From Silicon Valley to Velcro Valley, mall projects, luxury fashion houses and designer boutiques continue to open here at a rapid clip despite a significant economic cooling-off in the state with the fifth-largest GDP in the world. The boom also comes in the middle of the worst retail environment nationally in more than a decade, evidenced by the disappointing holiday selling season and the languishing luxury sector.
Developers insist the state’s new retail influx is simply a case of keeping up with market demand. But industry watchers wonder if California is headed for a bad case of overstoring — or is already overstocked. After all, there currently is almost 30 square feet of retail space for every man, woman and child in the state.
“I think we’re already there,” said Jack Kyser, chief economist of the Los Angeles Economic Development Corp., noting that there is a growing population in the state, but one that doesn’t necessarily translate into consumers with expendable income.
“Every time you turn around you see some new retail development, and you have to say, ‘What’s going to support this?”‘
To be sure, there are plenty of well-heeled consumers shopping the estimated 1 billion square feet of total retail space in the state. According to the state’s Franchise Tax Board, 9.2 percent, or about 3.2 million, Californians earn $100,000 or more a year. Then there is the population growth rate which, including immigration and migration, adds 500,000 residents at all economic levels a year to California’s existing population of 35 million.
And some observers point out that the development isn’t merely an exercise in retail ego gratification. Instead, it’s a means to survival, to keeping the store image fresh.
In a shrinking market, some publicly held retailers expand store count to show growth to Wall Street. Forced growth, however, could have far-reaching negative effects, analysts caution.
“A choice location is equal to a profitable store,” said Tony Cherbak, partner in the consumer products group of Deloitte & Touche in Costa Mesa, Calif. “But retailers will be a little more selective [about location] given the uncertainty in the marketplace.”
Although many California-based chains, including Gap and Pacific Sunwear, are slowing down, mall developers remain bullish.
In Silicon Valley alone — despite being one of the first areas to plunge into the economic doldrums because of the dot-com fallout — at least three sizable mall projects with luxury stores are bowing.
Analysts worry that the mall developers based their decisions on stellar times in the dot-com industry. Indeed, all three developers conceded their Silicon Valley projects were in the works long before the economy turned south.
Gucci confirmed it will open a two-level, 6,000-square-foot door at Santana Row, an $800 million project in San Jose slated to open midyear. The Italian brand will have formidable neighbors at the new address, a 680,000-square-foot, open-air shopping center: Burberry, St. John Knits, Tod’s, Hogan and the first Acqua Di Parma boutique in the U.S. are all slated to open there.
The two other projects involve considerable overhauls.
The Westfield Shoppingtown Valley Fair will undergo a $165 million redevelopment, slated for completion by spring 2002. The center recently added Nordstrom as a second anchor to an existing Macy’s, as well as Tiffany & Co., Swarovski and Kenneth Cole. Louis Vuitton, Armani, Tommy Hilfiger and Fendi have all signed leases to open units there this year.
Westfield officials project the 1.5 million-square-foot center will pull in annual sales of $800 a square foot. In contrast, Rodeo Drive retailers reportedly are in the $1,000 to $3,000 range, according to analysts.
Third, the Palladium Co. is redeveloping approximately 3 million square feet of downtown mixed-use space. Dubbed The Palladium in San Jose, the six-block area will feature 400,000 square feet of street-level retail space — including luxury doors, residential, office and hotel space. The W Hotel was among the first to sign onto the project, which is expected to break ground later this year.
Not every observer is confident the enthusiastic plans can materialize in the current economic climate.
Speaking of the Silicon Valley projects, Ilse Metchek, executive director of the California Fashion Association, called them “deadly. They’ll never see the light of day.”
But mall developers maintain the demand is there.
“It’s a bit of a vacuum because it has taken so long for retail to come onto the scene,” said Nate Fishkin, senior vice president of Federal Realty Investment Trust, Santana Row’s developer. “And I hate saying this, but we’re going to see 20 more [projects] on our heels.”
Westfield is so confident in long-term growth that the retail estate company is breaking ground on a second shopping center in San Jose, a 250,000-square-foot multiuse complex.
“Suffering is relative,” offered Westfield development director Larry Green. “We were doing 100 miles an hour and now we’ve slowed down to 80.”
Despite economic concerns, Green stressed: “You’d be hard pressed to find another market as strong as California.”
Across the bay, luxury stores have been flocking to San Francisco, lauding its international draw and wealthy consumer base. Despite the plunge in tourism since Sept. 11 (Japanese visitors alone are down an estimated 50 percent), retailers keep moving in.
Yves Saint Laurent recently signed a lease for a 5,000-square-foot store on Maiden Lane. Prada, which has a temporary unit on the luxury stretch near Union Square, is planning a permanent door there. The house recently denied reports that construction of its San Francisco and Beverly Hills stores have been delayed because of budget cuts. “Those plans are very much going forward,” a Prada spokeswoman said, noting that delays stem from problems with building permits.
Meanwhile, Neiman Marcus is building an annex behind its store on Geary Street. And San Franciscans have been eagerly awaiting the city’s first Bloomingdale’s. The Federated division will eventually build a store in the former Emporium flagship on Market Street.
“We’re seeing retailers very bullish about long-term prospects,” said Linda Mjellem, executive director of the Union Square Association, adding that there have been no changes in lease agreements to date.
