What went wrong with Woodbury Lakes?

  • Article by: SUSAN FEYDER , Star Tribune
  • Updated: October 4, 2009 - 8:12 PM

Woodbury Lakes, now in the hands of lenders just a few years after it opened, faces an uphill climb to fill vacant space in a tough economy.

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Signs at Woodbury Lakes claim the Melting Pot Restaurant is coming but they have been up for a long time.

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The real estate, retail and financial markets all were in high gear when Woodbury Lakes opened in the fall of 2005 and was sold just a few months later to an East Coast investment firm.

No one raised an eyebrow when Cornerstone Real Estate Advisers of Hartford, Conn., paid $99 million for the retail center, borrowing more than two-thirds of the purchase price. Nearly 20 percent of the center was empty, but a broker who helped handle the deal predicted its 398,000 square feet would soon be filled. A lifestyle center geared to well-heeled shoppers, with draws of trendy retailers such as DSW shoes and Banana Republic and Aeropostale clothing stores, Woodbury Lakes seemed an ideal fit for the booming east metro area.

It's a much different scenario today. Cornerstone defaulted on its mortgage this summer. A foreclosure auction was set for last week but, instead, the lender, an entity represented by LNR Partners of Miami Beach, Fla., simply took back the property.

How did a center that seemed to have everything going for it -- including later additions of Swedish fashion hit H&M and Trader Joe's food store -- fall so hard and so fast?

Real estate observers say the answer is a combination of bad timing and real differences in where and how the center was built and marketed, compared with more successful lifestyle centers.

Two of Woodbury Lakes' largest tenants, Linens 'n Things and Z Gallerie, closed after filing bankruptcy. Others, such as Starbucks, closed some stores nationwide but notably only their weaker locations.

The center's current occupancy is 77 percent, substantially lower than the 85 percent average for area specialty centers tracked by Bloomington-based NorthMarq.

Welsh Companies now is managing the center, trying to retain existing tenants while securing new ones for space that's been vacated or was never filled.

That includes an unfinished space at one end of the mall with a sign for the Melting Pot restaurant that says "Coming Soon." Clerks at other stores in the mall say the sign has been up since last winter. Bob Pounds, a senior vice president of Minnetonka-based Welsh, said last week that negotiations with the restaurant are ongoing but no lease has been signed.

"It's going to be a challenge," Pounds said of attracting new tenants. Real estate experts agree. Lifestyle centers, with their emphasis on specialty merchants and restaurants, have been among the hardest hit in the economic downturn that has decimated discretionary spending.

Same concept, different area

Woodbury Lakes was developed by Minnetonka-based Opus Corp. and RED Development of Kansas City, the same partners that built Minnesota's first lifestyle center, the Shoppes of Arbor Lakes in Maple Grove. Tim Murnane, a former Opus executive who oversaw both projects, said several tenants in Arbor Lakes were eager to sign on to Woodbury Lakes because they didn't have stores in the east metro area.

But Russ McGinty, an area real estate broker who specializes in retail properties, said the Woodbury area is a smaller, less fertile market than the Arbor Lakes trade area. Welsh's marketing materials for Woodbury Lakes say that within 5 miles of the center there are 116,000 people whose median household income is about $36,500. That compares with almost 175,000 people with median household income of about $71,000 within 5 miles of Arbor Lakes. Woodbury Lakes is served by one major highway, Interstate 94, while Arbor Lakes is fed by much higher traffic counts from Interstates 94, 694 and 494, according to the marketing materials.

Tougher market for rents

"Woodbury is a thinner market. It would be difficult to justify the same rents there as Arbor Lakes," McGinty said. NorthMarq research shows that ever since it opened, Woodbury Lakes' occupancy and rents have been lower than the average for all specialty retail centers in the Twin Cities area.

McGinty and others say that despite being near the busy intersection of I-94 and Radio Drive, Woodbury Lakes is poorly situated. The center is laid out on a narrow strip of land along the highway and tucked away from Radio Drive. A frontage road leading to the center wasn't finished until last year.

"There's no processional effect" that invites people into the center, said Richard Grones, whose Edina-based Cambridge Commercial Realty specializes in the retail market.

The stores also face away from the highway, reducing the center's visual impact for drivers on the interstate. "All you see is rooftops and the garbage bins in the backs of stores," Grones said.

Grocer didn't arrive until 2007

Although they are focused mostly on upscale fashion merchants, lifestyle centers typically have grocery stores to draw traffic. Woodbury Lakes' Trader Joe's didn't open until 2007, almost two years after the center opened. "It diminished the honeymoon period," Grones said. The mall also lacks a movie theater complex, another regular draw for customers.

The signing of the Melting Pot or another restaurant could address a dearth of dining establishments that Grones and others say also has hurt the center. One vacant space formerly was occupied by the now-closed Salsarita's Fresh Cantina. Some restaurants that were announced as future tenants when Woodbury Lakes opened never moved in. Murnane said some agreements fell through when the developers didn't grant lease concessions sought by the restaurants. He acknowledges that in today's market tenants are able to drive an even harder bargain with landlords.

Pounds wouldn't say whether the center's existing leases have so-called co-tenancy clauses, which allow tenants to pay lower rent if certain key tenants move out or if occupancy falls below a certain level. But Pounds conceded they are common at retail centers.

Grones says that if they are triggered, the clauses can be a double whammy for a retail center. "Just when you need the rental revenue the most after someone moves out, you get hit again," he said. Grones and other area experts say they are sure at least some Woodbury Lakes tenants had the special clauses.

Overpaid on borrowed money

While store closings are a large reason for Woodbury Lakes' problems, they're probably not the only factor in the recent default. Cornerstone could not be reached for comment, but Grones, McGinty and other area real estate experts say they believe the firm overpaid and took on too much debt when it bought the retail complex.

Cornerstone wasn't the only investor caught up in the real estate boom. According to Real Capital Analytics, a New York research firm, prices paid for specialty centers nationwide peaked the year Cornerstone bought Woodbury Lakes.

Cornerstone's loan was securitized, or packaged together with other loans and sold off in pieces to investors. Industry experts say those types of loans would have been more difficult for Cornerstone to refinance.

Commercial meltdown

Jeffrey Larson, whose Eagan-based JBL Companies works with distressed commercial property owners, said the circumstances that led to Cornerstone's surrender of Woodbury Lakes to lenders have become more commonplace in the commercial real estate meltdown.

"They bought at the height of the market, and then the market turned," he said. "They just got caught in that game."

Susan Feyder • 612-673-1723

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