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The Valley Business Scene: What to Watch for in 2003

2003: A LOOK AHEAD The Valley Business Scene: What to Watch for in 2003 Boxed In Watch for a slowdown in buyer and developer interest in big box shopping centers. After several years of building such centers, land, particularly in the San Fernando Valley proper, has grown too scarce to accommodate the size requirements of such centers. At the same time, the big-box environment is changing, with some of those retailers feeling the pinch of the economy and others finding they are not welcome by communities. This past year, Home Depot’s efforts to locate a store in Agoura Hills were thwarted by that community. Other big box retailers like Strouds Inc. and Good Guys are struggling, and more store closures at retailers that have traditionally been tenants of these power centers are on the way. Teenage Wasteland Watch for a shift in the recent emphasis on marketing to teens. Newly flush teenage consumers with a decided willingness to part with their cash spawned a rash of marketing efforts over the last few years, and the San Fernando Valley seemed right in the thick of the teen bubble. Glendale Galleria opened The Zone, Robinsons-May followed with The Spot, and Abercrombie & Fitch launched one of the first of its new store concepts, Hollister Co., in Westfield Shoppingtown Topanga, to name a few of the recent moves aimed at teenage consumers. But reports of weakening sales and higher inventory levels are now filtering in from retailers like Wet Seal Inc., Charlotte Russe Holding Inc. and Abercrombie that cater to the group. Some attribute the slowdown to an over-emphasis by marketers. Others say it’s the recent dearth of fashion news. But there are also signs that, as teens age, they are behaving more and more like their parents and holding more tightly to the purse strings of their disposable dollars. Mixed Signals With the downturn in office real estate, developers, even those that have traditionally worked in the commercial sector, have turned their attention to residential projects. In 2003, watch for mixed-use developments combining retail and residential uses to become even more prevalent. The combination helps developers hedge their investments in uncertain economic times. Such projects, particularly in urban infill sites, are drawing increased support from community and government groups, who see in the combination amenities for residents, an economic development opportunity for older neighborhoods and a way to reduce traffic congestion. J.H. Snyder Co. has broken ground on its Oak Creek project in Agoura, which will include 336 residential units with retail establishments and a hotel. Selleck Properties is underway with El Paseo Simi, a project that will include townhomes, a senior residence and a shopping center, A Los Angeles city ordinance passed in 2002 will make it easier to build housing above retail structures in a number of neighborhoods, but it remains to be seen whether such combinations will ever, ahem, get off the ground along the Valley’s Ventura Boulevard. The Ventura Boulevard specific plan places height limits on new construction, but some believe that as the housing crisis worsens, some of those restrictions will be lifted. Less Than Perfect PerfectData Corp., a $2 million maker of computer and office care maintenance products, could close its doors in 2003. Simi Valley-based PerfectData, which lost $367,000 in the six months ended Sept. 30, 2002, has faced a shrinking market for its products, and the company’s attempts to find avenues for added revenues have so far failed. PerfectData has sought an acquisition candidate to boost its revenues, but negotiations with two such targets have not come to fruition. PerfectData officials did not return calls, but in financial documents it has filed the company said it does not believe it can attain profitability unless it secures a new business or new products. Mall Makeover Watch for redesigns at most of the major malls in the San Fernando Valley following a last-minute shopping spree in 2002. A rash of acquisitions took the ownership of such retail landmarks as the Glendale Galleria and Fashion Square in Sherman Oaks out of the hands of third-party managers and into the courts of two of the most successful mall owners in the country. Owners, by the way, known for their willingness to invest and expand the uses of their properties. “These companies have the financial wherewithal to put a lot of money into the centers in terms of redesign, and it’s very often in their near-term plans when they acquire a mall,” said Paul Morgan, senior equity analyst at Thomas Weisel Partners LLC, who covers General Growth Properties Inc., the new owners of the Galleria. General Growth, which also owns Northridge Fashion Center, currently has about $120 million worth of redevelopment activity underway at its properties. Westfield America, which acquired Fashion Square, has just completed a successful makeover of Shoppingtown Promenade, turning the Woodland Hills complex into an entertainment center. On the Brink The coming year is likely to test the mettle of many companies, but a few will find the road particularly treacherous. The difficulties at these companies go beyond the overall malaise in the economy. – Optical Communication Products Inc., a maker of fiber optic subsystems based in Chatsworth, saw its revenues shrink 74 percent in its fiscal 2002 year, and analysts expect the company to see further revenue reductions in the coming year. Analysts also expect Optical Communication Products to report a full year net loss in 2003 of about $0.14 per share, after eking out earnings of $0.01 per share this year. Optical Communication Products is not only up against a troubled industry outlook, it has also become a very small player in a field that is likely to see escalating consolidation in the next year. – Capstone Turbine Corp., maker of microturbine engines based in Chatsworth, is likely to hold on through 2003, thanks to a substantial nest egg. But that doesn’t mean the company is out of the woods. As the reasons for last year’s energy crisis become clearer, and worries over a potential shortage of traditional energy shortage subside, Capstone’s product is looking less and less attractive to potential buyers. Its microturbines are more expensive than other energy sources and, while the microturbine systems promise cleaner energy, such luxuries are not topmost on the agenda of a cash-strapped corporate America keeping a tight watch on its bottom line. Right now, Capstone is burning through its cash at a rate of somewhat more than $40 million a year. With about $144 million in cash on hand, Capstone appears to have some breathing room. But analysts anticipate that the company’s revenues and earnings will remain relatively stagnant in 2003. – Homestore Inc., the Westlake Village online realty company, is still cleaning up its balance sheet as it endeavors to correct overstated revenues of the past. But Homestore has yet to resolve several lawsuits, nail down a new revenue model without benefit of the advertising revenues it once claimed or complete a restructuring that will bring its costs in line with its new sales expectations. – In 2002 Vertel Corp., a Woodland Hills-based telecommunications software manufacturer, cut its workforce by about 40 percent, but that may not be enough to sustain the company through the slowdown in the telecommunications industry. In announcing its financial results for the third quarter of 2002 ended Sept. 30, Vertel reported a 30-percent decrease in revenues. “Although we plan to increase revenues and continue reducing expenses, we believe it is likely we may require additional financing in the first quarter of 2003 to fund our operations for 2003 and continue operating as a going concern,” said Craig Scott, the company’s CFO. Take the Corner Office, Please Don’t expect to see much improvement in the office real estate market. A boost in first-quarter leasing activity is a tradition of the real estate industry because deals in the works toward the end of the year don’t come to fruition until the early months of the new year. But leasing won’t follow the traditional path in 2003. With virtually no deals in the pipeline in the fourth quarter of 2002, the first and second quarters of 2003 will likely be even gloomier that the comparable periods of the past year. And even if the overall economic climate improves as expected toward mid-year, encouraging companies to expand and relocate, the lag between those decisions and actual lease signings will likely keep vacancy rates up for most of 2003.

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