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Saturday, Sep 23, 2023

Pandemic Doubts

Late last month, Unibail-Rodamco-Westfield announced the cancellation of its $100 million expansion at Westfield Valencia Town Center. Dubbed Patios Connection, the project was supposed to take the former location of a Sears department store and turn it into a 101,000-square-foot Costco, gym and luxury movie theaters. The gym and theater components were canceled last November; now the entire project had been dropped.The scrapped upgrade came just months after a larger strategic shift by the European company. In February, Unibail-Rodamco-Westfield’s top management made the startling announcement during a shareholder meeting that they plan to sell off major U.S. properties by 2022, as earnings were down by roughly 40 percent last year.

As Chief Executive Jean-Marie Tritant succinctly put it: “We are assessing all potential options. At the end of the day, exposure to the U.S. will be minimal, if not zero.” Westfield declined to talk with the Business Journal for this story. But in a statement about nixing Patios Connection, the company cited the pandemic’s impact on retail.“Like so many businesses, 2020 was a year like no other in Westfield’s history,” the statement read. “Westfield moved quickly to adapt to the realities created by a global pandemic and the accelerated consumer trends for the retail industry. Part of this evolution is our strategic decision to bring to a close development plans for the Patios Connection Plan at the Valencia Town Center, which included a Costco. While this plan has come to a close, our commitment to Valencia Town Center continues.”“It is disappointing that this project isn’t moving forward after it was approved,” said Jason Crawford, manager of the Planning and Economic Development at the city of Santa Clarita. “The former Sears building (in Santa Clarita) being vacant hurts the neighboring businesses, and is a drag on economic activity, reducing sales tax for the city.”Market speculationWestfield has another mall-based former Sears store prepared for redevelopment. Last year the company announced it would spend $250 million to turn the vacant Sears space at its Westfield Topanga & The Village shopping center in Woodland Hills into a restaurant and entertainment center.The company also has pending the massive $1.5 billion Promenade 2035 project in Woodland Hills, an overhaul of its Promenade mall which would bring 1,400 residential units, 280,000 square feet of retail and restaurants, 731,500 square feet of office space, a 572-key hotel and even a sports and entertainment venue to Warner Center.It remains unclear how much the COVID-19 retail slump has affected these pending projects.

“We understand that all retail and specifically businesses like gyms and theaters have been greatly affected by COVID,” Crawford said. “We know that our residents would like to see a second location of Costco here in Santa Clarita, and we are continuing to meet with Costco to discuss other location opportunities.”Meanwhile, brokers versed in retail with no ties to Westfield or the Patios Connection project shared their reactions to the news and thoughts about the state of mall-based retail in a post-pandemic economy.Michael Schiff of NAI Capital in Westlake Village said that retail suffering from e-commerce continues and a pandemic year of closures and other COVID-19 related costs and complications have not helped Westfield’s cause.“It sounds like the final nail in the coffin for shopping malls,” Schiff said. “That’s why they are converting (the former) Sears (site) into restaurants.”More shopping centers are converting space to become more “experiential.” Restaurants have become more popular. But even they are havong some troubles.“Restaurants are also suffering from minimum wage and the cost of food going up,” Schiff continued. “They’re also saying ‘We can’t afford the rents.’ Landlords won’t lower the rents because they’re saying, ‘We won’t make a profit at reduced rents.’”Residential componentPasadena-based Kidder Mathews broker William Boyd, who has specialized in the Tri-Cities area for more than four decades, sees Westfield evolving into a residential-retail provider, with the Promenade project as a prime example.“It’ll be a combination – miniature cities – a ton of multifamily, then they’ll want restaurants and retail, and the hotel will feed the restaurants and retail,” he said.

He added that he can understand why perhaps Westfield’s parent company has decided to divest itself of U.S. holdings after a disastrous year for retail.“That’s just too much in that particular market; it’s easier to sell it off and focus on assets all over the world,” he said. “We don’t want that much exposure and investment, so we’ll let someone else (run it).”In Westfield’s announcement of the Patios Connection cancellation, the company left the door open for future development.“Westfield is committed to working with the city (of Santa Clarita) through their new specific plan process and look to continue to be a partner in the future growth and evolution of the city and its residents,” the company said in a statement.

Boyd’s Kidder Mathews colleague Don Hudson, a broker with 30 years of experience, attributed Westfield’s cancellation to pandemic panic.“(They are asking themselves) how to preserve cash; how to preserve our company?” Hudson said.

So what does that mean for the Warner Center projects?   “I’m not sure anybody outside of the company’s inner circle knows,” Hudson said. “They’ve already got the entitlements, and that’s worth a lot.”Regarding the announcement to sell off U.S. assets, Hudson believes it was designed to incite a reaction.“They may be testing (the market for) what they can get,” Hudson said. “They’re selling the sizzle.”Development dead end?Ultimately, Hudson remains bullish on Woodland Hills no matter whether Westfield holds onto or sells off its retail properties at Warner Center.“This is a vibrant community,” he said. “If you’ve got something worth going to, people will go there.”Likewise, Schiff at NAI Capital thinks the shopping centers will survive.“So, what do you do if you’re Westfield and you own this huge project?” he asked.

“They will always fill those units, it’s a matter of what price. … They’ll have to drop the rent.”If Westfield end up leaving the market, the company will be among a number of large corporations and builders that have reached the same conclusion.“The cost to build, two to three years to get your project entitled – a lot of these developers are saying ‘I can’t make any money,’” Schiff explained. “A lot of these developers say it just will not pencil out anymore. The cost of land, the city keeps raising the fees. Most of the developers are saying, ‘I’m done building in California.’” 

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.

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