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Wednesday, Sep 27, 2023


Retail/garcia/21″/LK1st/mark2nd By SHELLY GARCIA Staff Reporter Recently, when a neighborhood shopping center went up for sale in Northridge, more than 20 bidders came to the table. Neighborhood retail centers are a dime a dozen in the San Fernando Valley. But what made this one, the Devonshire Reseda Shopping Center, so attractive was the fact that it was almost half empty. Sound crazy? It isn’t. For the bidders on this Northridge center and others like it, a half-empty center is chock full of opportunity. It promises the chance to bring in a whole new breed of strip-center tenants that are more likely to stay longer and pay a higher lease rate than the mom-and-pop retailers that have traditionally inhabited these centers. “Things have changed. Retailers have changed,” said Jay Kerner, president of KMI Real Estate Group Inc., which just bought the Devonshire Reseda center for $19.5 million. “Where before, (retailers) wouldn’t go into a storefront, now you’re seeing them go into street locations.” In the past, better retailers flocked to the malls, leaving the strip centers to doughnut shops, nail salons and takeout Chinese restaurants. But since then, as malls have lost some of their cachet and competition for the retail dollar has intensified, retailers have begun to seek out neighborhoods where they can be close to their target markets. Often, that is a neighborhood center, typically of 100,000 square feet or less. “We continue to be over-stored, so the name of the game is location,” said Richard Giss, a partner with the retail services group at Deloitte & Touche; LLP. “If you can find a location closer to your demographic, retailers are more interested than they’ve ever been.” By trading in its mom-and-pop tenants, a center owner can often raise rents from an average of $1 to $1.50 a square foot to $1.75 to $2.25 a square foot. Just as important, the owner stands to attract tenants that are better capitalized, so turnover, and the expense it brings, is reduced. But for most centers, which are 20 years old or more, the strategy hinges on the vacancy rates. Developers need a significant amount of vacant space in order to renovate the look of the center in a way that will draw upscale tenants. Vacancy rates in shopping centers in the San Fernando Valley are averaging under 10 percent, according to Marcus & Millichap, an Encino real estate brokerage. As a result, these kinds of centers are few and far between. “For every one that’s available, there are 100 people who want to buy it,” said Matthew May, a partner with Madison Partners who just represented the buyers for Plaza del Sol, a small center in Encino which is 70 percent vacant. “A lot of these transactions are not listed for sale,” May added. Many have absentee owners or managers who have not taken an active interest in the property and, as a result, failed to fill vacancies when they arose. Or, as in the case of Devonshire Reseda, the management may have prepared for an eventual sale by deliberately leaving spaces vacant as the leases expired. “I look for these opportunities all the time,” said Dave Norcott, managing director of Seeley/Colliers, who brokered the sale for KMI. “It’s a difficult process.” Many older centers have tenants who have been there for 10 years or more. Their businesses may be marginal, but by now, the rent is dirt cheap and they’re unwilling to leave. “If I can find one opportunity a year in a serious endeavor, I’m feeling happy,” Norcott added. Only 13 shopping centers of 50,000 square feet or less changed hands in the San Fernando Valley in the first nine months of 1998, according to Marcus & Millichap. In the next largest category, centers of 50,000 to 100,000 square feet, there was only one sale for the same period. The activity level has remained relatively constant over the past two years. For the sites that do become available, developers hope that a facelift, coupled with a good location, will attract a different class of tenant to make the project worthwhile. “There has to be an upside potential relative to the near future vacancy,” said Kerner. “The whole idea is to achieve greater rents.” In addition to stores like The Gap, Old Navy and Starbucks, coveted for their ability to attract other upscale merchants, developers have set their sights on restaurants that encourage leisurely diners rather than doughnut and sandwich shops or takeout joints. “In a center like Northridge, I could definitely see an operation like an Islands coming in,” said Kerner. “Places that have atmosphere.” KMI, which has not yet begun its remodeling, has not yet signed any lease deals, but it is not alone in believing in the potential to transform these centers into upscale shopping and entertainment venues. “A lot of mall retailers are going on the street,” said May, pointing to national chains like Ethan Allen, Athlete’s Foot and The Good Guys. “You’re not going to have a ticket broker and a nail salon. You’re going to have more food uses and services like a day spa.” But while some national retailers have lately ventured out of the mall, others say the opportunity to attract these stores to neighborhood centers is limited. “You’re not going to see a rush to strip centers,” said Giss at Deloitte. “Some retailers can be successful as a stand-alone operation, but it is a minority. I see (the movement to street locations) as people taking advantage of a particular opportunity, not a shift in the landscape.” At the same time, a renovated shopping center does stand to attract more traffic than its older neighbor, and that’s good for real estate values, Giss points out. “You take a center that’s long in the tooth and dress it up and all of a sudden, it’s filled, and it’s going to pull from some other center that hasn’t renovated.”

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