Staff Reporter

Thinking about hanging a shingle on Rodeo Drive or the Third Street Promenade? Better get ready to pay dearly that is, if you're lucky enough to find an available shop.

Vacancies along posh Los Angeles-area shopping corridors have become virtually non-existent, even as rents have soared into record territory up 20 percent to 25 percent from a year ago.

"We've surpassed the market of the late '80s. The market is so strong in prime areas that there's little or no vacancy to be had," said Dan Blatteis, owner of Blatteis Realty.

Rodeo Drive's vacancy rate is below 2 percent, and annual rents there are $18 to $20 per square foot, up 25 percent over last year, said Blatteis. Mont Blanc last month set a record by leasing a 1,000-square-foot shop for $25 per foot, he added.

On the Third Street Promenade in Santa Monica, rents have climbed to $9 per square foot, up from $5 to $8 last year, according to Matthew May, a partner at brokerage Madison Partners.

Even so, national chains continue to rush in. The Gap just opened its 45,000-square-foot store and Banana Republic is relocating to a 40,000-square-foot location, more than five times the size of its current space.

"Inventories are growing. Look at Ralph Lauren, who started with clothes and now has home furnishings. Gap started with clothes and now has cosmetics. Go to Starbucks and now you can buy chocolate and sandwiches with your coffee," said May. "Retailers have spent millions to build their image and now they want to expand their offerings to correspond with that."

Even along less-prominent stretches, such as Santa Monica's Montana Avenue, rates have doubled to $6 per square foot the rate that newcomer Peet's Coffee is paying for its newly leased space of about 2,000 square feet.

Along Beverly Drive in Beverly Hills, between Wilshire and Santa Monica boulevards, there is no vacancy and rents have nearly doubled to $7 to $7.50 per square foot. Similarly, finding space on Colorado Boulevard in Old Pasadena is virtually impossible, while rents there have soared 50 percent in the past year, to $5 to $6 a foot.

National chains, such as The Gap and Ann Taylor, are primarily driving the increases, as they try to lock in rents that conceivably could go even higher.

"It's the mid- to larger-size chains that are moving in. Smaller mom-and-pop stores can't afford to absorb the increases, whereas larger ones have the financial wherewithal to do that," said Jackie Fernandez, director of Southern California retail services of Deloitte & Touche LLP. "Landlords put a 'percentage rent clause' in contracts that stipulate that if the tenant's sales increase beyond a certain point, a landlord can collect a percentage of revenues. National chains can absorb that. It's hard for smaller stores."

Besides strong sales increases, another factor driving the higher rents is a belief among many national chains that being in a prestige neighborhood is essential to building brand awareness.

"At Rodeo Drive, they're looking for advertising value. They'll attribute a portion of their rental budgets to advertising. Those stores like Gucci and Ferragamo need to be a part of that premium venue to maintain their brand image," Blatteis said.

But even the national chains won't pay rents so high that they would drive a store into the red, several retailers and brokers said.

"We want to make a profit. We waited for more than seven years before choosing this location. We waited for the best location and the right price," said Ron Michaels, general manager of Louis Vuitton, which is preparing to relocate to a new Rodeo location double the size of its current one.

Clearly, retail rents are tied to sales, and some say local sales growth may be peaking out.

"I'd say that we wouldn't go up much beyond 10 to 20 percent (above current rates), but in theory, things can keep going if there is no vacancy. Ultimately, it's based on store sales and Gap and Ann Taylor are posting 25 to 30 percent increases in sales," Blatteis said. "If they can sustain that, then there's no telling what can happen."

Only one force would be powerful enough to reverse the trend: an economic downturn.

"We need a good recession to stop spending, which dries up sales. Otherwise if sales go up, rents go up," said Mark Tarczynski, a retail specialist with CB Richard Ellis Inc.

Despite the dizzying increases, Los Angeles remains a bargain compared to New York, where annual rents hover at $37.50 per square foot on Madison Avenue and $47.92 on Fifth Avenue.

"Retailers are getting a better deal here than elsewhere," said Carmen Korey, vice president of retail services for brokerage firm First Property Realty Corp. "It's kind of a weighing process. They weigh the demographics, the products and the viability of the community. There's more to it than just rent."

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