Savvy Owners and Retailers Look to Find Opportunities Despite California's Challenges
Sep 28, 2010 11:54 AM, By Patricia Kirk
The Great Recession swept across California, leaving behind record unemployment, empty homes and stores, and broken projects strewn across the landscape.
But this dark cloud has a silver lining. Lower land values and construction costs have created advantageous conditions for owners to upgrade assets while the market’s reduced rents have encouraged retailers to open new stores.
As a result, high-barrier submarkets in San Diego, Los Angeles and San Francisco are experiencing increased demand by retailers, who want to lock down deals before bargain rents and construction prices disappear.
“Lots of tenants are looking for well-located properties or land, values are flat but holding, and anything that’s well-located doesn’t last long,” says Tony Villaseñor, senior vice president for retail in the San Diego office of Santa Ana, Calif.-based Grubb & Ellis Co.
Macerich opened the renovated and expanded Santa Monica Place in late August.
Encino, Calif.-based Marcus & Millichap Real Estate Investment Services notes that effective rents have dipped on average between 2.4 percent to 4.5 percent in San Diego, Los Angeles and San Francisco, compared to 2009. That’s brought rents to a level where retailers are more willing to do deals.
Moreover, owners say construction costs are down up to 25 percent throughout the state, making it a good time to break ground or redevelop dated centers. The lower construction costs mean that developers can accept the market’s new lower rents and still building projects that turn a profit.
Consequently, California’s dominant markets are seeing signs of renewed development and redevelopment activity. Broken projects are getting a second chance, new centers are rising, empty boxes are disappearing, malls are getting makeovers and vacancy rates are declining.
For example, Walter Pagel, senior vice president for retail in the Newport Beach office of Grubb & Ellis Co., says that unfinished, bank-owned projects in Chino and Moreno Valley recently were bought up on the cheap by developers.
This allowed the stalled projects to move forward because the new owners bought them at a low enough price that they can afford to lease up the property at rents of $21 per square foot.
In contrast, the projects stalled because the original developers had been asking for rents of $25 per square foot in order to generate cashflow necessary for healthy returns. Those rents were too high for prospective tenants.
Financing feats
Even lenders are coming back to help fund projects, albeit cautiously. Banks are scrutinizing rents to ensure projects pencil and are taking a new look at pro formas of stalled projects to decide if they make sense now, notes Morgan McEvoy, vice president of retail services in Los Angeles for Seattle-based brokerage firm Colliers International.
Tenant commitments are facilitating redevelopment of tired, but well-located strip centers, says McEvoy, enabling owners to secure construction loans with little or nothing down.
The renovated Santa Monica Place includes a central plaza for hosting community events.
Signed leases increase a property’s value, often providing ample equity to secure a loan, even at today’s 50 percent to 60 percent loan-to-value requirement, he explains. For instance, ground leases for two Fresh & Easy Neighborhood Markets and a CVS pharmacy enabled two of McEvoy’ clients to obtain loans for renovating 50-year-old strip centers.
Santa Monica, Calif.-based developer Watt Cos. used a similar strategy to secure $15 million in financing to renovate and expand an old strip center in Harbor City, an ethnically diverse community in the Los Angeles South Bay.
This center is getting a complete makeover, thanks to the loyalty of three national tenants—L.A. Fitness, Ross Dress For Less and Falles Paredes. All three signed leases in 2007 and maintained their commitments to this location through the recession, notes broker Chris Wilson, president of Los Angeles-based Wilson Commercial.
A growing pipeline
New Lowe’s stores in San Francisco and Concord account for about half of new space rising in the Bay Area. Significant projects, however, are getting under way throughout San Francisco, including CityPlace, the Fourth Street shopping district at North Mission Bay, Alameda Landing and a new transit-oriented development downtown.
CityPlace recently won city approval after being stuck in the entitlement process for six years, notes Ross Portugeis, a retail broker in Colliers’ San Francisco office. Located on Market Street in downtown San Francisco, this project, by local developer Urban Realty Co. Inc. and Commonfund Realty Inc., a Connecticut-based investment manager, will replace several vacant buildings with 350,000 square feet of “sexy, glass-walled retail space,” he says.
The drama is not completely over, however. An appeal of the CityPlace environmental impact report has been filed and a hearing was slated for early September.
Another big San Franciso project is the latest iteration of Mission Bay. In terms of retail, a joint-venture of locally-based Farallon Capital Management, the city and Mission Bay Development Group LLC have plans to create a 100,000-square-foot shopping district in the development’s residential sector.
San Diego codes call for 20 percent of new apartment projects to be devoted to retail space.
“In five to 10 years this will be the heart and soul of the community,” says Kelley Kahn, Mission Bay project manager for the city’s community redevelopment agency.
In addition, there is Alameda Landing, a 97-acre, mixed-use project by San Francisco-based Catellus, a division of global REIT ProLogis, that is scheduled to break ground in 2011.
The project, which includes 300,000 square feet of retail, 400,000 square feet of office space, 300 residential units, a hotel and a senior housing facility, will be developed in phases, beginning with residential, notes Sean Whiskeman, vice president of retail operations for Catellus.
Also under construction is a new one-million-square-foot Transbay Transit Center. With ground-floor and concourse-level retail, the center will serve passengers on the region’s 11 transit systems and future Caltrain high-speed rail. The transit plan calls for transforming the adjacent area to a transit-oriented development with 2,600 homes, 100,000 square feet of retail, and three million square feet of office space.
Meanwhile, two lifestyle centers account for most of the retail space under construction in the Los Angeles area.
Meanwhile, two lifestyle centers account for most of the retail space under construction in the Los Angeles area.
Further south, new Lowe’s stores account for about half of new retail space rising in San Diego County. “But lots of tenants are looking around for well-located properties or land,” Villaseñor says. “And there’s no shortage of tenants looking for deals in neighborhood centers,” he adds, noting that insurance companies and pension funds are back in the real estate market and are investing in this asset class.
The real growth area for San Diego, however, is in the downtown market, because the city has required residential projects to have 20 percent of their space devoted to retail.
“Downtown has been the biggest...Continue reading on the next page.
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