07.11.2017

Walking Mall Now Pedestrian

Los Angeles Business Journal, July 10, 2017 Issue

Santa Monica’s Third Street Promenade launched almost three decades ago with a strategy that was unconventional at the time – closing the boulevard to cars and creating a pedestrian mall.

The rise of e-commerce has begun triggering unprecedented tenant turnover on the three-block shopping strip, however, and property owners are looking for creative ways to boost their fortunes and weather widespread tumult in the retail industry.

A recent count totaled six out of about 100 stores on the Promenade vacant as of the end of last month, according to Downtown Santa Monica Inc., a local business-booster nonprofit. An additional seven were recently leased but not yet open, giving the off-putting appearance of a rocky business climate.

Those numbers might seem small, but they’re notable for a tourist hot spot that accounts for $517 million in retail sales annually, according to the most recent data available, and draws foot traffic on par with Disneyland – 16 million people a year, according to Downtown Santa Monica.

The Promenade is grappling with vacancies for the first time since it opened in 1989.

“For many years, nobody would ever see a vacancy on the Promenade, and we would switch tenants before the buildings became vacant,” said Tenzer Commercial Brokerage’s Barbara Tenzer, who has worked in the shopping district since its debut. “This is the most turnover that we’ve had in a long time – but it’s not just for this area, it’s all over the United States.”

Tenzer and others are pushing for the popular tourist destination to evolve as a number of once-popular apparel retailers downsize.

American Apparel and Nasty Gal have filed for bankruptcy protection and closed all their stores, including sites on the Promenade. BCBG Max Azria Group Inc. is shuttering 120 stores amid bankruptcy proceedings, although its Santa Monica Place location is slated to remain open at the southern edge of the Promenade.

A neighboring Sears department store closed in April, and the landlord decided to convert the property into an office and retail project.

Renovations

Malls in Los Angeles and nationwide are aiming to hang on to both tenants and customers by pumping hundreds of millions of dollars into renovations.

Westfield Corp. is completing a $1 billion makeover of its Century City mall, for example, while Taubman Centers Inc. is in the midst of a $500 million redo at the Beverly Center. Only developer Rick Caruso’s centers – designed to look like authentic streets in the style of the Promenade – appear to be sticking with their original format.

Revenue at the Grove in the Fairfax District climbed 10 percent last year, while revenue at the Americana at Brand in Glendale jumped 20 percent in the same period, according to the Caruso company.

Caruso, which declined to disclose revenue figures, is generally credited with keeping the two malls chock-full of tenants thanks in part to a unified marketing approach that involves sharp merchandising and tailored lease terms.

The company also sets high standards for tenants, and is said to have a waiting list of prospects eager to fill any openings.

The Promenade, however, consists of storefronts owned by individual entities, a structure that limits the chances to usher in sweeping changes as a common retail destination. The street’s commercial prospects also are hampered by the size of most of its floor plans – either overly spacious or too deep and narrow.

To make matters harder, most of the owners – the majority of whom are private investors or family trusts – are accustomed to landing tenants willing to pay top dollar – a standard that’s been in the range of $12 to $18 a square foot on a monthly basis.

It’s not so easy anymore.

“The market is here, the tourism is here, we just have to get property owners to understand how to shift,” said Kathleen Rawson, chief executive of Downtown Santa Monica.

Always evolving

William Tucker, president of Tucker Investment Group in Calabasas, who has owned several properties on the Promenade since the late 1980s, said the district can handle change because its key assets endure – an attractive location a couple of blocks from the ocean and outdoors appeal.

“You don’t want the area to stay static –you want it to always be evolving,” he said. “A good landlord is open to new ideas.”

Tucker took on that challenge a couple of years ago when he sought a replacement for Yankee Doodle, a sports bar and restaurant that had occupied 15,000 square feet – a size he described as gigantic. Instead of looking for a large eatery, and unable to convert the entire space into a store under Santa Monica’s planning guidelines, he shifted a portion of the building into retail. That space is now occupied by T-Mobile, while Bruxie, an eatery specializing in waffles and fried chicken, moved into the smaller dining space.

That type of landlord creativity might be crucial for the Promenade’s success, said Scott Schonfeld, a principal at Linwood Ventures in Santa Monica, which co-owns a food court on the Promenade with Lincoln Property Co.