TENANTS TO HERTZ: TRY HARDER
CALIFORNIAMART TENANTS URGE THE MART’S NEW OWNER TO DO WHAT IT TAKES TO BRING THE BUYERS BACK.
Byline: Kristi Ellis
Some locals call it the buy of the new millennium. Others call it a venture that looks risky at best. But the industry buzz in Los Angeles is that, in purchasing the CaliforniaMart, real estate investor Judah Hertz has bought himself a formidable challenge, which is to stem a tide of dissatisfaction among current tenants and at the same time launch a major effort to attract new ones to a facility with persistent vacancy issues.
About a month or so since the mart changed hands, tenants still stinging from what they say has been a rocky past few years had plenty of advice for new owner Hertz, who also owns Hertz Investment Group and has taken on similar challenges before. Their prime directive: Do more to bring back the buyers. They added that while his approach so far has been “reserved,” they are for the most part cautiously optimistic.
Hertz has moved in his management team and has sketched out an initial plan for reinvigorating the mart. He is not shy about holding the opinion that its previous managers “did not have a clue on how to run this building. You have a $300 million building and no one was at the controls.”
He apparently crafted a deal that gives him a good head start. Hertz reportedly walked away with the three-million-square-foot complex for a fraction of its original cost; industry sources peg the purchase price of the mart at $70 million to $80 million, even less than the previously reported estimates of $90 million. That would make it a bargain, considering the founding Morse family had defaulted on $250 million in loans in 1994. (Equitable Life Assurance Co., which took control of the mart in a foreclosure in 1994, put the building on the block just this past January.)
Shortly after the purchase was completed in late May, Hertz unveiled these parts of his overall strategy:
Launch an international marketing initiative.
Double the mart’s contemporary offerings.
Improve communications between management and current and future tenants.
Hertz’s latest step was to move the Buyer’s Club from its prime second-floor spot into a smaller space that once housed the video conferencing center, on the ground floor. The Buyer’s Club and videoconferencing center, both opened in 1997, were part of Equitable’s initial $14 million renovation program.
The mart currently leases 150,000 square feet to contemporary showrooms, on the fifth floor. Hertz plans to devote another 150,000 square feet to contemporary lines, though he said he hasn’t decided where he’ll add it.
In pursuit of his other key strategic objective so far, promoting the mart internationally, Hertz has drafted a tentative plan to take the concept of the mart on the road to other countries and, in turn, bring representatives back to do business in his building.
Among his first plays, he said, will be the launch of a Chinese trade show here sometime this year that he hopes will attract a large contingent of Chinese manufacturers and apparel-related businesses.
Credited with a keen sense of timing, Hertz has apparently made a good first impression on tenants, as well as other property owners in the area. In his favor is the mart’s location on Ninth Street in downtown Los Angeles, which is an area in the midst of a slow comeback, according to Jack Kyser, chief economist with the Los Angeles Economic Development Corp.
“Downtown is slowly morphing,” said Kyser, noting new residential and commercial development, including new boutique hotels, the Disney Hall and a Staples retail/entertainment center that will boast two hotels, retail outlets and a 5,000-seat auditorium.
The mart for the past decade has had an occupancy rate of 65 to 70 percent of its 1.9 million square feet of rentable space. Market sources said it has suffered a dearth of retail traffic due to consolidation and the fact that an abundance of trade shows have fragmented the market and cut into buyer attendance at any one venue.
That wasn’t always the case. Through most of the Eighties, the building was fully leased, with a healthy waiting list in effect, according to Dave Zoraster, vice president of CB Commercial Real Estate. But the mart’s occupancy spiraled downward in the early Nineties, reflecting the economic downturn and retail consolidation trends that plagued not just the Los Angeles market, but regional marts across all industries around the country.
In Hertz’s favor, said market observers, is some groundwork laid by the previous owners: Equitable invested $55 million in capital improvements with an eye toward revitalizing the wholesale center.
“Equitable did a lot of remodeling,” said Kyser. “He’s not walking into a distressed property.”
Still, Hertz has to work on fundamentals. To that end, he said he plans to concentrate on the needs of existing tenants first and then focus on filling the building.
“In 12 months, you are going to be looking at a building that is 100 percent occupied and has a waiting list,” Hertz said in an interview with WWD. “This building is just tremendous in size, and I plan to take the same approach that I did with the International Jewelry Center (another one of his turnaround properties): First, listen to what the people have to say.”
“The people” in this case are 1,200 tenants who have at least that many opinions about how the building should be run. The most common thread was concern over a current slump in daily buyer attendance.
While under the administration of Susan Scheimann, former president and chief executive officer, mart management boasted buyer attendance increased overall by 20 percent through May 2000 compared with the same period of the previous year. But some tenants painted a different picture, one of declining traffic and inadequate attempts to combat the erosion.
