Retail Moves Into Mixed-Use World

Nellie Day is a contributor to Real Estate Southern California, from which this article was excerpted.

Whether it’s the mom-and-pop store on the corner lot or the Super Wal-Mart off the freeway whose square footage rivals Disneyland, one crucial ability that retailers must fine tune in today’s market is how to properly and skillfully negotiate their leases. This is because, like it or not, most of Southern California is still boasting a landlord market; and with such limited available land and space the option to buy is, for many, just not an option.

“The [retail] market is very hot, especially in downtowns like San Diego,” says Corinna Gattasso, associate vice president of San Diego-based Burnham Real Estate Development’s Urban Retail Group. “I have many tenants competing over space. I also have tenants that have entered our market in the past several years that are the only ones in their niche in the entire city to do so.”

Fueled by the booming housing market, one would think retailers would have the pick of the litter when it came to spaces, as so many new residents meant more shopping centers, more opportunities for expansion and more retail choices. This was not, however, the situation that many retailers faced when negotiating leases over the past year. Some Southern California staples, such as Ralphs and Starbucks, had enough pull and staying power that, to them, leases boiled down to two points: demand and expand.

“We had a deal with Starbucks when we were negotiating our Sierra Vista Plaza in Murrieta,” says Alan Clifton, vice president of leasing and disposition with Passco real estate company. “In other deals Starbucks had done with us we gave them more in tenant improvement allowance because we felt they would not only attract other tenants, but also that, when existing tenants came up for renewal, we could get more from them. We got that center up to 98% leased before eventually selling it [for $13 million]. Many [leases] are done like this, with the amount of foot traffic a retailer can bring in being a major point.”

This is great for Starbucks, but not all retailers have as big a bargaining chip as this coffee powerhouse. Even some well-known retailers are finding that their brand name isn’t giving them much to negotiate with as Southern Californians find themselves embracing lifestyle centers and their upscale shops.

“Most landlords at those lifestyle centers are very interested in keeping the synergy within their center,” says Mark Baziak, senior vice president and a retail specialist out of Grubb and Ellis’ Newport Beach office. “Instead of doing a Subway their looking to see if there’s a Panera Bread or Corner Bakery or something more edgy that could go there. It keeps rents up and it keeps them rising.”

In lifestyle centers, wealthy neighborhoods, booming suburbs, certain ethnic enclaves and downtowns with tons of mixed-use and condos being constructed, the retail market is so saturated that many tenants are at the mercy of not only the landlords, but the neighborhood and the surrounding businesses as well.

Klaus Tabar, who specializes in tenant representation and is president of Laguna Beach-based Pointe Commercial real estate, agrees that a retailer’s neighbors, especially in a mixed-use project, can make or break a lease negotiation–whether it is the tenant or landlord doing the negotiations.

“It’s quite confusing to have either office or residential above [retailers'] stores,” he says. “Sometimes a retailer isn’t a good fit for a neighborhood, but sometimes it’s the retailers with the concern–the concern of having to share parking with condo owners, which can put a squeeze on their customer convenience, and such.”

Many experts agree, however, that when mixed-use neighbors are on the same page, the results can be extremely positive. “Investors are becoming more comfortable with the mixed-use concept,” says Michael Dee, senior vice president and national director of retail for Grubb and Ellis, in Grubb’s summer 2006 Retail Market Trends report. “At the same time, they are exercising more caution toward traditional grocery anchored centers, which are under pressure from Wal-Mart Supercenters and Super Target.”

It seems that, with the unavailability of land, mixed-use projects and leases aren’t just for downtowners anymore.

Anaheim is another city about to reap the benefits of mixed use. Inside Platinum Triangle, Anaheim’s seven-million-sf-plus mixed-use development, will sit the Stadium Lofts, which are composed of 390 for-sale condos above 12,000 sf of street-level retail. Burnham Real Estate Group provided the lease up, which will feature a mix of tenants that include an El Torito Grill, which signed a 15-year, $5.7-million lease for more than 8,000 sf of space, as well as a Subway, Juice it Up and Kelly’s Coffee & Fudge. Burnham is also slated to lease Shop A-Town, the 135,000-sf retail portion of LNR Properties’ A-Town. Located in the center of Platinum Triangle and will also include 2,681 residential units including townhomes, live-work lofts and about 11 high-rise towers.

Gattasso again notes that the mixed-use retail tenants were chosen with a lot of consideration put into the surrounding neighborhood and what would work best in it.”It’s a completely different dynamic when you have people above you,” she says. “You have to take into account the noises, aromas, types of clientele who could affect your tenants. You want to create the right image for your building. You want to study the market and figure out what’s taking place–to look at the big picture and see what’s happening today. Retail is very specific because we have to be concerned with variables that someone in office or industrial doesn’t. Things like co-tenancy, signage, being on what side of the street, what the demographic is, whose across the street from you, whose one block down, these are a lot of things to consider.”

A lot is for sure, but if these variables are properly taken into account and monitored, leasing retail space in Southern California can be quite smart…and profitable.