Is There Opportunity For More Shopping Malls in Nairobi?
Over the last several months there has been talk in newspapers, board rooms, clubs and even professional circles that the office, retail and residential property submarkets are over supplied. While data is scarce on this subject, a real estate market report released last month was quoted as stating that shopping malls are operating at an average of 40% occupancy. A week later an executive of an Asset Management Company was quoted stating that after the completion of the approximately 620,000 square feet Two Rivers Mall in Runda, Nairobi will not need any other Mall. Accordingly anyone thinking of putting up a Mall should therefore consider other cities and towns. This article is not questioning the veracity of the Market report that put the average occupancy rate at 40% but the seemingly alarmist conclusion that Nairobi the 12th most populous city in Africa does not need any more Malls as it is oversupplied. To explore this subject further, this article will define a shopping center, trace the origins of shopping centers, look at the key issues to consider when developing a shopping center and address the nagging question of whether shopping centers have a future in Kenya.
According to the International Council of Shopping Centers (ICSC), “a shopping center is a group of retail and other commercial establishments that is planned, developed, owned and managed as a single property with onsite parking. While this definition is appropriate it leaves out a critical social and economic role that shopping centers have come to play in any society or economy. Various scholars and authors, have identified different types of shopping centers. For our purpose we will stick with the broader ICSC categorization which has three types namely Malls or Shopping Malls, Open air Centers and Hybrid Centers and superimpose other classifications:
Malls or Shopping Malls: These are closed shopping centers with shopping streets and alleys. They have a Gross Leasing Area (GLA) of between 400,000 and 800,000 square feet (Regional Malls) and over 800,000 square feet for Super Regional Malls. Two Rivers at 620,000 square feet when opened, Garden City and Sarit Center each at 500,000 will fall into the category of a regional mall.
Open Air Centers: These are characterized by store following one another in a strip. They have a common parking lot located at the front of the stores but do not have closed streets. Open Air Centers have GLA of between 125,000 and 400,000 square feet and take different shapes the common ones being L, U and Z. The simple I shaped is used in residential and community centers. Under this category, we have neighborhood centers, Community Centers, Power Centers, Theme Festivals Centers, outlet Centers (these house mostly manufacturers and retailers and do not have anchor tenants) and Lifestyle Centers which are usually located around high earning residential areas and try to combine shopping and lifestyle needs of the catchment area. Westgate Mall, Garden City Village Market, The Junction Mall, The Hub and Galleria Mall will fall under this category.
Hybrid Centers which are a combination of Malls and Open Air Centers. They are the new trend in shopping centers. Unlike the name suggests, they are smaller than shopping malls and open air centers though they combine the offerings of these two types. From a planning perspective small sized shopping centers meet very little resistance from communities, can be put up much faster and cost less to build. They are also able to attract high rents.
While a clear definition and classification of shopping centers exist, the term “shopping mall” is commonly used in Kenya to describe any newly built shopping center irrespective of size and offerings. We will therefore use these terms interchangeably.
Shopping Centers as we know them are not a recent phenomenon. From literature, their origins can be traced to the Al-Hamidiyah Souq in Damascus or the Grand Bazaar of Istanbul which are identified as the medieval predecessors of shopping Malls. The first planned shopping Mall was the Gostiny Dvor built in 1785 in St. Petersburg. It housed 100 stores on 53,000 square meters. However the most acknowledged and cited milestone of shopping center development is the Southdale Center in Twin Cities, Minnesota, United States of America (USA).
This completely closed regional sized shopping mall was built according to the plans of the Austrian born Architect Victor Gruen. Southdale, the first modern shopping mall opened its doors to customers in 1956. The success of this mall led to the growth and spread of shopping Malls in the USA. By 1992, there were 38,000 shopping centers with sales space of 4,586 billion square feet and a turnover of US $ 717 billion. The US Census Bureau puts the number of shopping centers as 107, 773 in 2010 of which 1500 are regional and super regional sized shopping centers.
