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Thursday, Jun 8, 2023

A Dirt Cheap Lease

When Westfield Group LLC finally broke ground a few weeks ago at its Village at Westfield Topanga project, it had Costco Wholesale Corp. to thank. The Issaquah, Wash. retailer and the Australian mall developer struck a deal for a 150,000-square-foot anchor at the $335 million development almost four years ago. The commitment helped Westfield push forward with the massive development amid a long recession and seemingly endless litigation from opponents. “You get a Costco and a couple of major leases done and the rest start rolling,” Westfield Co-Chief Executive Peter Lowy told the Business Journal after the March 24 event. “These things build momentum.” Here’s what Lowy didn’t say: Costco may have scored one of its sweetest deals in securing a spot in the development, which connects the Westfield Topanga and Promenade malls with shops and restaurants, in addition to the discount club. Costco signed a 20-year lease valued at roughly $65million with Westfield for 12 acres of land, according to a source familiar with the deal. That puts the monthly rent for Costco at about 52 cents a square foot for the land, though the retailer is bearing its own construction costs for the building and a 700-space parking structure. In addition, the source said there is some potential for rent increases based on the retailer’s sales, but was unaware of the formula. Local brokers say Costco timed the deal almost perfectly, reaching its lease close to the bottom of the market, just two years after the financial crisis and while the recession still had a firm grip on the real estate markets. “In the world of deals, it’s a pretty sweet deal,” said Todd Nathanson, president of illi Commercial Real Estate in Encino, who was not involved in the deal and had previously been unaware of the details. But it’s tough to precisely compare the Costco lease rates to other deals, because most retail leases are for built-out space, not land. As a proxy though, Chris Pernevi, the research manager at the Irvine office of Colliers International, noted that since Costco inked the deal, freestanding, big box retail space in the San Fernando Valley has jumped about a third from about $1.75 a square foot triple net to $2.29 a square foot triple net as of the end of last year. At the bottom of the market in late 2008, the number fell to $1.60 a square foot. (Triple net requires the tenant to pay a portion or all of the expenses related to ownership, such as maintenance and utilities.) There were reports that Brent Weirick, an executive vice president at the Encino office of Colliers, represented Costco in the Westfield deal. The broker worked with the retailer for its location at Plaza Pacoima, but declined to comment on the Woodland Hills deal. ‘Architecturally appealing’ But while Westfield may not have reached a favorable land lease, the Costco deal helped build support for the project. Westfield has reported the 550,000-square-foot first phase is already 60 percent preleased. The full list of tenants has not been announced, but Lowy leaked a few names at the groundbreaking last month, including Larsen’s Steakhouse and a Burke Williams Day Spa. The source familiar with the Costco deal said Westfield is actively looking to bring a large gym and grocer into the development, but was unaware of any progress in that regard. The land for the Costco store was once home to Black Angus and some other small shops that closed years ago. The store will replace another Costco at Canoga Avenue and Roscoe Boulevard, and will look to be a step above the typical outlet, said Bob Holden, general manager of the Costco in Canoga Park. “It’s going to be much more architecturally appealing,” said Holden, who will run the new location once it’s complete. “We’ve gone into upscale areas before and now what the customers will want. This is going to be one of our best stores.” The store, along Victory Boulevard with a gas station at Owensmouth Avenue, should open by the middle of next year. The project was able to break ground after Westfield settled its two-year-old lawsuit with the Woodland Hills Homeowners Association. The group filed its suit in 2012, arguing the Costco and its adjacent gas station would violate building guidelines by encouraging car use – while a key aim of the area’s specific plan is to make Warner Center a more pedestrian-oriented area. The suit was dismissed last summer, and though the homeowners appealed, a settlement was reached last month. Westfield declined to discuss details of the settlement, and Gordon Murley, president of the homeowner’s group, wouldn’t say much more. “We both made our statement and they wanted it all confidential. We think it will work out well,” he said. Ripple effect Westfield has agreed to build the project’s first phase within the next three years instead of over a longer period of time after the L.A. City Council voted last month to award the developer up to $59 million in tax breaks over the next 25 years. The development’s first phase will feature the Costco, as well as retail shops and restaurants. However, Westfield has decided to hold off on constructing a 158-room business-class hotel, which was in the original plans, citing market conditions. A second phase that could include residential units and office space is still on the drawing boards. Lowy said it hasn’t been decided when that phase would start. “Consumers want more density. The more density, the less sprawl, the better the lifestyle,” he said. “But we’ve got to build and lease this up first.” Meanwhile, the impact of the Costco lease and the overall development is being felt beyond its borders. Nathanson the broker is currently marketing about 11,000 square feet of retail space across the street from the Costco site that currently houses a Men’s Wearhouse on a short-term lease. Since Costco made its commitment to come to Warner Center, Nathanson said rents have gone “through the roof.” “In mid-2010 we were marketing space there at about $1.85 a foot and entertaining offers at lower numbers,” he said. “Now we’re marketing at well over $2 a foot.” Lonnie McDermott, senior associate at the Encino office of Marcus & Millichap Inc., believes that Westfield is satisfied, though it would likely want to renegotiate the lease if it could. “Obviously the deal would be more now, but it’s tough to say how much,” he said. “But I feel like Westfield had to get that big anchor tenant. It’s a win-win for not only Costco and Westfield, but the whole community.”

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