“In the long run, none of us knows what the real impact of the Sept. 11 events will be,” Mjellem continued. “Business is off. But we all go through economic cycles. It will bounce back. And what better place to be than in these 32 very walkable blocks with a niche for luxury retail.”
In Los Angeles, three major mall projects are being closely watched.
Perhaps the most visible sign of the times was the shutoff in August of 39 oil wells that were pumping out black gold on the historic Farmer’s Market property to make way for The Grove, a $100 million project with 579,000 square feet of retail space.
Centrally located in the Fairfax district near Hollywood and West Hollywood, The Grove is more than 90 percent leased, said Rick Caruso, president and owner of the development firm, Caruso Affiliated Holdings. The Grove will introduce the second Nordstrom in Los Angeles (after the retailer’s unit in Westside Pavillion). Other retailers signed on include NikeGoddess, Banana Republic, Gap and J.Crew. It is scheduled to open March 15.
Asked if he’s concerned about the state’s — and the area’s — aggressive retail development, Caruso said it’s nothing unusual.
“Do I always worry about [the future]? Sure, it’s part of business,” he said. “It’s a private company and it’s my own money and I’m always very conservative in what I do. The real risk is leasing and that’s pretty much over with. We have exceeded our projections on rent.”
But increased competition is inevitably another risk.
Fewer than five miles away stands the 640,000-square-foot Hollywood & Highland, the $615 million behemoth that boasts big-brand retailers, nightclubs, restaurants, a multiplex, a hotel and the new home of the Academy Awards. Sephora, DFS Galleria, Limited Express, Bebe and Gap are among the retailers banking on projected sales of $500 a square foot.
About 1.5 million visitors have come to Hollywood & Highland since its Nov. 9 opening, with an average of 200,000 a week. About a third of the retail tenants at the complex have yet to open, but expect to in the first quarter.
A Louis Vuitton source noted that sales at the DFS Galleria, with in-store shops from Burberry, Celine, Coach, Polo Ralph Lauren and Vuitton, exceeded expectations in the first month of operation.
This is only the latest in an unprecedented movement to rejuvenate Hollywood and its surrounding neighborhoods. Still, despite enthusiastic support from developers, city officials and many residents, not every project has escaped the economic travails of the last quarter of 2001.
Following the attacks of Sept. 11, the Sunset Millennium Project on Sunset Boulevard lost the financing for a boutique hotel. Now, posh apartments might go up in the hotel’s place in the $400 million project. Some 740,000 square feet of retail and office space is scheduled to open in about 10 months.
“I live and breathe fear and that’s how I keep myself sharp,” said Mark Siffin, chief executive officer of Mayfield Development, who is overseeing the Sunset Millennium Project. He hopes the first rule in real estate — location — will be the project’s advantage.
Although the steel structure has not yet been erected, he noted 65 percent of space is leased. Retail tenants include L’Occitane and Vertigo.
As for stand-alone luxury stores, Beverly Hills will this year welcome Furla, Cerruti and Coogi. In recent months, Christian Dior, Burberry, a temporary Prada shop and a renovated Valentino boutique put up flags there.
But the famous zip code isn’t the only area seeing new stores in greater Los Angeles. British accessories designer Anya Hindmarch opened her second American boutique on Robertson Boulevard in West Hollywood (her first is in New York) last spring. Women’s specialty retailer Shakiri, eyewear boutique C by Karina and lingerie emporium Vionnet have all opened there in the past year. In December, Giorgio Armani unveiled Armani Casa with a 6,300-square-foot store on the corner of Robertson Boulevard and Melrose Avenue. Poleci opened its first-ever store here Dec. 22, giving one of Los Angeles’s larger manufacturers a local place to test products.
An hour’s drive south in Orange County, (a.k.a. Velcro Valley, due to its dominant industry and consumer interest in extreme sports such as surfing) several malls are following the example of upscale mall South Coast Plaza in Costa Mesa, which completed a $120 million remodeling in 2000.
But not all mall owners consider the money pouring into properties a signal of confidence in the future. For some, it simply represents a way to survive.
The Irvine Co. is embarking on an expansion to add 35,000 square feet of retail space to Fashion Island in Newport Beach, including adding a third level to the Neiman Marcus there. The company also is investing in a $45 million expansion to its Irvine Spectrum Center, an open-air shopping center in Irvine, filled with youth-oriented retailers such as Hot Topic, Quiksilver Boardriders Club and an Oakley signature store.
Another fast and youth-oriented center, the Mall of Orange, is undergoing an update and remodel of its 822,000-square-foot property in the City of Orange. And the long-standing Westminster Mall in Westminster will add a Macy’s as well as at least seven new stores this year.
“Retailers are trying to keep up with the needs and wants of consumers,” said Karie Najemnik, general manager of Mall of Orange. “Retailers are reinventing themselves with new concepts. They’re trying to stay ahead, instead of lagging behind. If you don’t meet [consumer’s] needs, they’re going to go get it somewhere else.”
Lee Schalop, a real estate analyst with Banc of America Securities in New York, said this thinking is right on target. “It’s the new concepts that catch on and become huge,” he said.
Others believe it will be a waiting game.
“I think, in this case, [the current development is a result of] more national retail chains responding to the California boom of recent years,” noted Tom Lieser, senior economist at UCLA’s Anderson School of Management and author of the business school’s forecast. “While the timing may be a little off, companies that have some staying power might not regret their decisions,” he added. “But there will always be some blood from these things.”