As retail rents skyrocket, some mom-and-pop operations are taking the money and running before conditions get any worse.
So-called lease buyouts, where a national chain offers an independent business a sizable amount of cash up front to vacate prime property, are being used more often throughout L.A. these days.
It’s a symptom of the tight market in some of the more successful shopping districts such as the Third Street Promenade in Santa Monica, where high rents are edging into nose-bleed levels.
As usual, to be in prime property you’re going to pay the price.
The Promenade’s success in developing an outdoor shopping area with food, clothing, books and entertainment has made it a coveted place for large retailers. But monthly rents in the area have soared to more than $9 a square foot.
To forestall paying that much, some retail chains are now working out deals to give smaller retail businesses cash to take over the remaining years of their leases. National shoe chain The Walking Co. recently did such a deal to claim a spot on the Promenade, paying an undisclosed sum to entice restaurant/nightclub Chillers to leave.
“We call it a lease buyout,” said Kathleen Rawson, executive director of the Bayside District Corp., which oversees economic activity in the Promenade and its surroundings. “Walking Company took over the Chillers lease. National chains are taking over older Main Street stores. It’s happening in a lot of places.”
According to Reis Inc., a New York commercial real estate analysis firm, Santa Monica and other parts of the Westside have the highest retail rates in Los Angeles County. The average annualized rent at prime Westside shopping centers those that provide the most services and tend to have large anchor stores was $40.28 per square foot ($3.36 a month) for the period ending June 30.
Other expensive centers are those in the western San Fernando Valley, where average annualized rent is $34.34 per square foot; the Tri-Cities area, at $32.26 a foot; the western San Gabriel Valley, at $26.10; Long Beach/Cerritos/Carson, at $27.26; and South Bay/Torrance, at $35.08.
“Everything has spiked up over the last few years,” said Bill Bauman, executive vice president and director of retail properties at Colliers-Seeley International. “In Burbank, we’re seeing the highest rents ever. South Bay has always been a good retail market, especially in Torrance and at the beaches where there’s limited opportunity to get in.”
While lease buyouts haven’t become endemic, they are on the rise, local real estate experts say. In areas that aren’t under a single owner, large retailers want in on places where young, well-educated people shop. And they are willing to lure smaller operations, especially independent proprietors who can’t afford to stick it out, with money up front.
“Rodeo Drive has gone from around $15 to $20 a square foot (per month) in the past few years,” said Chuck Dembo, owner of Beverly Hills real estate firm Dembo & Associates. “Say a merchant has three years left on his lease, and he’s under market by several dollars a square foot. When the lease expires, there’s no way he can pay the new rent. Why not ‘call it a day’ early? They see the writing on the wall.”
Other areas where Dembo has seen or heard of such deals include Old Pasadena and Robertson Boulevard in West Hollywood, Melrose Avenue, Ventura Boulevard in Studio City and Montana Avenue in Santa Monica.
Neighborhood centers
Some of these areas, of course, aren’t designated as regional centers but as neighborhood or commercial centers, which are smaller shopping areas that tend to have lower rents.
According to analysis firm Reis, the Westside had the highest neighborhood retail rents at $26.66 a foot, per year. Second was the Burbank/Glendale/Pasadena area, with neighborhood center rents at $23.94.
Lease buyouts are more likely to occur in areas like Santa Monica, where there are dozens of landlords. It is much less likely to happen in large developments. At the Commons at Calabasas, where large retailers pay between $3 and $6 a square foot per month, depending on the size of the space rented, developer Rick Caruso has made a conscious effort to incorporate national chains with smaller mom-and-pop operations. Since his firm has control over the whole center, any store that wants to sell its lease needs permission to do so. And he’s reluctant to give that permission.
“We don’t want to have tenants with the authority to put someone else in there that we don’t want,” he said. “A couple of our smaller tenants have been approached by larger chains and we’ve said no. You have to have a mix of national chains and smaller businesses.”
The struggle to maintain a diverse atmosphere exists for places such as the Promenade, which built its reputation on having a diversity of shops.
Tom Larmore, a member of the board of the Santa Monica Chamber of Commerce, said he has heard of more cases of large chains taking over expired leases rather than outwardly buying them out.
“Certainly it’s an issue of concern, and one that we share with the city,” he said “There used to be a concern there were too many restaurants, and not enough retail. Now, there’s concern that restaurants have been priced out. The businesses that are being replaced tend to be smaller businesses, who are our members.”
But it’s not as if these smaller retailers aren’t profiting by the rise in rents as well, real estate experts point out.
“Maybe a clothing store has other stores, but this one place isn’t working out,” said Barbara Tenzer, president of Tenzer Commercial Brokerage in Santa Monica. “So they think, ‘I’m gonna ask for a lot of money from these (national chain) retailers and see if I can get it.’ It can make sense for all parties.”
