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OVERVIEW

When Jessica Provenz headed to Santa Monica’s Third Street Promenade last weekend to go shopping, she wasn’t looking for clothes as much as an experience.

She could have hopped over to the Beverly Center, the multi-level mall that’s a two-minute drive from her West Hollywood apartment. But instead, she drove 40 minutes to Santa Monica so she could browse through outlets of many of the same chain book stores, coffee shops and clothing retailers that she could have visited in her own neighborhood.

“But I couldn’t have this,” she said, gesturing to the throngs of people meandering around the plaza on a recent sunny afternoon, some pausing to listen to a pianist performing on the plaza and others watching kids clamber over a public sculpture.

Provenz’ preference hasn’t gone unnoticed by the real estate industry. Many shoppers increasingly spend their time and money at street-level shopping districts such as the Third Street Promenade rather than indoor mega-malls.

“Wall Street is going to Main Street,” said Harvey Green, chief executive officer and executive vice president of Marcus & Millichap, the largest investment real estate brokerage in the nation. “Even the big power centers, rather than building something enclosed, are looking to incorporate the strolling and open-air qualities that made Ventura Boulevard and Old Town Pasadena a success.”

It’s an ironic twist to the decades-long battle between urban retailers and suburban shopping malls: Centers such as Third Street which was the city of Santa Monica’s redevelopment project devised to undo the damage caused to its downtown by suburban shopping malls now garner some of the highest retail rents in the county.

“(These projects) began as a counter-response to the suburban auto-center concept,” said Allan Kotin, a principal with KMG Consulting, which advises the public and private sectors on real estate developments. “Now some of these projects have become so successful that they’ve undermined the suburban centers.”

Third Street Promenade rents have doubled over the past two years, with landlords asking as much as $6.25 per square foot, per month. National retailers are clamoring to get space on the strip, with Restoration Hardware, Crate and Barrel and Pottery Barn all soon to open shop there, leaving some wondering if the district might become a victim of its own success.

“It’s becoming a Century City mall at the ocean,” said Matthew May, a partner at Madison Partners, a Westside commercial real estate brokerage. “As the rents get higher, the local merchants have had to flee and those were the ones who gave it flavor.”

Nonetheless, the success of such street-level districts has other developers salivating. Landlords in successful promenade-style centers can typically charge rents costing about $1.25 per square foot more per month than traditional shopping malls, in part because the high foot-traffic generates about 30 percent more business for retailers, Green said.

But few developers would want to emulate the struggle that finally made successes of Third Street and Old Town Pasadena.

Back in the ’70s and ’80s, the downtown shopping districts of cities like Pasadena, Burbank and Santa Monica were decimated by the shiny, insular shopping centers.

“Those tired pedestrian centers looked more like a cement park than a retail district,” said Larry Kosmont, president of Kosmont & Associates Consulting, which advised the city of Burbank in revitalizing its downtown.

The cities formed community redevelopment agencies to provide the infrastructure from lighting to parking to jump-start revitalization. Most importantly, they needed to add a “signature theme,” such as uniform street lamps and park benches, that provided the district with a sense of place.

Often, only CRAs with their powers of eminent domain and ability to raise capital can provide the necessary jolt that gives a downtrodden shopping center momentum.

“These centers are hard to create from scratch,” said Paul Heiss, development director with shopping center development firm Madison Marquette. His company is currently developing a street-retail project in the Inland Empire, but has so far left downtown renovations to the public sector.

“These districts often have disparate ownerships, and you need a CRA to spearhead the development to create a plan and offset the costs of parking,” he said.

Private investors enter the picture once the infrastructure is in place. Often, Kosmont said, one or two developers will own 70 percent of the buildings.

“To do one building just doesn’t make sense you’ve got to have control over the (entire project’s) direction,” he said.

Then the wait begins. For Burbank’s redevelopment project, monthly rents began at 30 cents per square foot when the street opened in 1985, and it wasn’t until this year that rents began to hit $2.50 to $3, Kosmont said.

Westwood Village is now undergoing the infrastructure improvement phase of its redevelopment project, with the hope of revitalizing its retail district. The $4 million streetscape project which doubled the number of trees, widened sidewalks and added a parking garage will be completed next month.

Bob Walsh, president of the Westwood Community Alliance, said those infrastructural improvements are part of the “process of evolution” needed to make the village attractive again. The district has always had an enviable demographic mix of wealthy homeowners and a corporate lunchtime crowd, as well as access to the San Diego Freeway (405). But the absence of a coordinated strategy held the village back in the past, he said.

“We need to make the village an attractive place to invest,” he said, noting that Westwood needs interest from developers and “destination” tenants such as theme restaurants to craft it into a competitive retail district.

Unlike shopping malls, CRA-initiated shopping districts never become single entities that can be bought and traded wholesale. So real estate investment trusts, which are gobbling up power centers and outlet malls across the country, can buy pieces of Third Street Promenade but can never control the entire district.

That piecemeal investment strategy appeals to few REITs because they aren’t interested in purchases less than $10 million.

Instead, many REITs have taken the “main street”-style shopping center beyond its roots and made it into a profit-formula of its own.

“You see outdoor plazas being built in places where 20 years ago, a mall might have gone there instead,” Green said.

Caruso Affiliated Holdings, which developed “main-street-style” retail centers in Westlake Village and Thousand Oaks, creates a “downtown” shopping district in cities too new to have a historical downtown.

“A successful shopping center has a sense of community,” said Rick Caruso, president of the development company.

But he found that creating an instant sense of community in a tract-home suburb requires more money and land than a traditional shopping mall.

First, there’s the ambiance: Caruso plants trees that are at least 20 years old, installs moveable tables and benches to encourage shoppers to hang out, and he integrates some kind of water feature such as the 1-acre pond he plans to install at his current Calabasas project.

Then there’s the tenant mix: the shops must have “browsability,” such as music and book stores.

So far, his centers are 100 percent leased, Caruso said, and he charges rents 30 percent to 40 percent higher than traditional shopping centers.

But his “village-style” concept comes at a cost. Caruso said he spends about 50 percent more to built a pedestrian-friendly center rather than a traditional power center, in part because much more land is dedicated to open space.

Then there’s parking.

When Caruso built Westlake Village Center, he provided five spaces for every 1,000 square feet of retail more than the industry average of 4 to 1. But he found that Westlake Village shoppers were staying for an average of three to four hours, rather than the typical one to one and a half hours spent shopping. So he bumped up the ratio to 6 to 1 and added valet parking, but there still are often lines at the parking garages.

Most of the costs of adding ambiance and parking are ultimately passed on to consumers who haven’t protested so far, according to Green.

“I don’t think there’s anyone who doesn’t know that they’re paying $1 more for the entire experience,” he said. But, he added, most shoppers are looking for a different kind of value in their shopping experience today.

“When you’re watching your kid run through the fountain at Universal CityWalk you can’t put a dollar figure on that,” he said.

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