Rent or own?
That question has plagued many young Angelenos sifting through the pros and cons of buying an entry-level condominium or renting a two-bedroom apartment.
For the most part, retail and wholesale apparel companies have been spared the headache usually they can only lease space. But what if leasing wasn’t the standard? Would business people do the same calculations and jump at the opportunity to be condominium owners?
A series of new commercial condo projects is testing that theory. Developers of these projects are confident that the skew of the current commercial market with its ascending rents and short-term leases will tilt the equation toward the “own” direction, at least in L.A.’s dense Fashion District.
“It is very analogous to the residential side. Some people are more comfortable renting and others want to own their unit,” said Kent Smith, executive director of the Fashion District’s Business Improvement District. Downtown’s Fashion District is where the commercial condo concept has its longest local history the 300-unit San Pedro Wholesale Mart was built in the mid-1990s and an annex was added a couple years ago and is where the largest new projects are going. In the vital apparel industry core, these condos give wholesalers a place to display their clothes to buyers for retail stores.
Among the latest developments is the 200-unit Los Angeles Fashion Center or L.A. FACE, slated to open next year on South San Pedro Street, and the 200-unit Stanford Regency Plaza, scheduled for a 2008 launch, on Stanford Avenue and Pico Boulevard. Other smaller commercial condo complexes are cropping up as well.
Alix Chang, operations manager of Khan Development Co. Inc., is responsible for attracting buyers for L.A. FACE’s units and said about 85 percent of them have been sold since they went on the market in 2004. The average price for a 1,200-square-foot space is now $750,000, up from $360,000 two years before and well over the county’s average residential condo price of $415,000.
“The popularity of this sort of a project is very, very high. The price has been doubled, but it is still cheaper than your average (rental) price in downtown,” said Chang. “It is like owning a house. You don’t have to worry about the lease, you pay your mortgage. It is your store, you own the land and the property.”
Depending on the down payment and the size of the property, the L.A. FACE selling price brings estimated monthly bills of around $3,000 to $4,000. Leasing space at comparable locations in the Fashion District starts around $2.50 per square foot and can, at the very best spots, go up to $10 per square foot. Using those figures, monthly rent at a 1,000 square-foot showroom ranges from $2,500 to $10,000, not including tenant improvement costs and other fees.
Niche practice
Sina Kangavari, managing partner of KI Group Inc., the developer of Stanford Regency Plaza, which is costing $30 million to construct, said interest in Stanford Regency is high. He’s already looking for other locations to build commercial condos. At the San Pedro Wholesale Mart, manager Jay Kim said there are now only two vacancies and even those have drawn serious prospects.
Despite the apparent demand for the condos, ownership isn’t widespread for wholesale apparel and retail businesses.
Part of the reason is that most large chains the Best Buys and Gaps of the world have historically leased, and properties designed to suit these chains have been arranged that way accordingly. For independent retail businesses, the failure rate is high, and lease terms reflect the churn of stores and restaurants in shopping centers. Buying a condo latches an owner-operator into a business that might not last two months, let alone several years, which raises the issue of a foreclosure that could leave a unit vacant for months or longer.
And even if business takes off, Mark Tarczynski, a senior vice president at CB Richard Ellis Group Inc., said that retailers like the freedom leases offer. They want to make a splash at a hot location, but not be stuck with depressed property if the neighborhood tanks.
“Retail is kind of a moving target,” he said. “Your store location one day could be a huge hit, and then five years later, the market has moved and you got to move somewhere else.”
That’s not as much of an issue in the Fashion District, which has been the heart of L.A.’s apparel industry for decades and still largely caters to wholesalers. But in addition to the inflexibility of ownership, banks have made it difficult to get loans for buying and building commercial condos.
Recalling the initial development of condos in the Fashion District, Cooke Sunoo, director of the Asian Pacific Islander Small Business Program, said banks weren’t keen on providing financing because they couldn’t grasp the concept. That meant that a lot of upfront cash was necessary.
