Shopping malls are here to stay, at least according to David Simon,

chairman and CEO of Simon Property Group, owner of more than 350 malls,

outlet centers and other retail-oriented properties in the U.S., Europe

and Asia.

Indeed, Simon said during a recent Wharton Leadership Lecture,

his firm, the nation's largest public real estate company, might

consider making acquisitions again given that prices have recently

fallen to levels last seen in 2002. The company, he added, is well

positioned to weather a consumer downturn that has eliminated such

familiar mall tenants as Wilson's Leather, the Sharper Image and Steve

& Barry's.

Meanwhile, those who would write the American shopping center's

obituary have been proven wrong before, he noted. During the boom years

of the 1990s, Time magazine declared that online shopping meant that malls would soon become extinct. And now, in the bust years of the early 21st

century, a new crop of eulogists are predicting that the financial

crisis will turn glittering spaces like the Houston Galleria or

Indianapolis' Circle Centre into premature relics. I'm going to bet on

the American consumer a bit more than CNBC and the others, Simon said.

I think [retail] will bounce back a little bit faster and harder than

most people say.

Nonetheless, in a wide-ranging presentation that covered his career,

his Indianapolis-based company's growth into a global behemoth, and his

views on both management and the future of retail real estate, Simon

made it clear that his industry is facing real challenges, some of

which will lead to significant change. What's going to happen ... with

retail real estate is that the strong retail will get stronger, he

said, adding that weaker retail will suffer, sooner rather than later.

Where it used to take years for ... a bad mall to go out of business,

I think it's going to happen more quickly. For us, we know the winners

and losers already. But the time [the losers] are going to be around

[will] shorten.

Simon's confidence is based on his belief that his company is well

positioned to compete in the more competitive environment of the

post-crisis period. Simon Property Group includes top regional malls,

premium outlet centers and super-regional malls acquired as part of the

company's 2007 takeover of the Mills Corp.

In general, Simon predicted, regional malls -- such as the King of

Prussia Court and Plaza outside Philadelphia and Southern California's

Fashion Valley Mall, both of which his company owns stakes in -- will

perform better than run-of-the-mill local malls. At the same time, the

outlet centers and former Mills properties appeal to budget-conscious

shoppers. But winning in the future, he added, is about improving even

the best-located and best-marketed facilities.

A 'Smarter Box'

Long-term, the mall has to become a smarter box, he said. King of

Prussia is a good example. King of Prussia has 150 stores. The average

consumer goes to five or six. If we can figure out how to communicate

to that consumer as [he or she] walks the mall, whether it's 'Hey, go

to this store because you can get free this with every purchase,' or

'New merchandise is in,' or that kind of stuff, I think it is going to

facilitate loyalty. That's what we're working on.

Simon has been through the industry's ups and downs before. After

getting his MBA from Columbia Business School, he spent several years

on Wall Street at the height of the M&A environment during the

1980s. He worked at First Boston before following colleagues Bruce

Wasserstein and Joseph R. Perella when they left in 1988 to start their

own boutique investment bank. My dad said, 'Go learn from the

masters,' Simon said, referring to his father's advice when asked

whether he should join the fledgling firm.

In 1990, in another economic downturn, Simon left Wall Street to

head back home to Indianapolis and what was then a family firm, Melvin

Simon & Associates. We were really at the height of the real

estate workout following the savings and loan crisis, he said. Like

today, credit was tight and activity sluggish. It really took three,

four years to work that all out.

Simon's father had already made the company a major player in the

shopping mall universe. When the younger Simon came into the business,

with broad experience in mergers and acquisitions, he triggered a new

age of aggressive growth. In 1993, he took the company public, renaming

it Simon Property Group. The capital gave us the ability to grow. We

were trying to think of the retail paradigm in terms of scale, driving

down our costs and capital. That led to a number of M&A activities

that I'm well known for, [using] ... a lot of the techniques I learned

with Wasserstein and Perella and applying them to realty.

Simon became president and CEO of the new firm in 1995. A year

later, in the first big merger of two public real estate firms, Simon

bought rival Debartolo Realty for $1.5 billion.

Up to that point, no one ever had thought about, 'Can you grow

these companies in scale? Can you do typical M&A?' Simon said.

That really created a platform where we ended up doing about $25

billion in deals. [In terms of leadership,] you've got to be an

innovator, you've got to be aggressive. The best history of that really

is ... the M&A stuff that we did. That included one of the first

hostile attempts -- a year-long battle to wrest control of the

Taubman Centers mall empire from A. Alfred Taubman and his family. The

battle ended, unsuccessfully for Simon, in October 2003. Now, he says,

we're back at 2002 valuations. People should start thinking once again

about how cheap real estate is.

Simon's recent acquisitions have included one-time titans such as

Mills, part of a $4 billion 2007 deal; Chelsea Property Group, a $5.1

billion 2004 deal; and $1.5 billion worth of property from Rodamco

North America in 2001. That last deal was struck just two months after

the September 11 terrorist attacks during a time of significant

economic and political uncertainty. No one knew what the consumer was

going to do; no one knew how you were going to finance anything.... It

was a sign that sometimes you have to take an aggressive approach to

creating value.

Tough Decisions

But the aggressive managerial actions Simon has engineered since the

financial crisis surged last year have tended to avoid the celebratory

press conference. With everyone being downgraded left and right, we've

maintained our investment rating, he said. Our capital and liquidity

is very strong, and I added to that. Last year, the firm restructured

its dividend payments from cash to mainly common stock. I made a very

tough decision, he said. We're going to add another $925 million in

free cash flow this year because we are preparing for the worst.

Simon cited that decision, rather than any major takeover, as an

example of his leadership. I think, as a leader, you have a kind of

dual personality. You have to be very aggressive, yet you can't roll

the dice where, if you make a mistake, you're going to blow the

business out. Shareholders by and large, believe it or not, want you to

roll the dice and try to make the big play. Because ... if they don't

like what you did, they sell the stock -- and you're left trying to

figure out how to run the company. You want to listen to shareholders,

but at the end of the day, you've got to rely on yourself.

Today's economy, particularly the volatility on both the income and

debt side of the balance sheet, makes for an especially harrowing

climate, Simon noted. I don't think anybody anticipated this. To some

extent, we're all scrambling. Some of us are doing it better than

others. Simon was helped by having been on Wall Street during the

contraction of the early 1990s. It's easy to be a leader when you're

going to buy something and grow the business. But when you're going to

shrink or restructure, that's when your leadership skills are really

going to come to the fore.

In the meantime, he said, a healthy balance sheet remains key, in

good times and bad. We're not a retailer. We're the landlord

collecting rent. Absolutely, that job is harder today than it has been

in the past. Retail has a lot of volatility. Seven of the top 10

tenants we had when we went public are no longer in business today, and

yet we've been able to continue to grow our business because it's the

real estate that retains the value over the long term.

Shareholders, he added, have decided they're going to re-equitize a

handful of the best real estate companies on the market and the rest

will go by the wayside. He predicted his firm would be one of the

survivors. Results are ... all that matters, frankly. What you did for

investors is not that important. It's what you are going to do going