Santa Monica’s Third Street Promenade is undergoing a change of character as independent restaurants, increasingly falling victim to escalating rents, are driven to cheaper space on less trafficked streets.

Operating on narrow margins and unable to compete with their national retailer neighbors, independent restaurants have seen the popularity of the trendy retail strip, once their life blood, turn against them. In a matter of years, local real estate and retail observers said, the Promenade might resemble an indoor mall of chain stores within a halo of restaurants on Second, Fourth, Broadway and Wilshire.

“Even though the restaurants and independent retailers are being pushed off the Promenade, it’s creating great opportunities in other areas,” said Randy Starr, executive vice president of Tenzer Commercial Brokerage with offices on the Promenade. “Fourth Street and Second Street are becoming restaurant row.”

So far, the casualties include Remi, whose space will be taken by one of two new Tommy Hilfiger stores on Third Street, and Charlie Temmel and others are walking a thin line.

“(We are) in negotiation with our landlord and they’re looking to triple our rent,” said Dan Ringwood, owner of the Teasers restaurant and night club. “Our lease is for 90 percent of current rental rates for restaurants and that’s where we’re not seeing eye to eye.”

While many are quick to say the rent inflation has come about naturally and does not portend a death knell for restaurants at the Promenade, restaurant owners and the organization charged with managing downtown business don’t want to lose the sidewalk dining experience.

“We need to do something to keep the restaurants in the district and on Third Street in particular,” said Kathleen Rawson, executive director of Bayside District Corp., the 11-member board appointed by the city council to direct business in Santa Monica. “They create the transition from outside to inside.”

Part of a cycle

The rent situation that is forcing eateries off the Promenade is a cyclical animal that once worked in their favor. Rawson said the Promenade was built around movie theaters, which attracted foot traffic, which in turn attracted restaurant owners and then retailers. As the crowds reached critical mass, the demand for space increased and restaurants, with a typical profit margin of 2 percent to 3 percent, now find themselves holding the doggy bag.

One Italian restaurant on the Promenade is paying $1.75 a square foot on a lease that has two years remaining. The restaurant’s controller, who spoke on the condition of anonymity and asked that the business not be named, said there’s considerable worry about 2002. She said she expects the landlord to ask for $10 per foot.

“All things being equal, if rent goes up to fair market value, we’re going to be in a quandary,” she said.

David Khedr owns retail and office space in the 1200 block of the Promenade. He said property owners on the Promenade still are paying assessments as debt service on a $12.5 million bond issued by the city and are entitled to use the favorable market conditions to make some of that money back. He said he just signed a tenant to a 10-year lease at $7.50 per square foot.

Khedr said he had a restaurant in his building for a while, but it did poor business and could not keep up with rent payments. A better restaurant might still be there, he said.

“The good restaurants stay and pay the market rent because they are doing business,” Khedr said. “But they have other opportunities. They don’t have to be on the Promenade.”

Randy Brust, an appraiser with Crescent Realty Advisors, affectionately called the Promenade situation “insanity.” Concurring with Khedr, he said it’s really nothing more than good ol’ American capitalism.

“The market makes the rents,” Brust insisted.

Long-term leases

One reason the rent increases seem so dramatic is that they are affecting businesses whose long term leases, now coming due, are significantly below market rates. Another is that the sheer number of feet pacing the Promenade virtually guarantees flattering sales numbers.

“It’s such a home run location that they’re willing to go in and spend the extra money on rent,” said Jeff Kreschek vice president of leasing at CIM Group. “I think that’s a natural result. It’s clear, however, that restaurants don’t have the same margins and they have a tougher time competing for space.”

Not only do the restaurants have their profit margins working against them, they are competing in a Westside market saturated with restaurants.

Regardless, everyone wants to be on Third Street. Broker Rafael Padilla, senior vice president at Muselli Commercial Realtors said the Promenade remains the most sought-after retail destination in greater Los Angeles. If there’s room for restaurants, fine, he said. If not, they will find their way to other locations and hungry people will follow.

That remains a matter of debate.

“You can’t turn this into just a retail outlay and expect people to disperse from there into the smaller streets for restaurants,” Kreschek said.

Rawson said she is part of a working group of property owners, council members and community activists looking for solutions to the rent escalation and increasing presence of chain retailers. It’s a delicate balancing act between property rights and long-term vision, she said.

“The concern is that if the Third Street Promenade becomes like an indoor mall, we’ve lost an element we think is important,” she said. “At the same time, we don’t want to snatch the rug out from under the property owners.”

Moving nearby

Others, including the restaurant owners disagree. A number of restaurants have been taking space on Second and Fourth streets, including Buca di Beppo on Second and Benihana, which is moving into an existing building in the 1400 block of Fourth Street. “We need to watch it carefully,” Kreschek said. “We need to be sure we don’t end up with all chains.”