California Trends
California has always been the king of setting trends for the nation. Here’s what’s happening in the Golden State.
Randall Shearin

The Golden State hasn’t lost is luster yet. While some pin it on the economy and others pin it on gas prices, California is, like the rest of the nation, seeing some interesting effects. While some sectors of retail are taking a hit, others are hitting a homerun in the state.

“California is much like the rest of the nation,” says Jeff Kreshek, vice president of leasing with Hollywood-based CIM Group. “It has its challenges. There are going to be parts of Southern California that will be hit disproportionately to others, but all in all, California is a pretty resilient economy and a place that has unbelievable density. Retailers want to be here.”

New development, too, isn’t sprouting out of the ground at the rate it has been in years’ past. Solid developments that have good locations and underserved populations are still showing interest from retailers, and many new developments are underway. Retailers’ expansion plans have curtailed a lot of new development in the state.

“Because anchor retailers have scaled back their expansion plans, land prices have dropped precipitously,” says Mark Schurgin, CEO of Los Angeles-based The Festival Companies. “No one wants to hold land for years for the anticipation of a tenant committing in 2012.”

Caruso Affiliated’s The Americana at Brand in Glendale had retailers exceeding their expectations after opening in May.

“There are new developments that have been planned,” says Bill Hagelis, president of Ventura-based The Hagelis Group. “The ones that are moving forward have committed anchors in tow. Some anchors are changing their rent structures and pulling their horns in; the projects with those anchors are having a tough time and are being delayed. Developers are being cautious and they are phasing projects. Retailers are being less considerate of ‘B’ sites and are now going for more of the ‘A’ sites. If you don’t have an ‘A’ site in the market, they’re holding back.”

Rick Caruso is one developer who has an ‘A’ site if there ever was one. When Caruso Affiliated opened The Americana at Brand in Glendale in May, the first 2 weeks saw over 1 million shoppers at the center. Does that sound like a slowdown? The Cheesecake Factory, Lacoste, Peter Alexander, Barneys New York Co-Op and Katsuya were among the retailers and restaurants that reported breaking their sales expectations in the first 2 weeks at the center. Other tenants at the 900,000-square-foot lifestyle/entertainment center include H&M, Anthropologie, Barnes & Noble, Martin + Osa, Ruehl, J.Crew, Tiffany & Co., Sur La Table and Pacific Theatres. Gilly Hicks opened its first California store at the center in July, and hip LA fashion boutique Kitson will open a 15,000-square-foot location at the center this fall. Some positive news in a not-so-positive time.

Turning Around Hollywood

Hollywood has been one of the big success stories in Los Angeles for the last few years, and most of the thanks are due to CIM Group. The company has been helping turn downtown Hollywood from a dingy, scary strip to the Tinseltown that everyone wants to see. The company has bought a number of buildings — closing in on 30 at last count — in Hollywood and renovated them into a number of uses. CIM understands that Hollywood is not just about tourists; it’s about the people that live there and work there. And so it has developed retail uses for both audiences.

CIM Group has repositioned Hollywood & Highland Center, part of its plan to help revitalize the city of Hollywood.

The office and multifamily buildings that company owns in Hollywood now have national and regional retail and restaurants located on the bottom floors. In addition, CIM has purchased and renovated the Hollywood & Highland Center over the last few years. There, it recently landed Cirque du Soleil, who will operate a show regularly. Forever XXI, Guess, uWink Media Bistro and H&M are recent additions to Hollywood, and Zara will be joining in the next 9 months. Sales at Hollywood & Highland Center have doubled since CIM’s purchase. CIM also added Fresh & Easy, Longs Drugs and LA Fitness at 7021 Hollywood Boulevard, which have also performed extremely well since opening, reports Kreshek.

“That project continues to serve a niche in this market which had never been served before — daily needs,” he says.

In addition to Hollywood, CIM is also currently developing The Strand, a project that it will be opening in Huntington Beach later this year. The center has leases signed by Forever 21, Active Ride, Rip Curl, Johnny Rockets, CVS/pharmacy and RA Sushi.

Passco manages The Promenade at Howard Hughes Center, a 247,833-square-foot lifestyle and entertainment center in Los Angeles.

Adding to Hollywood in the near future is Madrone Hollywood, a mixed-use project by Tallen & Keshen Holdings, that features 13,700 square feet of retail and 180 luxury condominiums.

