Has Retail Reached Bottom, Started Rebound?

In a California Economic Forecast study released last month, Santa Barbara-based economist Marc Schniepp found that the overall retail market in greater Los Angeles has constricted year-over-year. “Despite tight vacancy rates, new deliveries to the market have softened this year,” the report said. In L.A. County, lease rates have surpassed $2.50 per square foot and rose sharply in West Los Angeles, the San Fernando Valley and the San Gabriel Valley. And despite appearances – such as vacant storefronts and even dilapidating shopping centers – brokers and executives working in the trenches of retail real estate north of the 101 freeway remain bullish about the San Fernando Valley’s future, specifically in places such as Woodland Hills, Studio City and Sherman Oaks. “I see occupancy sustaining,” said Todd Nathanson, president of Encino-based Illi Commercial Real Estate, which specializes in retail locations from the Mojave Desert down to North Orange County. “We’re looking at very low vacancy. Employment numbers are up.” Nathanson tracks all levels of real estate since his firm brokers deals for everything from mom and pop shops to big box retailers anchoring shopping centers. “Overall, retail is very healthy,” Nathanson said. “Santa Clarita is still somewhat over-retailed, so there’s a little more absorption there.” In a broad view, Nathanson said, “rents have flattened in the last year but are still healthy. But with the big box, a lot of people are going to attribute it to the internet – rates have caused people to operate more efficiently. To maintain healthy sales volumes, a lot have elected to scale back on floor sales.” Carter Magnin, a broker in the retail services group at Cushman & Wakefield’s Century City office, told the Business Journal that Ventura Boulevard, where businesses range from upscale eateries and markets to strip malls to independent shops, such as Tarzana’s Wanderlust Creamery, has always been a main thoroughfare and retail hub in the Valley. “We are seeing tremendous rent growth in markets like Studio City,” he said. “The incomes are on par with neighborhoods over the hill, and, in some cases, even surpass them.” While indoor shopping malls may be hurting, some owners are employing creative ways to breathe new life into their square footage, such as at Northridge Fashion Center, where parent company General Growth Properties retained realty brokerage Charles Dunn Co. to lease out a long-dormant second floor as creative office space. “I do have high confidence in the owners who own these types of properties,” Nathanson said. “In the San Fernando Valley, they should be able to achieve these goals.” ‘Cultural transformation’ Matthew May of May Realty Advisors in Sherman Oaks has seen two sectors expanding in the past 18 months: discounters such as dollar stores and clothing chains like Marshalls, T.J. Maxx and Five Below; and fitness centers, from L.A. Fitness to higher-end, more specialized gyms Equinox and Motion Stretch Studio, both with Woodland Hills outposts. With an explosion of the subscription model, “we’re just seeing more and more of them, and more different concepts coming on,” May said. May recently leased out Sherman Oaks Collection, which includes artisanal ice cream and high-end juicer shops and is shadow-anchored by an adjacent Gelson’s market. “You still have the fast-casual restaurants (doing very well),” May said. “They’re the bread and butter.” Magnin believes that demand in the San Fernando Valley has been there for years and retail is just starting to catch up. “There is a cultural transformation taking place,” Magnin said. “When you see restauranteurs like Sprout Group (Barrel & Ashes) and Jon & Vinny (Petit Trois Valley) opening in the Valley, you know something is happening. … Restaurants have always been the pioneers into markets and a catalyst for new retail, and these noteworthy names should not be overlooked.” Magnin sees the Valley’s changing demographics inviting an influx of what was traditionally considered Westside- or West Hollywood-style tenants. “You have tenants such as Drybar, Pressed Juicery, Joan’s on Third in the market already, and a slew of others circling several projects,” Magnin noted. “In addition, the Sportsman’s Lodge project is extremely exciting and will only add to the vibrant retail market in Studio City.” The only challenge to Studio City’s bubble, Magnin said, “is quality inventory and parking.” Another Valley neighborhood exciting brokers: Woodland Hills. “Similar to Studio City, the incomes and average home prices have always been strong,” said Magnin said, singling out Atlas Capital’s Valley Country Mart for bringing “an unprecedented tenant mix in Woodland Hills.” Experiential strategy While the traditional shopping malls may struggle to maintain big box tenants and consumer interest, experiential outdoor retail centers, led by developers Unibail-Rodamco-Westfield and Caruso, have proven effective attendance magnets. “In addition to the street retail along streets such as Ventura Boulevard, the lifestyle projects in the Valley are raising the bar for retail,” Magnin said. Nathanson agreed. “I think that’s where this is headed — well-located shopping experiences,” he said. “The pendulum is swinging the other way now,” said May, who believes that for all of the e-commerce convenience and the time spent on computers and phones, people now seek “an emotional connection” in the form of attractive brick-and-mortar settings. Take developer Rick Caruso, May said. “He spent the money to recreate part of Europe,” May said. “You go (to a Caruso town center) and you feel like you’re in a different environment. It’s what Vegas did. Go to the Venetian; go to Caesar’s.” Nathanson noted that landlords and developers that have mastered experiential shopping can charge premium rents for space. Magnin cited the retail expansion at Westfield Topanga as a great example. “We are seeing concepts that would have never considered entering the San Fernando Valley three or four years ago,” he said. The brokers see a future in the Woodland Hills market specifically because as the Warner Center Specific Plan 2035-galvanized housing developments and retail projects — including Westfield’s forthcoming overhauls of Topanga and Promenade malls — come to fruition, the demographics in that neighborhood will skew younger. “The incomes have been steadily growing for the past decade, and younger families are moving to the Valley,” he said. “This growing demand is manifesting in the type of offerings we are seeing, specifically the elevated luxury and lifestyle brands that are entering the market for the first time.” Right now, the San Fernando Valley, along with parts of the Conejo and Santa Clarita valleys, outranks sales volumes in most surrounding submarkets, Nathanson said. “The bottom line,” Nathanson said, “is the population is here.”