A lone beachfront store on Pacific Coast Highway in Malibu grabs attention as a prominent advertisement for its occupant, American Apparel. The property epitomizes the kind of bold standalone real estate the L.A. clothing company occupied in its hometown.
The site also represents one of 14 premium local retail spaces that are expected to be vacant by April as the bankrupt company shuts down its 110 locations across the country.
The American Apparel properties are becoming available even as the retail market is trying to absorb spaces left vacant by the closure of two other chains, Sports Authority Holdings Inc. and Sport Chalet, which also declared bankruptcy last year. The three companies will leave more than two dozen empty L.A. storefronts in their wake.
However, the return of dozens of properties to the rental pool at roughly the same time is not seen as damaging to a market that has experienced robust activity despite the rise of e-commerce. Much of that strength has come from the discount sector, which has been able to navigate the online shift and kept up the demand for real estate.
“The timing of the vacancies was pretty good in terms of the cycle,” said Scott Burns, executive vice president at Jones Lang LaSalle, of the sporting goods retailers’ vacancies.
He pointed to 2009, when hundreds of big box stores became available after Circuit City and Linens ’n Things, which has since become an online-only retailer, declared bankruptcy.
“By the time Sports Authority and Sport Chalet hit the market, a lot of spaces were absorbed,” said Burns, who’s representing the landlord of a former Sports Authority in Canoga Park. “It’s a good time to digest some more.”
The complications of bankruptcy might delay move-ins for new tenants, but the spaces are expected to be filled sooner rather than later, most likely by the end of the year.
Shifting strategies
American Apparel opened its first retail store in the United States in pregentrified Echo Park in 2003, an area that fit with the company’s edgy attitude.
“They were always interested in being established in more Bohemian, young, emerging, urban areas,” said Philip Klaparda, an agent at Dembo Realty who helped American Apparel secure 70 to 80 of its earliest leases around the country. “They always had a slight disdain for shopping centers and heavily commercial projects.”
The company eventually expanded into more traditional locations, including the Third Street Promenade in Santa Monica, as its store count swelled to a high of about 280. Sites in retail hubs are generally considered less risky because co-tenants bring in foot traffic, said Gabe Kadosh, vice president of retail services at Colliers International, who represents the owner of the Little Tokyo American Apparel store.
American Apparel sometimes did better in standalone spots.
The Melrose Avenue location in West Hollywood was one of the company’s highest-grossing stores, said Terry Greene, managing general partner at GTL Robertson Properties, a Beverly Hills real estate firm that owns the property.
Klaparda said American Apparel broke even at the Malibu location.
Bruce Dembo, whose family owns the property through holding company Deepwater Investment Group and acted as the leasing agent through Beverly Hills brokerage Dembo Realty, isn’t worried about finding a tenant.
“It’s not good for the landlords but it’s worse for the employees,” said Dembo. “The landlords will turn out fine.”
He said he expects the next tenant at the site to pay a higher rate than American Apparel, which negotiated a lower rent about a year ago, after it filed for bankruptcy the first time in October 2015. He wouldn’t say how much the company was paying, but CoStar property records show monthly rent on the 2,500-square-foot space at $4.50 a square foot, or $11,250 total.
American Apparel didn’t return a request for comment last week.
In the end, neither leasing in high-traffic areas nor up-and-coming ones was enough to save the company, which filed for bankruptcy again last year.
Canadian clothing manufacturer Gildan Activewear Inc. this month purchased American Apparel’s intellectual property and some manufacturing equipment for $88 million. Retail operations were not included in the deal; the companies reportedly signed a 100-day license to keep the stores open.
Sport Chalet and Sports Authority took the opposite approach in choosing their locations, moving into large, big box stores, often in suburban malls. Sport Chalet, which was based in La Cañada Flintridge and most recently owned by Meriden, Conn.-based Vestis Retail Group, generally took stores that were a bit smaller than the average 40,000-square-foot Sports Authority location.
Vestis declared bankruptcy in April and said it would shut down Sport Chalet’s 47 stores. The half-dozen or so locations in Los Angeles appeared to have closed their doors by the end of June.
Sports Authority, based in Englewood, Colo., declared bankruptcy in March and announced it would shut down the chain’s 450 stores in May, though many of its half-dozen or so L.A. stores closed in July.
Only a few former Sports Authority sites have been filled, including a location in Thousand Oaks where a Marshalls moved in.
Slow recovery
Local real estate agents attributed the slow lease-up to the bankruptcy process. Because property leases are considered assets of a bankrupt company, any modification to them has to be approved by the court.
Bankruptcy trustees try to maximize the value of the company’s assets in order to pay back creditors as much as possible. Whether it’s worth the hassle to go through the court process depends on the value of the potential deal, said Burns.
If the company signed a lease at a time when rents were low, it might be worth pursuing that rental deal. Otherwise, the business seeking the location can wait until the bankruptcy proceedings are over and deal with the landlord directly, assuming no one else has taken over the lease.
The timing of the closing of the two sporting goods chains also contributed to the present vacancies. It might take three to six months from the time a prospective retail tenant tours a site to the signing of a lease, and an additional four to five months to prepare a building, said Burns. The landlord might need time to do some work as well.
Given that the holidays are retailers’ busiest time of year, the July closures meant it would have been hard for a new store to move in before the end of last year. Burns said that most locations will have identified a tenant by the third quarter of this year.
The new occupants will likely be discount retailers such as Marshalls or HomeGoods, which have done well in spite of the shift to e-commerce, said Colliers International’s Kadosh, with 10- to 15-year leases.
American Apparel is much earlier in the bankruptcy process and it’s still uncertain what will become of its stores. But GTL’s Greene is confident he can fill the clothing company’s former West Hollywood space.
“Our objective is to get another great tenant in that particular corner within three to four months,” he said.