The additions to Hollywood are just part of the positive forecast that Marcus & Millichap has made for the greater Los Angeles area. The real estate investment brokerage company forecasts that builders will deliver 3.7 million square feet of retail space in greater Los Angeles this year, up from 3.4 million square feet in 2007. Vacancy is anticipated at 8.1 percent at the end of the year, while asking rents will rise 2.8 percent, to $30.42 per square foot. Part of the reason for the company’s rosy forecast is that it sees a “flight to primary markets” among retail sector investors.

Reinvesting In California

Westfield has plans for a large addition and renovation to Westfield Fashion Square in Sherman Oaks.

Westfield is one of the largest owners in California, and the company wants to be even larger. It has a number of significant projects, totaling several billion dollars, underway in the state.

In the Century City submarket of Los Angeles, Westfield has completed the first phase of its remodel of the retail space at Westfield Century City. Westfield has long range plans that call for $500 million to be invested in the center and adjacent properties it owns. The result would create a mixed-use center including additional retail, residential condominiums, and other commercial space.

Westfield plans to join its Westfield Topanga and Westfield Promenade projects in Canoga Park with a third project, called The Village at Westfield Topanga.

Westfield has three other major projects ongoing in the Los Angeles area. Westfield Topanga in Canoga Park continues to open new stores. Neiman-Marcus will open at the center September 5, making Topanga the first center in the world anchored by both Neiman-Marcus and Target. Westfield has submitted plans for its $700 million project for the adjacent 31 acres, known as Warner Center, that would fill the void and link its Westfield Topanga and Promenade centers. The new project would be known as The Village at Westfield Topanga.

In nearby Sherman Oaks, Westfield has submitted plans for a $200 million makeover of Westfield Fashion Square. The center is anchored by Bloomingdale’s and Macy’s, and contains 120 specialty retailers. Westfield has plans to expand the center by 280,000 square feet to accommodate more retailers, restaurants and a dining terrace.

In 2009, Westfield will open a $120 million outdoor expansion to Westfield Santa Anita in Arcadia. The addition will add an open-air component of 30 new shops and restaurants, as well water elements and a large outdoor courtyard.

Investing as much as $900 million, Westfield plans to renovate and reinvent Westfield University Town Center in San Diego, expanding the center by more than 750,000 square feet.

In the San Diego area, Westfield has plans to invest $900 million into Westfield University Town Center. The 30-year-old project would be expanded by more than 750,000 square feet for new and remodeled anchor stores, a cinema, over 150 new specialty shops, new outdoor plazas, parking, housing and a regional transit center.

A Different Time For Leasing

Striking out on their own in recent years, California leasing and tenant rep veterans Bill and Linda Hagelis are busier now than they’ve ever been. Based in Ventura, the couple’s company is working heavily in Ventura County and the Central Coast. It also has several leasing assignments in Palm Springs.

Ventura County has seen many projects in recent years as population grew in the area. The Hagelises report that the leasing climate there has slowed, with retailers being more cautious. Starbucks is one retailer, on the heels of its announcement that it would close 600 stores and scale back new openings, that has pulled back in the area. Restaurants, in general, aren’t jumping on a lot of new opportunities, says Bill Hagelis.

“Quick service restaurants are still in the game, but the mid-market guys are not as anxious for sites as they were,” he says.

In west Ventura County, Shea Properties is developing The Collection - Riverpark, an 800,000-square-foot center that will contain lifestyle and community center retail. The Hagelis Group recently completed a deal that will bring a 55,000-square-foot Whole Foods to the center. The project has been planned for 5 years, and is currently under construction with its first phase. 

“With the economy changing, the market is not as robust as it was a few years ago,” says Linda Hagelis. “Riverpark is the only project containing a Whole Foods in this area, so it is very exciting for residents.”

In Oxnard, the company is also working on the redevelopment of Carriage Square shopping center, an older center that’s being razed and rebuilt. Lowe’s Home Improvement Centers will anchor the center, which is being redeveloped by Upside Investments. KFC, Ihop and a drug store will also tenant the center.

One area that’s keeping The Hagelis Group busy is the re-leasing of big box space. In power centers where retailers like CompUSA have gone out, the company is working on repositioning the space to smaller space, or finding new tenants to take the space. At Shopping at the Rose in Oxnard, The Hagelis Group replaced a vacant CompUSA with a Ross Dress For Less, for example.