“Somebody who is coming in for a construction loan, if it is for a supermarket or an apartment house, there are certainly formulas they use,” he said. “These things were anomalies.”
But Mark Weinstein, president of Santa Monica-based real estate company MJW Investments Inc., said the main reason retail condos haven’t spread is simple: “People just haven’t done it.” Weinstein, himself, is putting retail condos in Santee Court, a mixed-use development in the Fashion District.
Across the country, the concept appears to be gaining. Year-to-date, more than $118 million in retail condo sales have been rung up nationwide, exceeding the $56.3 million total for all of 2001, according to New York-based real estate firm Real Capital Analytics. This year, the average sales price is $521 per square foot compared to $441 a square foot in 2001.
In the Fashion District, the San Pedro Wholesale Mart signaled to other developers that commercial condos could be successful. Not only that, the building east of the traditionally busy areas along Santee Alley and Los Angeles Street demonstrated that condos could be a draw, even in territory lacking heavy foot traffic.
“It took three to five years for the San Pedro Mart to entrench itself,” said I. Hassan, owner of Quantum Associates, an industrial real estate brokerage in the Fashion District. “After that, a few buildings started to come around and rent units around it. Now, a few other buildings are starting to build condos.”
The next round of condo development aimed at apparel manufacturers largely depends on how L.A. FACE., the Stanford Regency Plaza and a few other smaller projects fare. But future developers may have trouble: Kangavari said available real estate is scarce and it’s difficult to cobble together enough land for a significant project.
Condo conditions
However, the San Pedro Mart suggests market conditions can encourage condo development. The building originally grew out of tenants’ frustration over how landlords were treating them, according to Stephan Haah, president of Rockingham Asset Management LLC, who was involved in early efforts to create commercial condos.
Landlords were known to hike rents after short-term leases of three to five years expired and kick tenants out if they didn’t pay the increase. Additionally, landlords sought gratuities such as key money, which is illegal, but still thought to be widespread.
“They were basically being abused,” said Haah. “The consensus at the time was that they were paying way too much rent, and the most important thing is that they didn’t have stability in their location.”
Already prevalent in Asia, the commercial condo concept offered an exit strategy from tenancy. In Asia, Haah said he saw markets filled with hundreds of vendors owning their tiny storefronts. Developers benefited from the simplicity of the arrangement. Merchants with the wherewithal to shepherd a long-term business could afford the price for a small shop and set up owners’ associations to provide for mutual security and clean-up services that landlords might skimp on.
Still, getting people to move from the popular thoroughfares of the Fashion District to raw ground wasn’t easy. Hassan said that the condo concept was a necessity on the part of the developers to woo tenants who wouldn’t rent in a questionable location without an established clientele. But Haah said what got people on board was the participation of prominent industry leaders most notably early developer Don Chang, the founder of retailer Forever 21 Inc. to assure condo owners customers would visit the Mart.
As the Mart drew more and more entrants, it matured into a vibrant center for junior apparel. Many owners are from the Korean-American community and have a familiarity with the commercial condo concept. They oversee the Mart through the San Pedro Wholesale Mart Owners Association, which, among other duties, chooses management and has quarterly meetings to discuss concerns.
The newest developments have learned from their predecessor. Chang at Khan Development said that he is seeking condo owners who have a proven business record. He’s also encouraging owner-operators, rather than investment firms who’ve scooped up multiple units in the San Pedro Mart, by selling one showroom to each company. He claims he’s pulling merchants from the San Pedro Mart and has 10 people on the waiting list for each unit.
“When the San Pedro Mart was built, many people had doubts because the major area was in the Alley area. As time went on, the market kind of shifted toward the east. San Pedro was a one-stop shop,” said Chang. “When we announced our project, landowners began to develop little shopping malls because they knew the market would shift and it has.”
