Big Brawls Overs Malls

With land scarce, developers try to thwart each other using lawsuits and politics

Real estate mogul Rick Caruso seems to have created a perfect world. His office, complete with a marble-topped bar and a model of his yacht, sits above the Grove, an upscale shopping center he developed in Los Angeles. From his balcony, Caruso can gaze at the statues modeled after his wife and kids. He can watch the trolley, which carries shoppers along the Grove's twisty, European-style streets. Come the holidays, Caruso even makes fake snow fall over the piazza twice a night.

Beyond the Grove's polished trash cans and synchronized fountains, however, life is less serene. Westfield Group, an Australia-based mall owner, spent $3 million this election season to persuade residents of the Los Angeles suburb of Arcadia to vote in favor of two initiatives it sponsored that prevent Caruso from putting up billboards and charging for parking at a shopping center he has proposed in the city. Caruso, meanwhile, hopes to go to trial early next year in a $100 million antitrust suit he's filed against General Growth Properties (GGP ), the nation's second-largest mall owner. Caruso alleges that the Chicago company tried to kill another of his projects in nearby Glendale by telling prospective tenants they wouldn't get space in General Growth malls if they leased with him. "It's just morally wrong," Caruso says. General Growth declined to comment.

THE DINOSAUR CARD Shopping center development has become a cutthroat business full of lawsuits, strong-arm tactics, and costly political campaigns. With land for new malls scarce, owners who have invested hundreds of millions of dollars in big regional centers are trying to thwart each other's projects, citing the effects on traffic, endangered species, and even, if they can find them, dinosaur bones. "It's interesting that environmental issues are being raised by developers rather than by the community," says Patricia M. Johnson, a principal at Outcalt & Johnson: Retail Strategists in Seattle. "People are paying more attention to their competition than their customer."

Suitable land is so hard to find that only six large regional malls are projected to open in the U.S. over the next two years, according to the International Council of Shopping Centers. Annual growth in shopping center development has slowed to under 2%, a fraction of what it was in the 1970s and '80s. At the same time, the industry has been consolidated into the hands of a few large corporations, many of them publicly traded real estate investment trusts committed to delivering earnings growth on Wall Street. The 10 largest shopping center owners control more than 1 billion square feet of retail space, one-sixth of the nation's total and nearly twice as much as they did in 1998, according to the trade publication Retail Traffic.

Changing shopping habits, meanwhile, put indoor malls at a disadvantage. People like fresh air and sunshine, and outdoor malls are able to mimic the experience of quaint Main Streets while featuring popular chain stores. Retailers prefer these centers too, because expenses are lower when they don't have to pay for the heating and cooling of common areas. New centers often end up vying head-to-head for tenants and shoppers with older regional malls.

Shopping center developers have battled each other in Dallas, Houston, St. Louis, and Richmond, Va. Nowhere has the fight been as bitter as in the Los Angeles suburb of Glendale, which in 2001 chose to negotiate with Caruso to develop a 15-acre parcel of land. General Growth, which bought the nearby Glendale Galleria the following year, filed hundreds of comments on Caruso's plan, according to Gillian van Muyden, a senior assistant attorney for the city. It also submitted its own proposal. After the city gave final approval to Caruso in April, 2004, General Growth gathered enough signatures for a special election to challenge Caruso's award. The people also chose Caruso's plan, so General Growth sued the city, claiming its five-volume environmental report was inadequate and its selection process flawed. That case was decided in the city's favor in trial and appeals court, and the center is set to open in 2008.

General Growth also tried to kill proposed new shopping centers in Connecticut and Texas, according to lawsuits involving the company. E-mails filed in the Connecticut case show General Growth employees scheming to derail a competing mall by trying to "find a group of dinosaur lovers that feel there are bones or remains on the site." In both cases, however, the suits were settled and the shopping centers built.

By Christopher Palmeri

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