A big question in the state is the number of Mervyn’s stores that will close. Based in the Bay Area, the discount department store anchors a number of centers in the state. Mervyn’s, who declared bankruptcy in July, has not, as of our press date, announced any store closings, but there are a number of nervous landlords waiting to get a call.

Todd Siegel, vice president of asset management with Passco, who handles leasing for the company’s projects, has seen a slowdown on renewal leases for tenants.

“They are renewing,” he says, “but they take a longer time to make their decisions. They analyze their internal growth plans a little more carefully and they are cautious about continuing in locations where they are not profitable. In the past, they would hang on to a location and hope it would turn. Now, they are more apt to close a non-performing location before they renew the lease.”

Siegel has also seen a slowdown among franchisees. He believes this is because so many franchisees use home equity loans or other financing to operate or start up their businesses.

“Trying to find a new franchisee is pretty tough in this market,” he says.

On a positive note, Siegel sees a number of tenants who are still expanding in California, including Game Stop. Other tenants are taking advantage of market conditions by moving to better locations or expanding their stores to gain marketshare.

“Small tenant leasing has effectively shut down,” says Sandy Sigal, CEO of Newmark Merrill, a shopping center owner and manager based in Woodland Hills. “It has become very difficult for small retailers to find the capital to expand. The credit tenants have fallen into two categories: those that are still expanding — and they are only doing the deals that are perfect; and those who have had some trouble and who are struggling to survive. It is a difficult time in California. That said, California is a big state, so in some places it is a larger problem than in others.”

Festival’s Schurgin also sees the climate for leasing different than in the past few years.

“As where we used to have five or six tenants we could count on to fill a space, we now have one or two candidates,” he says. “Tenants are not in a rush to lease space. When they do commit, they take the time to make sure that the location will generate the sales needed for a successful store.”

It’s Hot In Riverside

Riverside County, especially the area centered around Temecula, is still growing — at least with retail space. In Temecula, Forest City is expanding The Promenade at Temecula, adding an outdoor lifestyle component to the regional mall. In nearby Hemet, California, The Garrett Group is developing Garrett Ranch, a mixed-use project on 200 acres at the intersection of state highways 74 and 79. The initial 70 acres will be used for a 720,000 square-foot regional power center with an entertainment and dining focus. Tenants will include lifestyle, big box, entertainment and restaurant uses.

In Murrieta, The Garrett Group is developing The Triangle, a large lifestyle center in the area’s Golden Triangle — the intersection of Interstates 15 and 215. The site is owned by the Domenigoni Barton family, who is partnering with The Garrett Group to develop the center. The site will be home to a 1.2 million-square-foot mixed-use project. The retail component will be about 650,000 square feet, while there will also be about 480,000 square feet of office space developed. The company plans to break ground in 2009.

Donahue Schriber is opening Countryside Marketplace, a 732,000-square-foot center anchored by Target, Lowe’s, and Kohl’s, this fall in Menifee.

Nearby, at I-215 and Clinton Keith Road in Murrietta, Retail Development Advisors is already underway with The Orchard – Stone Creek, a 460,000-square-foot center. Dixieline Lumber & Home Center, Bank of America, Starbucks Coffee and Subway opened in 2007. Juice It Up, Stone Creek Nail Spa, and UPS Store opened earlier this year.  More stores will open in the spring of 2009, including Super Target, Marshalls and Walgreens.

In Menifee, also near Temecula, Donahue Schriber will begin opening its 732,000-square-foot Countryside Marketplace this fall. The center is anchored by Target, Lowe’s, and Kohl’s.

Relief In The Desert

The Palm Springs area is still seeing some activity, mostly in neighborhood and community center development. Several centers are underway in the area. Costa Mesa-based Donahue Schriber opened Smoke Tree Commons, a 170,000-square-foot center at East Palm Canyon and Barona Way, in June. The center is anchored by Cost Plus, Michaels, Walgreens, Jensen’s Specialty Market and Petco. 

The Hagelis Group is currently leasing Gene Autry Plaza in Palm Springs. The 230,000-square-foot center has signed two anchors, Staples and Smart & Final, for the project. Banks, restaurants and other service oriented retail round out the tenant mix at the center, which is currently under construction. Palm Desert-based The Nicholas Group is developing Gene Autry Plaza.