From the USA, shopping malls spread across the world to Europe, South America, Australia, Asia and Africa. Africa portfolio of early shopping Malls include Gateway Mall in Durban South Africa, built in 2001, Mall of Arabia in Egypt built in 2010 and Morocco Mall in Casablanca Morocco measuring 250,000 square meters built in 2011. Morocco Mall has 350 plus shops. One of its key features is a 1,000,000 liter cylinder shaped aquarium with a 360 degrees view of the sea life that contains 40 species of fish. Among the first generally acknowledged shopping centers in Kenya include The Mall and Sarit Center in Westlands and Yaya Center in Kilimani.
Having a clear understanding that a shopping mall is just a shopping center, we can now evaluate whether, Nairobi still needs more malls. The appropriate framework to evaluate is one that looks at what happens before (pre) and after (post) construction of any shopping center.
Pre-Construction refers to the activities that are undertaken before construction of the shopping center. There are many activities undertaken but the key ones are:
Feasibility Studies: A feasibility Study is a decision making aid. While it gives no guarantee that a shopping center will be successful when complete, it however helps clarify the opportunity, identifies challenges to be encountered during and after construction. A good feasibility study addresses legal, social, economic, environmental and physical issues. A key feature of the feasibility is the answer to the question whether the shopping center will be marketable (i.e. are there tenants to take up space in the proposed development). Unfortunately there are number of shopping centers undertaken without feasibility studies while others have questionable ones done to support or justify a prior made decision. The other challenge is that most of the developers and investors lack the requisite knowledge to test the underlying assumptions and capacity to interrogate a feasibility report. They are easily overwhelmed by the numbers and buzz words (IRR, NPV, payback period, profitability Index, Occupancy Rates, Gross Leasing Area, pro forma financial statements and so on) used by consultants and accept recommendations some of which are based on dodgy market research, massaged figures, down played risk, exaggerated demand and over looked competition. Ideally a feasibility study should be carried out by a qualified independent consultant and not the Architect, Project Manager, Identified Facility Manager or related party whose independence can easily be questioned.
Design: Shopping Center design is a relatively new and evolving typology. In designing, the Design Team led by the Architect must address the needs of the Developer, Tenants and Customers. The developer is most concerned with cost and durability. The Tenant is most concerned with shopping center layout, shop design, flexibility and size. The customer is concerned about access, parking, movement, security and aesthetics. A review of shopping Centers, reveal that they are mainly designed to meet the developer and Architect’s fantasies. They are costly, have less functionality and easily breakdown leading to high maintenance costs.
Alterations after completion are often cumbersome and expensive. Customers are ignored as the shopping centers are poorly located (on the wrong side of the road) access is difficult (it takes long to enter a shopping centers due screening (which creates a feeling of invasion of privacy) and is common to encounter traffic snarl up where shopping malls are located and parking is largely inadequate particularly in the evening and on weekends. Tenants get shops that are either too big or too small, layout of shops are not appealing to shoppers (demand shoppers, comparative shoppers and impulse buyers) and locations that provide poor visibility and are not ideal for retail businesses.
Tenant Mix: This refers to a blend of shopping center occupants based on a pre-determined criteria usually from market research. Tenant mix is essentially an exercise in positioning of the shopping center. Tenants comprise retailers, service and entertainment providers. They represent the income source of the shopping center on one hand and attract customers on the other. There are three types of tenants. Anchor tenant who occupy large retail areas for a small rent but generate the most customer traffic. Preferential Tenants represent brand names around which the shopping center offering is built. The last type of shopping center tenant is the Filling-Up Tenants who operate small trade areas, pay high rents and generate little customer traffic. The tenant mix is important as it affects consumer preference. The tenant mix is what causes the customers to visit the shopping center and it must fit the targeted income group. In other words the income groups in the catchment area must be able to buy at the shopping center. So it does not make sense to put a shopping mall on Thika Road with tenant mix suitable for shoppers who reside in Karen.
The activities that are undertaken before construction if poorly handled can lead to failure or early death of a mall. Most of these activities cannot be undone once construction starts and is complete (you cannot change the overall design though you can review the tenant mix). So when you see a shopping center opening and having 40% occupancy (which basically puts it in the category of dead or dying shopping center) then some if not all of these key pre construction issues were not well looked into. A dead shopping center is a shopping center that has occupancy rate of less than 40% or is unable to attract traffic.
