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RETAIL GOLD RUSH

Thriving Southern California economy spawns new centers, stores

By Brad Berton

J.H. Snyder Co.’s mixed-use West Hollywood Gateway is one of several projects changing the face of the Hollywood area.

Work begins this month to convert the aging Huntington Beach Mall into Bella Terra, a mostly high-end, open-air retail and entertainment center.

A shaky stock market? Consumer confidence crisis? Retailers in trouble? You wouldn’t think so to look at the retail development boom in Southern California.

The region’s four primary markets (the three coastal counties of Los Angeles, Orange and San Diego, plus the Inland Empire) should see nearly 13 million square feet of new retail space completed this year alone, according to investment brokerage firm Marcus & Millichap, Encino, Calif. That comes on top of just under 12.5 million square feet completed last year and nearly 11.4 million square feet in 2000.

Yet shopping center occupancy and rental rates have held up impressively, despite all this construction, the U.S. recession and alarming retailer credit-quality concerns, according to Marcus & Millichap. In fact, San Diego and Orange counties rank second and third, respectively, on the firm’s 2002 national index of retail real estate market strength, which tracks 35 metro areas on the basis of a 12-month, retail space supply-and-demand outlook. These two adjacent markets simply switched places from the 2001 survey. The still-booming Inland Empire region shot up seven places to sixth, while Los Angeles County dropped one slot to No. 15.

Real estate entrepreneurs and their cooperative capital sources are betting billions on a vast variety of ventures, and, fortunately for them, expansion designs from the likes of Kohl’s and Wal-Mart seem to be outweighing the retreats and outright disappearances of such “big-box” players as Home Base, Kmart and Montgomery Ward.

The net result is a development frenzy driven by infill ventures, as well as numerous projects chasing the region’s ever-increasing numbers of suburban rooftops. And where there is little room to build, notably in the region’s three continuously growing coastal counties, developers are rebuilding.

Indeed, the vast and varied pipeline of projects recently opened, in progress or soon to come demonstrates the development discipline’s enduring creativity even amid tricky entitlements, prohibitive costs and other daunting challenges.

“We’ve been seeing a real retail boom here in Southern California,” said retail specialist Steven Regenstreif, a vice president at Marcus & Millichap. The region saw $643.3 million worth of retail building applications in the first five months of this year, marking a 1 percent increase over the same period last year.

The boom follows a period of concerns about Internet-based commerce and financial issues at important retailers, he said, noting that several retailers that had questioned aggressive regional growth strategies are now “trying to catch up.” Starting next year Kohl’s will roll out more than 30 units here, while Wal-Mart plans to open as many as 40 more superstores over the next six years. And primarily as a result of Southern California’s glaring shortage of freestanding sites, they’re typically becoming anchors or in-line tenants at the region’s considerable roster of new and improved shopping centers, observers note.

Meanwhile, retail developers working Southern California’s primary paths of growth — mostly in the boom-and-bust Inland Empire that comprises Riverside and San Bernardino counties — are aggressively feeding the demand for retail in the region’s expanding suburban areas (see story, Retail booms as sun rises on Inland Empire).

What, some might ask, is going on in Southern California in apparent defiance of all the economic retail indicators?

Experts cite Southern California’s favorable long-term demographic fundamentals as among the most-significant factors behind the continuing retail construction push. Whatever the near-term economic ups and downs, projections indicate inevitable population growth, both internal and migratory, stretching from the region’s densely populated communities to the distant suburbs. This year alone, the three coastal counties will see their populations grow by more than 1 percent, while the Inland Empire’s population will expand by 3 percent (see chart, below).

A growth wave absorbing new homes as quickly as builders can complete them “will continue to drive a significant amount of retail development,” said Randall Lewis, a principal and executive vice president at Upland, Calif.-based Lewis Retail Centers. The firm is part of the Lewis Group, which has roots in regional homebuilding, but now engages in land and community development.

But population projections alone can’t explain the generally bullish retail property development push going on in Southern California today. Key factors that Lewis and others cite include:

• aggressive regional expansion by such important retailers as Kohl’s and Wal-Mart even as others retreat;

• tax structures that tend to motivate municipal support for revenue-rich retail properties;

• historically low property-debt costs combined with liquid capital supplies;

• stabilization of the movie theater sector;

• intense competition for scarce development and redevelopment sites.

“So much for the Internet destroying bricks-and-mortar retailing here,” quipped income property broker Marc Renard at Cushman & Wakefield’s downtown Los Angeles office. In fact, he added, despite Southern California’s prevailing “transitional economy,” institutional and opportunistic real estate investors alike are taking longer and closer looks at the region’s retail sector now that yields on supposedly recession-proof apartments have dwindled.

Hollywood & Highland: Not a box office hit, concedes its developer, Trizec Properties.

That quest for investment returns helps explain the intriguing roster of retail property investment ventures in the works in Southern California today. Seattle-based investment advisory firm Kennedy Associates Real Estate Counsel and its primary client, the $3 billion Multi-Investor Property Trust, continue to scour Southern California in search of such opportunities, noted Christopher Stirling, Kennedy’s executive vice president in the region.

“We see select opportunities to acquire shopping centers in strong Southern California urban locations and invest into substantial upgrades while updating the tenant mix to reflect today’s retailing preferences,” Stirling said.