In Palm Desert, The Hagelis Group is also leasing Monterey Courtyards, an 80,500-square-foot center that will be located between an existing Lowe’s Home Improvement Center and a proposed Target. A movie theater will anchor the project.

Much of this activity is leasing for centers that were announced and in development before the economic slowdown. Because of this catch up, Bill Hagelis foresees a slowdown for the area.

“Retail has grown so rapidly in the area. Now, the brakes are really being applied,” he says. “It is a tough market, especially for small shop space. A lot of anchors are waiting to see how the economy is faring.”

Caught In The Middle

While not traditionally a hotbed for activity, central California has seen a few developments over the past year. Donahue Schriber is developing two centers at the intersection of Riggin and Dinuba in the central California town of Visalia. The first center, which will open this fall, is the 296,000-square-foot Orchard Walk East. The center will be anchored by Target.

LandValue Management has completed a renovation and expansion of Sierra Vista Mall in Clovis. Photo courtesy of MCG Architecture.

In Clovis, LandValue Management hired MCG Architecture to design an expansion of Sierra Vista Mall, which has since been completed. MCG demolished a portion of the enclosed mall to create an outdoor plaza and lifestyle wing.

In Atwater, Regency Centers is developing the 478,517-square-foot Applegate Ranch shopping center. The new center is the largest in the area and is anchored by a 178,500-square-foot SuperTarget, Marshalls, Big 5 Sporting Goods and Petco. Other tenants include AT&T Mobility, Dress Barn, Sally Beauty, Planet Wings, Payless Shoes and Supercuts.

No Shortage In Sacramento

The Sacramento area has seen the development of a number of new retail projects over the last 5 years. Continuing that, a new center in Roseville has just opened, and Westfield is opening an addition to its regional mall there this November.

Peter P. Bollinger Investments opened The Fountains at Roseville, a 320,000-square-foot lifestyle center, in June.

Peter P. Bollinger Investments opened The Fountains at Roseville, a 320,000-square-foot lifestyle center, in June. The center includes tenants Z Gallerie, West Elm, Coldwater Creek, Chico’s and Anthropologie. This fall, Whole Foods, DSW, California Pizza Kitchen and McCormick & Schmick’s will open at the center, which was designed by MCG Architecture. Leasing is being handled by Inter-Cal Real Estate and San Francisco-based Retail West.

Just across the street, Westfield is planning to open a major expansion of Westfield Galleria at Roseville in November. The expansion will add more than 100 new retailers, including The Cheesecake Factory, Burberry, Kate Spade, Juicy Couture, lululemon, Oakley, Sephora and BCBG. Westfield is investing $260 million in the center’s redevelopment, which will also include a new dining terrace.

Westfield also has plans underway for a $100 million revitalization for Westfield Downtown Plaza in Sacramento. The complete remodeling project is anticipated to include new tenants, including Target, an upscale dining terrace, and a grocery retailer.

Continuing To Buy

One company that is continuing to expand is privately-held Newmark Merrill. The company has made some acquisitions in California recently, but it plans on ramping up even more when sellers realize what kind of condition the market is in.

“The really good time for us to acquire will be 6 months away,” says Sandy Sigal, the company’s CEO. “A lot of sellers are still holding their assets with hopes that things will get better or not get worse. It is still early in the game; we haven’t seen a lot of foreclosures in the shopping center business, but you can see the makings of it. Retail sales are suffering; it’s a fundamental that may not yet show in delinquencies, but it’s coming.”

The company acquired El Cajon Town & Country Shopping Center in El Cajon earlier this year. Newmark Merrill plans to do some tenant repositioning at the center, including the addition of a Fresh & Easy neighborhood market, as well as a facelift of the center. In all, the company will invest $19 million in its acquisition. As a developer, Newmark Merrill is working on projects where there is necessity. To get things done, it is using more equity, and more cash.

“We’re avoiding anything that we are going to have to take any speculative risk on for the next 2 or 3 years,” says Sigal.

Newmark Merrill is planning an expansion and remodel of the 59,000-square-foot Ralphs Market-anchored Carson Town Square in Carson which will add another 39,000 square feet to the center.

The company is paying particular attention to infill markets, which Sigal says aren’t as dependent on housing growth and tend to have more stable disposable income. In some cases, that means reinvesting in the company’s existing portfolio. In Carson, Newmark Merrill is building an expansion to its Carson Town Center, which it has owned for 20 years.

