Rising out of former swampland in New Jersey, just across the Hudson River from Manhattan, is a sprawling orange-and-blue complex that developer Larry Siegel calls his crown jewel. Xanadu, one of the largest commercial real estate projects in the country, was a testament to real estate excess even when times were good. Siegel promised to deliver a mall that would contain the Western Hemisphere's first indoor ski hill, America's tallest Ferris wheel, a two-story chocolate waterfall, and a 36,000-square-foot "city" made of candy—not to mention more than 200 stores.
Now, Siegel's $2.2 billion project is slated to open this summer amid what's likely to be the worst retail environment in half a century. About 150,000 stores are expected to close in 2009, representing close to 14% of all retail outlets nationwide, according to the International Council of Shopping Centers. Mall owners are dealing with a particularly toxic combination of falling sales, overbuilding, and massive loans that are fast coming due, plus the specter of a growing number of barely solvent tenants. And consumers are staying away, with traffic down 13% in January over last year.
All of this raises questions about how Siegel, who is president of Meadowlands Development, will turn his retail pleasure dome into a reality. He says retailers have signed up for just more than 70% of Xanadu's space—a figure that several outsiders speculated could be reached only with deep discounts. A number of expected tenants have already gone bankrupt or backed out. Siegel says that only two retailers have canceled leases. Meanwhile, a study by the site manager found toxic waste under the site, which so far has resulted in $6 million in cleanup costs to Xanadu's owners. And Meadowlands Xanadu is even named in a lawsuit by a builder chasing late payments from one tenant.
While Siegel is under pressure, he takes pains not to show it. On a recent tour of the 2.4 million-sq.-ft. mall, the Philadelphia-born entrepreneur, 56, nearly knocked off his construction hat several times as he gestured enthusiastically at various unfinished attractions. "I have never worked on a site that has so much pizzazz to it," says Siegel. He brushes off talk about retail bankruptcies and newly frugal consumers, preferring to cast the downturn as a golden opportunity. Xanadu, he predicts, will become a more affordable substitute for Disneyland, Las Vegas, even a Caribbean cruise. He adds: "We're not building this for the next 18 months but for the next 50 years."
That said, the coming months may determine Xanadu's survival. Siegel is desperately trying to beat the odds. He's negotiating to let key tenants delay opening until as late as 2011. He has promised some of them help in covering the cost of building out their interiors in exchange for an increased percentage of sales. He is also looking to other forms of revenue, from sponsorship of the 287-foot "Pepsi Globe" Ferris wheel negotiated last spring—Pepsi (PEP) will be the only soda sold in vending machines at the mall—to a possible recruiting kiosk and attractions sponsored by the armed forces. What better place than Xanadu, he argues, to "let kids fly in an Apache helicopter or a Black Hawk simulator?"
Siegel, a native of Philadelphia, grew up steeped in the ways of retail. His father was a manager at John Wanamaker's department store, where Siegel's favorite memory was of the annual Christmas spectacle. That gave him the idea of combining shopping and entertainment. In 1981, he joined Western Development Corp., a Washington (D.C.)-based mall developer that later spun out the Mills Corp. Under Siegel, who became CEO in 1995, Mills developed a variety of what he calls "shoppertainment" projects. The high point came in 2003 with Madrid Xanadu, the first mall in Europe to feature an indoor ski dome and 250 stores.
Meadowlands Xanadu officially launched in late 2004 as a partnership between Mills Corp., Edison (N.J.)-based Mack-Cali Realty (CLI), and Germany's KanAm, a real estate asset manager. Mills had barely broken ground in New Jersey when it was forced to restate several years' worth of earnings. In regulatory filings, the company cited the "tone at the top," among other things, for its inflated earnings picture. David Fick, who was chief financial officer from 1991 to 1993, argues that "Larry is a visionary in terms of retail development and creating exciting environments, but he's never had the financial discipline to go along with that." (Siegel responds: "You can't run a business without financial discipline.")
Mills was sold to Simon Property Group (SPG) and Xanadu found two new owners: Colony Capital and Dune Capital Management. KanAm stayed in the venture. None of the owners would comment on their investment, leaving Siegel to explain its financial state. He says the bulk of dealmaking was done during better times, adding: "Thank God we got the debt in this project before the credit markets melted down."
WATERFALL TO FOUNTAIN
But there are mounting signs that Xanadu, named after the idyllic city evoked in a Samuel Taylor Coleridge poem, is facing modern-day woes. Against All Odds, a 38-store hip-hop clothing chain, has filed for Chapter 11. Several others promoted as future tenants in early press releases haven't signed leases. Among those listed were Borders (BGP), Virgin Megastores, and gourmet food retailer Balducci's, all of which now tell BusinessWeek they aren't going to set up shop in Xanadu. Others decline to comment on their plans. And Siegel himself remains vague, only noting that "someone like Best Buy (BBY) or Kohl's" may come in. Both companies say they have no plans to open there. Companies that have signed on in the past several months: Spanish clothier Zara and Sweden's H&M.
Some confirmed tenants are scaling back their plans. It'Sugar, a national specialty candy store chain, downgraded its 30-foot waterfall to a 4-foot fountain, though CEO Jeff Rubin is quick to point out that it will feature real chocolate instead of the original brownish water. The 36,000-sq.-ft. city made of candy will probably be replaced by a more modest jellybean sculpture of the Empire State Building. Hunting outfitter Cabela's (CAB) had big plans to let visitors shoot guns and arrows at a gallery in its store, Siegel said in January, and let people fish for live trout in its store pond. A month later, Cabela's spokesman John Castillo said the chain is now ditching such interactive fun. Among other things, Castillo explains, "a fishing pond would be hard on the fish."
On Dec. 22, construction management company E.W. Howell filed a lien claim against Xanadu alleging that the Fort Lauderdale-based upscale movie chain Muvico was three months overdue on a $676,392 bill for management services. Muvico declined to comment, while a spokesman for Meadowlands Development says the dispute has nothing to do with Xanadu.
THE SILVER LINING
A nearby golf course sits abandoned, unable to pay its bills, and Xanadu is scrambling to clean up its contaminated grounds. Richard J. Codey, a former Democratic governor of New Jersey, is growing increasingly concerned that Xanadu may never open. "Five years after we kicked off, it is still 30% empty on one of the best pieces of real estate," he argues.
And yet Siegel retains a salesman's knack for pointing to the silver lining. He peppers many conversations with reminders of the 8,000 retail jobs, $100 million in annual taxes, and other benefits Xanadu could bring the stressed state of New Jersey. The unspoken message: Xanadu is too big to fail. Even some of his critics are inclined to agree. "It's sort of like you're eight months pregnant," says Fick, the former Mills CFO who is now a managing director with Stifel Nicolaus (SF). "What can you do?"
Siegel, for one, is looking forward to holding Xanadu's opening party in the summer. "Then you're open, and the pressure is off." In fact, that's when the toughest test for America's largest new mall could begin.