By Ed Moosbrugger
March 18 -- There's been a rare sighting on the Third Street Promenade recently: a sign saying retail space is available. The “available” sign for a multi-level retail space formerly occupied by the Borders Books and Music store reflects the tougher times for retailers and landlords as even premier shopping districts are impacted by the recession.
“It’s definitely a different environment,” said Robert O. York, a retail development consultant to the Bayside District Corp. “A lot of retailers are experiencing some level of pain. There is a shift in demand and in acceptable rent levels.”
The demand for retail space has lessened in the face of the recession, falling retail sales and predictions of thousands of store closures around the country. Downtown Santa Monica has not been immune from troubles faced by both chains and independent stores.
The closure of the Borders store and the impending closure of the Circuit City store on Fourth Street have put some big spaces on the market, and there are reports of difficulty leasing some locations in areas surrounding the Promenade.
Still, Downtown Santa Monica is considerably better off than many other retail districts.
“We’re in a relatively good position in a terrible economic environment,” York said, noting that Downtown Santa Monica entered the downturn with few retail vacancies. “Third Street is still a highly desirable location relative to some other areas.”
“We’re in a very special area,” said Barbara Tenzer of Tenzer Commercial Brokerage Group and a member of the new Bayside Board.
It has been rare to see a retail “For Lease” sign on a Third Street Promenade building because demand has been so strong that spaces were rented before landlords even needed to put up a sign.
That’s changing.
For one thing, fewer retailers are looking to expand.
“Many are just sitting on their hands trying to conserve cash,” York said. More than a few are revisiting landlords,” although not as much in Santa Monica.
Tenants are starting to ask for rent reductions and spaces are not leasing even at lowered rents, said Vince Muselli of Muselli Commercial Realtors.
A number of leases are coming up for renewal in the next 12 months, York noted. That should give a better idea of where the market stands.
Downtown, which had a good year for most of 2008, started to suffer late last year in the wake of the sub-prime mortgage meltdown, said Tenzer. But things may be improving a bit, she said.
“I’m seeing a light at the end of the tunnel. It’s a very long tunnel,” Tenzer said. “It's a lot better than it was ... There are people who are willing to take a chance. That is a change from two months ago.”
She noted interest from companies from overseas and outside California.
It’s a very good sign, she said, that there are a lot of people interested in the Circuit City location. That store is being closed as the chain shuts down operations in the United States.
There also is interest in the former Border’s location, said Tenzer, who is one of the brokers handling the property.
The Promenade, which is filled mostly with chain stores, seems to be holding up better than some of the other streets in Downtown, which rely more on entrepreneurs to fill the spaces.
Muselli doesn’t expect significant changes in tenants or rents on the Promenade over the next year, but he expects more vacancies in the rest of Downtown.
Some spaces on 2nd and 4th streets are still not leasing after being on the market for as long as a year, Muselli said.
York agrees that some of the peripheral areas may have problems.
“A lot of entrepreneurs are still trying to figure out ways to get into business Downtown, but the financing situation is extremely difficult,” York said. “It’s so dramatically different than two years ago.”
There is somewhat of a standoff on rent levels, York said.
“On paper it looks very similar to the end of last year, but there are very few transactions,” he said.
Keeping spaces filled will remain a challenge for some time.
“It’s not easy. You have to work twice as hard,” Tenzer said. “I think landlords have to be flexible in this market.”
One of Downtown's strengths has been retail business generated from hotel visitors, but that part of the market has also begun to suffer.
Santa Monica hotel occupancy rates and room rates declined in both November and December. The steepest drop came in the final month of 2008, with the occupancy rate falling 7.3 percent and the average room rate declining 3.4 percent (compared with rates in the same months of 2007) among hotels tracked by PKF Consulting.
For the year, the occupancy rate fell 1.3 percent to 81.2 percent and the average room rate rose 3.8 percent to $289.24. Santa Monica had the highest occupancy rate among Los Angeles County submarkets reported by PKF.
