which is an engineering project, thus requires a slightly different due-diligence process for selection and supervision.
E.) Financing:
Mark assumed 75% debt financing, fully amortizing over 25 years, which allowed a return on equity of 16%, assuming 7% vacancy and lowest acceptable triple net rents. (Exhibit 4)
F.) Property Management:
As Rouse will make 10-15% on the common area maintenance charges on top of a management fee, Oviedo Marketplace will be a real "Cash Cow".
After being prepared to answer these questions, which represent the regular "homework" of a development task, Mike prepares himself to answer questions of his senior executives, which refer to the specifics of the Oviedo Marketplace project:
1.) Would power centers continue to gain groung on conventional malls?
In the airplane Mark finds the brand new "Emerging Trends in Real Estate 1996" by the Real Estate Research Corporation (RERC). Mike prepares another chart using their figures (Exhibit 5). "Let the market speak", he will say to the senior executives: "The Cap Rate of Power Centers is more than one percent higher than of Regional Malls. The prices indicate the market's expectation."
2.) Would Tenants hesitate to lease because of Oviedo Marketplace's unique program?
Yes they would, if Mike fails to organize a sound marketing team for the new product. Las Vegas will bring the important decisions. Once he can sign some "opinion leaders" in the shopping center community, he will be able to rely on the "herding"-effect, when he has the references of other tenants. It will be crucial to market the advantages of the project: the nearby hospital project, the agreement with two anchors, the cinema.
3.) How Would the infrastructure improvements affect the mall's financing?
There are two aspects to this question about finance:
4.) How might the Rouse Company's altered corporate strategy affect this project ?
It will be difficult to get all the resources within Rouse, as just increased its real estate portfolio by 20%.
5.) Risking the Company's Retail Reputation
"It takes twenty years to
build a reputation, which can be destroyed in five minutes." Mike is
very aware of the fact that re-entering the mall development arena with
a new product means taking a high risk. Everybody in the shopping center
arena looks at this new mall type. If it does not succeed, it will not
help Rouse to point at the other 85 existing and successfully managed malls.
Up to today even the stockholders have honored Rouse's corporate "streamlining"
with moderate volatility and constant growth since 1993.
List of Exhibits:
1. Accumulated Household
Income in Orlando MSA
2. Oviedo Marketplace: Time
Table and Risk Distribution
3. Oviedo Marketplace: Distribution
of Rentable Area
4. Oviedo Marketplace:
Finance
5. Capitalization Rates