Post Construction: This refer to the activities that take place once the shopping center is complete. There are several key activities generally grouped under management. These are Stakeholder management, Facility Management, Financial Management and promotion and marketing
Stakeholder Management: On completion of the shopping center, the key stake holders whose needs must be addressed include investors (owners), tenants, service providers, customers, Financiers and neighboring community including regulatory authorities. Stakeholder management is a high level function that requires the manager to delicately balance the various and sometimes openly competing interests. It is an exercise in managing expectations. A well-managed shopping center gives returns (income and capital) to the investors, addresses in a timely manner tenants concerns, make the customers feel welcomed, comfortable and safe, supervises suppliers and maintains a healthy relationship with the surrounding community and regulatory authorities.
Facility Management: These include activities like security, cleaning, electrical and mechanical services, civil works, traffic management and health and safety issues these are daily and sometimes routine activities in a shopping center.
Financial Management: These includes preparation and monitoring of budgets, cash and credit management, financing capital and recurrent expenses and risk management
Marketing: The main function of marketing is to promote the mall and encourage customers from the catchment area to patronize the shopping center. Various activities which include celebrity visits, food festivals, book fairs, exhibitions, religious and cultural celebrations, fashion shows can be held regularly at the shopping centers. Marketing also aims at keeping the shopping center attractive to tenants. Continuous market research within the catchment area is necessary to note any changes in consumer behavior, demographics and household incomes as well to monitor activities of any competitors existing and potential. The results of the market research should then inform a review of tenant mix and overall shopping center management.
Post construction challenges can be isolated as management gaps. These can be addressed through management changes, strategic planning, training, staffing and increased use of technology. Excellent facilities management skills are easily available locally and this what Investors are getting in the name of shopping mall management. Investors in shopping centers have been slow to recognize and provide resources for the critical roles of finance professionals and marketers to draw customers and deal with competitors. As soon as these critical skills are incorporated into shopping center management then we will be able to experience improved occupancy rates and better returns and prolonged life spans.
Having discussed the above, it will be an anticlimax to end this article without commenting on the future of shopping centers in Kenya. The Market report referred to earlier, the newspaper articles and comments by various corporate executives give an impression that shopping centers in Kenya face an uncertain future. This scenario is not unique to Kenya as a similar debate is raging in the USA which has enjoyed over six decades of “Mall culture”. At the height of the “Mall Revolution” approximately 140 Malls were being built in the USA annually. When the Mall of Africa was opened in Durban in 2001, Market analysts were apprehensive as already there was retail space surplus. Several more Malls bigger than the Mall of Africa have since been built. In America a number of malls have closed over the last several years mainly driven by the economic meltdown, changing consumer preference (resurgence of down town shopping, populations moving back to the City Center from the suburbs as well as e-commerce) which has led major retailers like Sears, JC Penney and Walmart to close down stores. Sears alone has closed over 300 stores over the last 3 years and more closure are on the way. These closure have led to the chorus that end of Malls in nigh. However the war is not yet lost as Mall owners and developers are looking for new anchors to replace the disappearing retailers. Potential anchors include Movie Theatres, Emerging Department Stores.
Unlike America, the shopping culture Kenya and Africa is just picking up driven by a middle class with high growing purchasing power and pent up appetite for consumer goods. The movement to suburbs is accelerating due to congestion and high property prices within the city as well as improved infrastructure and security in the out skirts of the city.
Countries in Africa are also growing at an average of 5%. According to the World Bank, Kenya’s economy is projected to grow at 5.9% this year and 6.1% in 2017. In addition we are yet to experience true shopping malls (our shopping centers fall in the category of closed and open air shopping centers). What is clear is that most of Africa and Kenya included may not enjoy shopping malls for as long as America and rest of the developed world have due to forces of convergence. However, the key point to take home is that real Shopping Malls are on the way and when they do arrive, we will have a whole new shopping mall experience. There is room for more shopping malls. All that investors and developers need to do is just address the pre and post shopping centers construction issues.