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Monday, May 27, 2024

Small Retailers Could Get Stung As Ventura Boulevard Beautifies

Used to be that small retail shop owners could depend on Ventura Boulevard, with its high traffic counts and low rents, to give them plenty of bang for their buck. But lately, things are changing along the San Fernando Valley’s most famous street. As property values have risen, landlords along the boulevard are either selling or refurbishing, and the changes have already been seen in rent hikes as much as double the rates of just a few years ago. So far at least, retail sales have continued to be strong, but if consumers retrench, as many believe they will, shopkeepers could be at risk. “If you’re a mom and pop or a regional tenant, there’s only so much volume you can do, and the rule of thumb that rent should represent 10 percent or 15 percent of your sales is getting harder to follow,” said Todd Nathanson, a principal with CBM in Encino who specializes in the retail market. “What everyone is watching is when the defaults will happen.” Nathanson said he has seen rents rise to the mid-sixty cent range from the mid-thirty cent range just three years ago. Much of that increase can be attributed to property tax increases, which are passed along to tenants in many of these Ventura Boulevard spaces, as well as strong demand coupled with limited supply. At the same time, as property values have risen, landlords are either taking their profits and selling or they are using their newfound equity to renovate the many strip malls that line the boulevard. Either way, many of the strip malls along Ventura Boulevard are currently undergoing renovation. “I think there are properties that have either been sold or, with the real estate cycle, people and investors and owners are spending the money to make their properties nicer,” said Dean Cutler, senior sales and leasing broker at The Piken Co., which handles many properties along the boulevard. “There’s also been some new development and it makes the older development look tired. I think everyone wants a clean look and more marketable property. It helps their value.” The question is whether business for these local merchants will rise commensurate with the new rents that come as a result of the improvements. For one thing, these stores tend to be small, allowing for only so much inventory and placing a ceiling on the potential sales volumes retailers can expect. Some believe that rising gas prices will bode well for local boulevard retailers. Even if overall retail sales slow down, these local merchants could get a larger share of the pie as shoppers seek to make their purchases closer to home. “There has been a lot more local shopping,” said Bryan Gordon, CEO of Pacific Equity Properties Inc., which expects to complete the first phase of its Ventura Boulevard center renovation in Tarzana in the fourth quarter. “Apart from everything, a trip to the mall isn’t what it used to be. The parking, the traffic, the terrible food is no longer the fun experience that it was.” Pacific Properties’ project, The Village at Tarzana, is currently leasing, and Gordon reported that there is no shortage of retail and restaurant tenants interested in the property, both national chains and smaller, independent operators. Others too say that demand has not seemed to slow, at least not yet. “A good reason for a lot of the rent hike has been supply and demand,” said Nathanson. “The tenants don’t have an option. If rents get too high, they can’t go across the street anymore.” Then too, despite all the talk about consumers pulling in the reins on spending, sales volumes have been holding up quite nicely. For the month of May, at national chains at least, same store sales rose an average of 4.1 percent, according to the International Council of Shopping Centers, nearly level with the percent gains achieved between January and April and considerably higher than the 3.2 percent increase expected. But there are increasing signs that the retail climate is changing, and tenants who are locked into lease rates that are much higher than historical levels may find that they can’t generate enough business to support their costs. “I think the small businesses are certainly going to be challenged in a changing climate,” said Cutler, “but there are a lot of national retailers and chain tenants that have demand for space and they can’t find spaces that fit within their parameters.” If national retailers have not curtailed their demand for space, some smaller, local companies have been slower to enter lease deals. “People are being a little more cautious and evaluating their decisions in light of the changing real estate climate,” said Cutler.

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