Shopping centers are popping up in this new hot spot

The below-average temperatures freezing out much of the United States have many Americans dreaming of a trip to the Caribbean. But it's not only sun-seeking travelers who have their eye on the tropical island of Puerto Rico.

Next month, Taubman Properties will cut the ribbon on a 650,000-square-foot luxury mall in San Juan, which is being billed as the first luxury shopping center on the island.

Also in San Juan, CPG Real Estate this year is putting the final touches on its Paseo Caribe project, which fuses residential and retail space. And come fall, Macy's will open its second Puerto Rico location in Ponce, a city in the southern part of the territory.

Rendering of The Mall of San Juan
Source: The Mall of San Juan
Rendering of The Mall of San Juan

What's perhaps most perplexing about these projects is that they're taking place amid a shaky economy. Retail sales in Puerto Rico have posted either muted gains or losses for much of the past year (the most recent data coming from October), and the economy continues to hobble along in the face of high debt levels and budget deficits.

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"You have to go back to one thing," said Bill Taubman, chief operating officer of Taubman Centers. "There's only like 5 square feet per capita of retail. There's almost no competition of any kind."

Dipping a toe into island luxury

Located in San Juan's metropolitan area, which had a population of about 382,000 as of 2010, Taubman's property is a stone's throw from the city's financial district and its international airport.

Saks and Nordstrom will serve as anchor tenants for the high-end property, which will include about 110 storefronts. Taubman expects that about 50 percent of the shops, including the two anchors, will be unique to the island.

In addition to those department stores, other tenants that have signed onto the project are Versace, Louis Vuitton, Kate Spade, Jimmy Choo, Gucci and Omega (for all but Louis Vuitton and Gucci, these are the brands' first locations in Puerto Rico). The center will also house more affordable labels such as Chico's and Gap.

About 80 percent of the stores should be leased by the mall's March 26 opening, Taubman said. It will also feature a hotel and a casino.

"I think the customer wants the great brands that they know," he said. "We're going to have a lot of the great brands that they know."

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Not only does Taubman expect the centrally located mall to attract the 4 million tourists who spent $3.3 billion in Puerto Rico in 2013, he said it will also appeal to the region's affluent residents, who have been more resilient to the region's economic woes.

He added that the local high-end shopper has an appetite for luxury that's evident through the large chunk of business that these retailers do with the Puerto Rican shopper in U.S. markets with a heavy Hispanic influence, such as New York City and Miami.

"I think that we will bring to Puerto Rico a level of shopping that hasn't existed," Taubman said.

Sears, Wal-Mart high-end stores?

Sam Kirschner, chief operating officer at CPG Real Estate, agreed the advent of true luxury shopping is on its way to Puerto Rico, where "the high-end … was J.C. Penney and Sears and Wal-Mart and Kmart."

His company is in the midst of building what he calls the first truly integrated lifestyle center on the island. Called Paseo Caribe, the property is situated between Old San Juan and the hip community of Condado; it will include about 150 condominiums and 110,000 square feet of retail space.

CPG’s Paseo Caribe property in Puerto Rico
Source: CPG Real Estate
CPG’s Paseo Caribe property in Puerto Rico

"We've been very cognizant of trying to appeal to both the local community as well as the tourists who are coming to San Juan, said Kirschner, who is overseeing the property's development.

That local community includes the residents of Paseo Caribe's three residential towers—where a condo can carry a price tag of $6 million or more—the affluent tourists staying at the region's high-end hotels, and the more middle-market travelers arriving on cruise ships.

The property is also differentiated in that there aren't many places on the island where people can shop and dine right on the ocean, Kirschner said. CPG has yet to announce the mix of retailers who will have shops at the site, though Kirschner said he expects it to be fully leased, open and operational for the holiday season.

Not all smooth sailing

Both properties are coming to market at a time when much of the Puerto Rican economy remains shaky. But Jesse Tron, spokesman for the International Council of Shopping Centers trade organization, emphasized that the island is ripe with opportunity, and developers shouldn't be deterred by looking at current trends.

That's particularly important as many developments take 10 years to build.

"You can be going through a potential downturn when you weren't expecting it when you're in the middle of building," Tron said. "They're looking at the demographics that are there, the spending power, the tourism effect."

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Puerto Rico has been a fruitful investment for retailers such as J.C. Penney. Penney's locations there are some of the best-performing in its portfolio, a fact the department store attributes to the fact that it was there early (it opened its first store there in 1968) and its larger store formats (its larger stores tend to be its most productive, said Kristin Hays, senior vice president of communications and investor relations).

Its San Juan location, for example, is easily double that of some of its locations in the U.S.

Macy's is hoping to capitalize on the region by opening its second location in the territory later this year, after what it called a "very successful" location in San Juan.

Still, there are some challenges with operating stores in Puerto Rico: Namely, it can be difficult for retailers to determine whether to treat it as a domestic or an international market, said Alison Paul, vice chairman and leader of Deloitte's U.S. retail practice.

Taubman said that can influence decisions such as how large a retailer builds a store (Latin American shops are typically smaller) and their product mix (stores there tend to be more accessory driven).

"That's a legitimate issue," he said.

But there are also aspects of the market that make it easier to tackle than other regions. For one, you're still dealing with American laws, Taubman said. Tron added that while there are certainly cultural differences, there is some overlap between the tastes of shoppers there and in Miami.

"If you look at how luxury does so well in that market [Miami] it wouldn't surprise me at all to see a real close mirror [in Puerto Rico]," Tron said. "It sort of bodes for an easy transition."