May 2021 Number 138 ®

Retail Continues to Shift as Reopens CC CONTINUES TO SHIFT AS CALIFORNIA REOPENS For some shopping center landlords, new concepts and renovations hold the key to future success. For others, bringing in more of what customers like is the answer. In either case, oftentimes lease negotiations are as creative as the retail transformations. By Nellie Day

he past year has brought about challenges, closures and, most Tof all, change to the state’s brick and mortar landscape. Now, as the world begins to move past the pan- demic, shopping center owners must assess where the damage — and op- portunities — lie. First, the bad news. COVID-19 pre- cautions accelerated the downfall of many retailers and stores that were struggling before the pandemic. It also sped up the adoption of online shop- ping as many California consumers were left with little choice in a restric- tion heavy state. The result is vacant storefronts, ranging from grotesque- ly large department store spaces to restaurants that just couldn’t survive without diners. Tawa is opening its new hybrid concept for at Westfi eld In January, Coresight predicted Oakridge Mall in San Jose in late summer. This will be 99 Ranch Market’s fi rst new 10,000 U.S. stores could close this year, concept store to open in California and its fi rst site inside a mall. a 14 percent increase from 2020 clo- sures. Retailers that are able to hang GREETING A NEW CONSUMER the recession portends less individual on a bit longer should hopefully see Though California’s broad reopen- consumption,” the survey explains. brighter days as California loosens its ing is good news, shopping center “To be sure, some activities will be restrictions. Gov. Newsom has said he owners and retailers undoubtedly coming back, particularly personal plans to “fully reopen” California on have questions about what — and services and experiential retail.” June 15 if COVID trends hold steady. who — awaits the new retail environ- Taiwanese American grocer 99 “There is a subdued but growing ment. After all, they have vacancies to Ranch Market is one retailer trying to optimism that most retail formats in fi ll and, in many ways, a new consum- cater to the new consumer by provid- good locations will come back nicely er to welcome back — an oxymoron in ing an experiential atmosphere. The due to the pent up demand in the mar- and of itself. Buena Park-based chain created a hy- ketplace,” says Jim Terrell, principal The Allen Matkins/UCLA Ander- brid concept that is part grocery store at B. Riley Real Estate, an affi liate of son Forecast Commercial Real Estate and part dining destination, with en- based B. Riley Financial. Survey for winter 2021 notes that re- hanced in store and takeout options, “That said, retail continues to endure tailers are not only dealing with a new interior designs and convenient margin compression and permanent shopper who has gotten used to the services like curbside pickup. This shopping shifts to the internet. The internet, but one who has re-evaluat- new concept will open at Westfi eld U.S. is still overstored per capita, and ed their household income over the Oakridge Mall in San Jose in late sum- we expect to continue to see retail past 15 months. mer. space coming back to market, particu- “Increases in the savings rate on “One of the challenges for grocers larly in the department store segment.” the part of households in response to is to know how the store can offer an

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experience that enriches customers’ “We will continue…to try to gain shopping experiences,” says Jill Lin, prime locations in cities and suburbs, marketing and creative manager for ample space for parking that could Tawa Supermarket, which owns 99 boost ecommerce development and Ranch Market. “If we can adopt an in- deliver a great experience to custom- novative concept to the that ers,” she continues. “Being near syn- makes shopping more of an experi- ergistic retailers is always an advan- ence, why not?” tage as you can join forces to drive The Oakridge location will be 99 traffic and sales. We believe the estab- Ranch Market’s first new concept lished foot traffic and synergies from store to open in California and its first surrounding stores, the site inside a mall. The new concept (Century 20 Oakridge and XD) and will be situated in the mall’s north- restaurants in will west corridor, which has undergone a be beneficial for our business.” reinvention as of late. Colin Shaughnessy, executive vice A former Sears space is now occu- president of U.S. leasing for URW, pied by Living Spaces, while a Sears which owns Westfield Oakridge, ex- Auto Center has new life as a Sleep pects to see this type of reinvention URW is bringing non-traditional tenants Number. 99 Ranch Market will occu- continue as shopping center owners like fertility and family building clinic py a space between Living Spaces and look to lure customers back to the KindBody to Westfield as Macy’s that previously served as in stores. the shopping center owner looks to cater line retail for mall tenants that were “We are seeing an abundance of to consumers’ daily needs. relocated to accommodate the new innovative uses from ghost kitchens, store. dynamic food halls, street food con- cid, an electric car showroom, at West- Though Lin notes the hybrid con- cepts to fresh food marketplaces,” field Valley Fair in Santa Clara, as well cept won’t be integrated into existing he notes. “Our customers crave new as fertility and family building clinic stores due to limited space, the grocer and seamless experiences that cater to KindBody and co-working facility is looking to expand, diversify and their daily needs.” BumoWork at Westfield Century City. target prime locations, which may in- With that in mind, URW is bringing clude shopping centers, if they offer a number of new and non traditional Adding More Of What Works the right mix of tenants. tenants to its centers. This includes Lu- While diversification is always inte- gral to retail, Ivan Gold, of counsel at Allen Matkins in , adds that a few well known categories and are still on the hunt for vacant spaces. “Big box discount retailers like TJ Maxx, HomeGoods, Ross and Burl- ington, and dollar stores like , and Family Dol- lar, will continue to open new stores,” he says. These expansions make sense, as they accommodate the treasure hunt- er and bargain consumers that have become cost conscious since the pan- demic. John Shaefer, executive vice president of JLL in San Rafael, has seen these expansions as well, along with a few surprises. “One category I didn’t expect to see The new 99 Ranch Market concept will be part grocery store and part dining destination, with enhanced in-store and takeout options, new interior designs and expand are fitness users based on cur- convenient services like curbside pickup. rent occupancy restrictions,” he says. “Crunch, 24 Hour Fitness, LA Fitness

