Despite concerns over the fate of the retail market, some are still interested in the asset type, as evidenced by a recently announced $27.4 million construction loan for a three-story speculative development on the Third Street Promenade in Santa Monica. Once completed, the project will have 25,000 square feet of retail space, including 50 feet of retail frontage on the iconic street.
It will also have a 2,500-square-foot rooftop deck.
Sawtelle-based Blatteis & Schnur Inc., the owner of the property, has already torn down the 77-year-old building that previously sat at the site.
The loan for the project at 1404 – 1408 Third Street was arranged by Beverly Hills-based Sonnenblick-Eichner Co. earlier this month. The money was provided by Civitas Capital Group, a private debt fund.
Sonnenblick-Eichner Co. Principal David Sonnenblick said the company has been working with Blatteis & Schnur for decades. The company acquired the property in 2019 before Covid and started working with Sonnenblick-Eichner Co. in 2022 on financing the project.
Sonnenblick said finding financing for retail projects now can be challenging.
“Because of the speculative nature of the development and also being retail, there were a lot of lenders that did not feel comfortable stepping up and making the loan without a tenant in hand,” he said. “Retail is more difficult than, say, a multifamily or an industrial deal … For office and retail on a speculative basis, coming out of Covid is difficult.”
Civitas, he said, knew the location well and was still interested.
The project isn’t Blatteis & Schnur’s first in the area. It is also the developer behind the Apple store on the Third Street Promenade.
As for the decision to build multiple levels, Sonnenblick said, “you only get one shot at building and you want to maximize your square footage.” He added that three stories is also what the zoning for the property allows.
Once completed, the property could be leased to one or multiple tenants.
He added that the upper levels could potentially be used by a creative office tenant as well.
Retail has suffered due to inflation and banking troubles, according to a report from Jones Lang LaSalle Inc. The brokerage found that nationwide there was 9.1 million square feet of retail real estate absorbed in the first quarter, down from 20.1 million square feet the previous quarter.
Compared to pre-Covid levels, however, JLL found that most major cities are seeing rent growth. Most demand is coming from discounters, fast casual restaurants and quick service restaurants.
Sonnenblick said his company hasn’t yet seen a large amount of interest in retail real estate, adding that the Blatteis & Schnur Santa Monica development was unique because of its location.
Sonnenblick said the company saw it as “an opportunity to develop what I believe will be the nicest building at the Promenade.”
He added that high interest rates made some loans difficult, but there was still money in the market.
“There’s no shortage of capital out there,” he said. “Every institutional capital provider has money. The issue is that the cost of capital is more expensive than it has historically been, and the market has to adjust to that.”