Numerous Southern California investment/development operations are going well beyond simple upgrades of existing properties. Especially in the densest urban districts, many developers are supplementing the retail stock through comprehensive redevelopment of obsolete facilities, often turning them into New Urbanism-type mixed-use projects.

A critical factor prompting so many urban redevelopment pursuits today is that location no longer suffices from a competitive standpoint, observed Clifford Goldstein, a partner responsible for leasing and marketing at Los Angeles-based developer J.H. Snyder Co. “New retail product has an edge over older properties that might not have the right design or access necessary to attract tenants and shoppers,” Goldstein said.

Various projects by the Snyder firm alone illustrate some of the principal Southern California retail development trends. These include public-private neighborhood revitalization efforts, mixed-use developments featuring multistory retail components and the continuing development wave in Los Angeles County, where the 5.5 million square feet of new product slated for completion this year exceeds even last year’s 5.3 million. This fall Snyder and Beverly Hills, Calif.-based partner firm Lexington Commercial Holdings expect to start a major overhaul of Valley Plaza, an aging shopping district in North Hollywood. Meanwhile, the long-delayed, 23-acre NoHo Commons mixed-use plan for North Hollywood’s redevelopment district is expected to finally get going later this year. Snyder has also just launched its innovative West Hollywood Gateway, featuring 245,000 square feet of multilevel retail space and 80,000 square feet of offices.

Numerous landmark-class, retail-heavy redevelopment projects have just opened or will open within a few miles of Snyder’s West Hollywood site, though some seem to be doing better than others. Trizec Properties’ groundbreaking Hollywood & Highland complex, whose fortunes are closely tied to Tinseltown’s tourist trade, had the unforeseeable misfortune of opening barely two months after last September’s terrorist attacks. Though Hollywood & Highland opened last November 86 percent leased, Trizec subsequently wrote down the project’s value by $217 million, due to cost overruns and a decline in visitors. And in late July Trizec CEO Christopher Mackenzie cited “continued underperformance” at Hollywood & Highland and its other troubled property, Desert Passage in Las Vegas, for lower FFO projections for this year.

But the retail and entertainment complex will almost certainly continue to act as a catalyst for other innovative Hollywood redevelopment projects. Among these are the $125 million Sunset & Vine retail and apartment complex, which got under way at its signature intersection in July, and the $100 million-plus renovation of the nearby ArcLight Cinerama Dome, the geodesic-shape theater built in 1963.

Just down the Sunset Strip, New York City-based Apollo Real Estate Advisors now heads the team behind the $300 million Sunset Millennium mixed-use redevelopment venture, which will ultimately feature 200,000 square feet of high-end retail space along with refurbished offices and perhaps a hotel. To the south, Caruso Affiliated Holdings opened its latest shopping center in March, the 640,000-square-foot Grove (see story, Caruso spared no expense on The Grove in Los Angeles). The highly designed, $160 million redevelopment project adjacent to the Fairfax district’s historic Farmer’s Market is 98 percent leased.

Though not every part of the coastal county region is seeing such intense retail-heavy redevelopment, various infill and repositioning projects abound these days. And new prospects seem to turn up every few weeks, such as the 60-acre Inglewood site that veteran builder Stan Rothbart recently agreed to purchase for $36 million and develop into a yet-to-be-named retail center. Or the $100 million retail and entertainment center just proposed for a 157-acre Carson, Calif., landfill by Carlsbad, Calif.-based retail development firm GMS Realty and brownfield specialist Cherokee Investment Partners, Raleigh, N.C.

Orange and San Diego counties are seeing their share of retail redevelopment ventures as well, even if not to the extent observed up north in Los Angeles. Snyder has joined Ezralow Retail Properties, an affiliate of Huntington Beach, Calif.-based Ezralow Co., to convert the aging, enclosed Huntington Beach Mall into a mostly high-end, open-air retail and entertainment center dubbed Bella Terra. Work on the $150 million project is slated to begin this month.

In Anaheim, near Disneyland and the Walt Disney Co.’s new California Adventure theme park, San Diego-based retail REIT Price Legacy Corp. has unveiled plans for Anaheim Garden Walk, a mixed-use redevelopment project. The $600 million, multiphased venture is to feature a hotel and some 540,000 square feet of retail space, including plenty of dining alternatives.

A number of retail redevelopment ventures in the works in the San Diego area illustrate how the continuing growth of Southern California’s heavily populated coastal areas is blurring the lines between the urban and the suburban. In San Marcos, one of northern San Diego County’s growing communities, Tone Yee Investments & Developments and World Premier Investments are aiming to expand their 293,000-square-foot Vallecitos Town Center to 540,000 square feet, while bringing in Wal-Mart to replace anchor spaces vacated by an Edwards multiplex, Home Base and Levitz Furniture. A Best Buy may also come there.

And in San Diego’s ever-densifying University Town Center district, Westfield America and partner J.P. Morgan Fleming Asset Management have proposed a major expansion and reconfiguration of the Westfield Shoppingtown UTC property. As proposed, the project would likely cost upwards of $100 million, boosting the retail and commercial gross leasable area from 1 million to 1.8 million square feet and adding some 500 residential units.

As Marcus & Millichap’s Regenstreif noted, demand for retail space in the nation’s “coastal” communities typically tends to stay resilient even during softer economic periods, and commerce in Southern California tends to recover quickly.

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