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and independent fitness operators have all been on the hunt over the past few months.” Crunch opened its newest location, a 37,000 square foot facility on the corner of Capitol Avenue and McKee Road in San Jose in March. Other fran- chises, including OrangeTheory Fit- ness and Club Pilates, have remained active, opening new U.S. locations throughout the pandemic. “Retailers like grocers, fitness and big box are out there, and they want to be in these shopping centers,” says Stephen Logan, vice president of de- velopment for Merlone Geier in . “What landlords have to do is put together a place that has a long fu- Lucid has opened an electric car showroom at in Santa Clara as ture. Shopping centers need to be an URW reinvents its shopping centers through a mix of traditional and non-traditional area for the community.” retailers that create new and seamless experiences for customers. Playing the long game often in- volves a little reimagination. For Mer- seen that exterior access is huge,” Lo- outlet — and was slated to become lone Geier’s Northgate Mall in San gan says. “Not only because it’s what a — until a community sur- Rafael, this meant converting an in- retailers want, but having a space vey revealed residents favored larger door mall into a mixed-use, open air where you have to enter from the inte- changes to the shopping center, which shopping experience. Phase I of the rior of a mall is frowned upon.” included a housing aspect. transformation includes removing Merlone Geier also plans to reno- “When COVID the 250,000 square foot mall’s interior vate and expand the current Centu- hit, we realized we roof to give each retailer exterior ac- ry movie theater to include an Imax had to look at the cess. The rest of the interior mall will theater, add more retail, restaurant mall, our capital be converted to outdoor facing retail and outdoor spaces and create 896 situation and our with a couple of larger boxes. apartment units where a Sears build- revitalization plans “As we’ve watched everything open ing currently stands. The vacant space differently,” Logan up throughout the pandemic, we’ve had been partially occupied by an RH explains. “We de- cided adding hous- ing and updating Stephen Logan the retail was a Vice President of great way to move Development forward on a long Merlone Geier term basis.” The first phase of redevelopment is scheduled to get un- derway in 2024. A second, longer term plan that extends to 2040 may include up to 460 more apartments, addition- al revamped retail and open air com- munity spaces. This plan, however, is contingent on Macy’s and Kohl’s va- cating the center — something Logan can’t predict but wants to keep his eye Merlone Geier is transforming Northgate Mall in San Rafael into a mixed-use, open- on. air shopping experience. Phase I includes removing the 250,000-square-foot mall’s “We don’t know what’s going to interior roof to give each retailer exterior access. Phase II may include up to 460 more apartments, additional revamped retail and open-air community spaces. happen with Kohl’s and Macy’s,” he continues. “But history has shown

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us that though these two are great industry’s fallout is just now getting tenants and anchors, their stores just underway. don’t need to be that big. They’re “The theater business is the wild starting to realie they can be more card,” Terrell says. “Theater operators effi cient in smaller boxes. When you have generally had a very good grasp look at where the industry is moving, as to the demand in their markets, but it’s moving to smaller format stores.” the key uestion is whether the con- That may be sumer will come back with all the var- true for depart- ious entertainment options available. ment stores, but Movie business challenges have been he famous Pacifi c Cinerama ome on Sunset oulevard in ollywood will not other categories compounded by a lack of product and reopen according to its owner, ecurion are expanding in instability in the distribution network, Corp. he theater usiness has een hit select markets, as which could mean a longer recovery is particularly hard y CVI- and state Shaughnessy can ahead for this sector.” restrictions. attest. URW was The pain is already being felt as trying to fi gure out companies like Los Angeles-based or top centers with creative land- on how to backfi ll an Decurion Corp. announce they won’t lords, Terrell doesn’t necessarily see Shaghne old Sears location at reopen Pacifi c Theatres and ArcLight these impending vacancies as a huge ective Vice Westfi eld Topanga Cinemas locations. ArcLight has sev- deal. President of in the Los Angeles en California locations, including fa- “Real estate developers are creative esin submarket of Can- mous destinations like the Pacifi c Cin- by nature and good real estate is still URW oga ark, which is erama Dome on Sunset Boulevard and a product in demand,” he notes. “We undergoing a trans- ArcLight Hollywood. have seen theaters converted into formation. The new iteration, set to Pacifi c and ArcLight also served churches, music venues, restaurants, debut in 2022, will contain an entirely as anchors at some of Southern Cali- bookstores and even hardware stores. new ,000 suare foot retail district, fornia’s most noteworthy shopping With the growth of distilleries, opera- chef driven food hall, lounges and centers. They led tenant rosters at tions associated with cannabis, ghost cocktail bars, and interior and exterior the Grove in Los Angeles, Americana kitchens, e-gaming locations, and oth- boutiues, among other features. at in Glendale, Santa Monica er new and exciting concepts, good It will also receive a new anchor, lace in Santa Monica and aseo Col- real estate will not have an issue get- Herms. orado in asadena, among others. ting redeveloped.” “Originally, we planned to have Hermes located within the luxury precinct inside the center, but as we shared our vision for the redevelop- ment with their team, those plans shifted to give Herms an anchor position in the Sears transformation project that would enable better con- nections with their customers and an opportunity to create their own iden- tity within the expansion,” Shaugh- nessy says. “We are about identifying the right space that meets the needs of the retailer within the respective mar- ket.”