“We still see strong leasing activity in that market, and we’re still able to make deals there,” says Sigal. “If it were a thinner market that was more reliant on housing growth or housing appreciation, I don’t think we’d be expanding the center.”

Growing Tustin

If you get to Orange County, do not miss The District at Tustin Legacy. Vestar must have told its retailers: break the mold when you design stores for this center. (When you notice Whole Foods has a wine bar, a chocolate bar and gelato bar, you’ll understand). The 1.1 million-square-foot power and lifestyle center is anchored by Whole Foods Market, Target, Costco, Lowe’s, and TJ Maxx/Home Goods. A separate area, The District Promenade, has lifestyle and teen retailers like Borders Books & Music, DSW, Finish Line, Hot Topic, Justice, Lids, Madison Bleu, No Fear, Sunglass Hut, and a 14-screen AMC theater. Restaurants at the center include RA Sushi, Lucille’s Smokehouse Bar-B-Que, Auld Dubliner Irish Pub, Go Roma Italian Kitchen, Peet’s Coffee & Tea, Bluewater Grill Seafood Restaurant, Chaparosa Grill, Johnny Rockets, JT Schmid’s Restaurant & Brewery, Panera Bread, Red Brick Pizza and Sharky’s Woodfired Mexican Grill.

Vestar’s project is only one piece of what’s going on in Tustin. Practically on the same piece of dirt, Shea Properties has plans for the ambitious Legacy Park, an 820-acre mixed-use center on the site of the former Marine Corps Air Station Tustin. Legacy Park is anticipated to include 6.7 million square feet of commercial space, including retail, office, hotels and restaurants, as well as 2,105 residential units, at full build-out, which will take place over a number of years. The center of the project is a 200,000-square-foot retail and restaurant component (the project will contain 500,000 square feet of retail in total). The first phase of Legacy Park, which has tech office space, is opening later this year.

Meanwhile, Up North

Due to the higher barriers to entry and slower population growth, Northern California has not grown as significantly as Southern California in recent years, thus the fall-off hasn’t been as fast.

The Bay Area has seen a number of renovations and new projects over the past several years. Marcus & Millichap reports that builders are projected to bring 300,000 square feet of new retail space online in San Francisco this year. Asking rents are predicted to rise 2.4 percent to $34.38 per square foot in the city, while vacancy is forecast at 4.3 percent for the end of the year.

Forest City and Westfield completed Westfield San Francisco Centre in 2006. The two companies now co-own Metreon, an entertainment center adjacent to San Francisco Centre that was originally developed by Sony. Thus far, the only change announced for the center is that New York City’s famous Tavern on the Green restaurant will join Metreon.

American Assets has added several new tenants to its Del Monte Center in Monterey.

In San Jose, Westrust opened The Plant, a 646,000-square-foot power and lifestyle center in an underserved part of town, earlier this year. All of the centers 10 big box anchors are open. Anchors at the center include Target, Home Depot, Best Buy, PetSmart, Ross, Off Broadway, Office Max and Ulta. Other specialty retailers now open include Justice for Girls, Bath & Body Works and Payless Shoe Source and Styles for Less. The center is built on the site of a former General Electric motor plant; Westrust is renovating a historic 60-year-old office building, which will contain more retail space on the ground floor, when complete. Cornish & Carey Commercial is leasing the center.

Marcus & Millichap has reported good news for the East Bay as well. There, the company states that builders are forecast to bring approximately 900,000 square feet of new retail space on-line in 2008, while vacancy is projected to end the year at 2.9 percent. Asking rents in Oakland are predicted to rise only 1.1 percent to $29.41 per square foot.

Madison Marquette has added new retailers to Bayfair Center in San Leandro as part of a major renovation. Photo courtesy of MCG Architecture.

In the East Bay town of San Leandro, Madison Marquette has transformed Bayfair Mall into Bayfair Center. After acquiring the 820,000-square-foot regional mall in 2003, the company added new tenants and turned more retail to the exterior of the center. The center’s anchors now include Kohl’s, Macy’s, Target, Century Theatres, Bed Bath & Beyond and Old Navy. MCG Architecture designed the renovation of Bayfair.

In Monterey, American Assets has been retenanting Del Monte Center as leases turn over. New to the resort/lifestyle center this year are Apple, Lucky Brand Jeans, Pottery Barn, Williams-Sonoma and Hollister. Lalla Grill also recently opened at the center.