By Liam Pleven
SAN JUAN, P.R.--Puerto Rico's government is struggling to pay
its bills. But mall owners and retailers are betting that consumers
on the island will keep on spending.
Fast-fashion retailer Hennes & Mauritz AB's H&M plans to
open its first store in the U.S. territory this year, at the
631,000-square-foot Mall of San Juan. Opened in March, it was the
largest new mall on U.S. soil in 2015, according to real-estate
firm CoStar Group.
Nordstrom Inc. and Hudson Bay Co.'s Saks Fifth Avenue made their
island debuts at the Mall of San Juan last year, and other
retailers are coming to the island or expanding operations. Retail
landlords have invested tens of millions of dollars to upgrade
their properties.
The moves amount to a high-stakes wager for mall owners and
retailers who face a slow recovery across the U.S. and hope to find
a sorely needed source of fresh revenue in Puerto Rico. But they
come at a time when the island is contending with crushing public
debt. "Puerto Rico's got serious financial problems," said Steve
Sakwa, a real-estate analyst at Evercore ISI.
Landlords and retailers are counting on a number of factors to
weather the storm, including an underground economy that means
shoppers are wealthier than official statistics indicate, a lively
tourist trade and a relative shortage of retail space compared with
the rest of the U.S., according to executives and analysts.
"San Juan is one of the densest markets in North America," said
Robert Taubman, chief executive of Taubman Centers Inc., a mall
owner based in Bloomfield Hills, Mich., that spent about $475
million to build the Mall of San Juan. "We are extremely
bullish."
On Monday, Puerto Rico was expected to make most of roughly $1
billion in scheduled bond payments, but it said last week that it
would miss about $37 million in payments due from public agencies,
underscoring the severity of the island's problems. In 2015, the
island's sales tax leapt to 11.5%, up from 7%.
The crisis adds to the challenges facing Puerto Rico's
consumers. The median household income is less than $20,000 a year,
roughly half what it is in Mississippi, the poorest U.S. state by
that measure, according to Census Bureau data. Nearly half of
Puerto Rico's 3.5 million people live in poverty.
"We don't feel secure," said Diana Domenech, a 45-year-old
therapist who was shopping recently at Plaza del Sol, a mall in
suburban Bayamon. "So I shop less right now."
In recent years, hundreds of thousands of Puerto Ricans, who are
U.S. citizens, have moved to the mainland. Migration is "the
largest risk" to the local economy, said HeidieCalero, an economist
who heads H. Calero Consulting Group Inc., based in San Juan.
Ms. Calero pointed to declines in sales of new cars and higher
home foreclosures as signs of the stress. "You're seeing evidence
that the consumer is not that resilient," she said.
But mall owners and retailers say they are protected from the
problems because the island isn't saturated with stores like much
of the mainland U.S. There are five square feet of mall space per
capita in Puerto Rico, compared with 23 square feet around the
U.S., according to Taubman Centers.
Puerto Rico's largest mall, Plaza Las Americas, is crowded with
shoppers even on weekday afternoons. Retailers such as J.C. Penney
Co. say their Puerto Rico stores are among their best-performing
locations.
"You've got lower supply and a consumer who loves to shop," said
Paul Freddo, a former J.C. Penney executive who is now senior
executive vice president for leasing at DDR Corp., which owns Plaza
del Sol and 13 other malls and shopping centers in Puerto Rico.
DDR, based in Beachwood, Ohio, has spent about $50 million in
recent years to upgrade its island properties, including moving a
food court to the second floor at Plaza del Sol to meet demand for
additional retail space, according to executives. Existing
retailers at the mall include Wal-Mart Stores Inc. and Home Depot
Inc.
The arrival of new retailers is a lure for Puerto Rico shoppers
who had encountered stores such as Nordstrom and H&M only when
traveling to the mainland or buying online. "I was eager to come
here and see it," said Fabiola Colon, 24, who was shopping in
Nordstrom recently.
In addition, many consumers have more disposable income than
official data might suggest, due to a lower cost of living and a
lax tax collection system, experts say.
That was a key factor for Taubman in deciding to build the Mall
of San Juan. The company tracked down data showing that more luxury
cars were sold per person in the area than almost anywhere else in
the U.S.
"That's when you knew" the market could support a mall with some
high-end stores, said William Taubman, the firm's chief operating
officer.
But planning and building the mall took more than a decade,
partly because of red tape. In addition to Nordstrom and Saks,
stores include LVMH Moët Hennessy Louis Vuitton and Urban
Outfitters Inc.'s Anthropologie.
The mall opened in March, just as the island's fiscal problems
were coming to a head. "They're opening this at about as poor a
time as you can," said Mr. Sakwa, the analyst, who added that the
property "may be too upscale for the marketplace."
Robert Taubman, Taubman's CEO, said the firm is confident the
investment will pay off in the long run. But, he added, "There's no
question that we had headwinds, not tailwinds."
Write to Liam Pleven at liam.pleven@wsj.com
(END) Dow Jones Newswires
January 05, 2016 05:44 ET (10:44 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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