ANTICIPATING THE FUTURE With many transformation projects underway and certain retail catego- ries expanding, California shopping ecurion Corp. owns Pacifi c heatres and rcLight Cinemas, neither of which are set to center landlords seem to have a fairly reopen following the pandemic. his includes the Pacifi c heatres at the Grove in Los healthy grasp on the COID related ngeles. vacancies so far. Unfortunately, one

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Still, if a new tenant or use doesn’t materialize, creativity may come at a price for landlords with less than stel- lar demand. “The conversion of theaters to other types of retail is expensive and typi- cally counts for a considerable portion of GLA [gross leasable area] in malls and regional centers,” Shaefer says. “Landlords will be forced to make sig- nificant financial decisions related to this subject.” Landlords may also be forced to make significant financial decisions if they want to attract tenants to lin- gering spaces of any size, notes Scott Y. Stuart, CEO of Turnaround Man- AMC Entertainment is currently “in talks” with several landlords that will soon have agement Association, an organization vacant theater space as and ArcLight Cinemas remain shuttered. The that focuses on corporate restructur- movie theater company is interested in purchasing these leases, which may include the ing, renewal and corporate health. ArcLight Hollywood that sits adjacent to the . “It’s a buyer’s market for retailers, strategy has provided some relief and alternative to short- and landlords are compromise during COVID, Terrell er terms, allowing going to have to be notes it’s not always an easy answer, either party to elect both creative and especially when financing is involved. to exit a lease ear- gracious if they are “It is difficult for ly, in some cases going to succeed in a landlord to find without customary filling commercial lenders willing to criteria, such as space,” he says. finance on percent failure to achieve Scott Y. Stuart “The balance of rent only deals,” he certain gross sales CEO bargaining power says. “More likely, levels.” Ivan Gold Turnaround has shifted in retail, you will find floors All of these are Of Counsel Management creating optionality set on the leas- good strategies to Allen Matkins Association for retailers given es with a percent Jim Terrell get tenants into va- how commercial rent component Principal cancies and retail property owners are struggling and as tenants take a B. Riley Real landlords back in the green. Yet, for Estate will continue to do so. There will be more aggressive all the astute suggestions listed above, bargains for retailers in current or new approach on other Terrell believes the wisest thing any- spaces who possess an optimistic mar- provisions in the leases.” one can do in this market is keep their ket outlook for retail.” These may include co-tenancy head screwed on straight. Of course, creativity also extends clauses, use of common areas and “The best advice is to not become to deal making. Knowing many retail lease term. Gold notes that some of emotional over a piece of real estate,” landlords are cash strapped, tenants these provisions can be mutually ben- he says. “Too often, tenants fall in love can leverage longer free rent periods eficial for the landlord, as an uncertain with a particular location and reduce in lieu of tenant improvement allow- brick and mortar landscape may call the objectivity by which they evaluate ances or push for lower rents up front, for more flexibility and less commit- it. Landlords, too, need to be objec- Shaefer suggests. ment all around. tive about their holdings. Real estate Landlords can also offer tenants “I would expect many leases to ini- doesn’t move but people do. What greater flexibility when it comes to op- tially be for shorter terms to lower the might have been Main and Main at erating hours, Gold adds, particularly level of commitment by either party one point in time may suffer from an during seasonal or operational adjust- in the face of an uncertain period of exodus of population or be outflanked ment periods. Then there’s percentage economic recovery,” he says. “We are by something new. The key is to be re- rent deals, which have become a hot also encountering a greater number alistic and objective while embracing topic since the pandemic. Though this of early termination provisions as an your vision.” CC

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