Hertz said he plans to continue buyer incentive programs that are already in place. One such program has tenants provide a list of their best accounts; mart management, in turn, focuses on that select group of retailers and pays their traveling expenses for a particular market.
Another incentive is the recently instituted Market Tuesdays, held once a month, offering buyer incentives such as free parking and lunch coupons. Attendance has been boosted on those days, according to Ruth McKeown, executive director of marketing for the mart.
Tenants, however, want to see more. “If he’s got money behind him, then he needs to get the buyers in here,” said Denny Rabineau, co-owner of contemporary dress firm Mica and a mart tenant for 10 years. Rabineau, who keeps the Mica showroom open daily, said he thinks Hertz needs to come up with a new hook.
“The other management team tried chump-change promotions with room and travel discounts, but they couldn’t offer buyers any big reason to come to the mart, other than a new season,” Rabineau said. As a result, he claimed, the mart has turned into a market week, as opposed to a 52-week-a-year business.
Rabineau, who also has a showroom in New York, said that he does his “best” business in L.A., but he attributed that to the efforts of himself and his sales staff to bring it in, and not to any mart activities to date.
“We have loyal accounts, but we have to go out and get the business,” Rabineau said. “That’s the only way we can increase our business.”
Rabineau said he is “hopelessly optimistic” that Hertz will devise a plan to attract retailers on a more regular basis.
Hertz, for his part, pointed out that while added buyer incentives are an understandable priority coming from tenants, his priorities are necessarily broader in scope. “As a landlord, I want to fill up the building; and as salespeople, they want business,” he admitted.
Rabineau’s showroom is located on the fifth floor in the C-wing — the linchpin of mart promotion over the past several years. Previous mart management heralded the fifth floor as the mart’s centerpiece for contemporary designers, and claimed buyers would flock to it. And for a time, they did, tenants said. But many showroom owners remarked that these days, the floor is quiet. It is a claim that Hertz dismissed.
Meanwhile, some showroom owners have taken matters into their own hands. A case in point is the Laundry by Shelli Segal showroom, which is currently closed to daily business due to lack of traffic, its executives said.
“Pre the Liz Claiborne purchase [last October], we had the showroom open every day, and it was fully staffed,” said Andrew Cohen, chief executive officer of Laundry. “We didn’t feel that there was sufficient traffic on a daily basis in the off-market to warrant [daily operation].”
Specialty stores in the Los Angeles region are now handled by a group that permanently resides in Dallas, Cohen added.
Hertz’s response to such developments is that the mart is not responsible for a particular company’s business.
He said the contemporary floor has “worked very well, and space is at a premium.” As proof, Hertz offered that the mart is very close to signing a lease with BCBG Max Azria for a large space.
“In this business, you see companies that are hot one year, then suddenly go out of style and start laying off people and reducing space,” Hertz said, naming as an example Rampage, which was forced to close its showroom in the mart when it filed for bankruptcy.
“The nature of fashion is that nothing stays the same,” he said. “When one place closes, another takes its place; and instead of looking at the losses [during] a year, you have to look at gains at the end of the year.”
Michael Gae, co-owner of Rep Et Trois on the second floor, said that he believed the merchandise mix has contributed to the decline in traffic on some floors.
Gae, who carries contemporary and misses’ lines such as Kisca, Kenar and Margaret M, noted that management had originally merchandised his floor by intermixing contemporary showrooms with misses’ showrooms. This, he claimed, was a successful formula. Then a few years ago, the mart remerchandised and designated the fifth floor as a showcase for contemporary lines. At the time, management moved companies such as Parallel, Poleci and David Dart from the second floor to the fifth, Gae said.
“They segmented the fifth floor, and the market changed on them, which is why it is dead today,” Gae said. Exacerbating the problem was David Dart and Democracy becoming more misses’ in direction. “If a contemporary store thinks that a floor has become too missy, it won’t go to that floor,” Gae said.
Gae, who has had his showroom in the mart since 1987, said that he still sees a steady flow of national stores at markets, but added that traffic is off on a daily basis. “The daily shopping habits on a local level are not what they used to be. It used to be more active.”
Still, Gae insisted that recent dips in attendance have not taken away the mart’s edge. The year-round business strategy outpaces other regional marts in Dallas, Atlanta and Chicago, which are primarily open only during markets, he said.
And as in the case of Mica’s Rabineau, Gae reported that he still does the bulk of his business in L.A.
Buyers remarked that Hertz so far seems somewhat “reserved” in approach.
“I don’t think that he plans to make any dramatic changes until he digests all of the facets of the building,” said Gae, who added that the essential difference between Equitable and Hertz as owners boils down to an understanding of the market.
“Equitable was a corporate company, that seemed to throw money into the building without understanding it and giving it to the marketing team to run,” said Gae. “I think Hertz is more hands-on and will know what’s going on here.”