March 16th, 2007
Retail condominiums a nice fit for fashion
That question has plagued many young Angelenos sifting through the pros and cons of buying an entry-level condominium or renting a two-bedroom apartment.
For the most part, retail and wholesale apparel companies have been spared the headache–usually they can only lease space. But what if leasing wasn’t the standard? Would business people do the same calculations and jump at the opportunity to be condominium owners?
A series of new commercial condo projects is testing that theory. Developers of these projects are confident that the skew of the current commercial market–with its ascending rents and short-term leases–will tilt the equation toward the “own” direction, at least in L.A.’s dense Fashion District.
“It is very analogous to the residential side. Some people are more comfortable renting and others want to own their unit,” said Kent Smith, executive director of the Fashion District’s Business Improvement District. Downtown’s Fashion District is where the commercial condo concept has its longest local history–the 300-unit San Pedro Wholesale Mart was built in the mid-1990s and an annex was added a couple years ago–and is where the largest new projects are going. In the vital apparel industry core, these condos give wholesalers a place to display their clothes to buyers for retail stores.
Among the latest developments is the 200-unit Los Angeles Fashion Center or L.A. FACE, slated to open next year on South San Pedro Street, and the 200-unit Stanford Regency Plaza, scheduled for a 2008 launch, on Stanford Avenue and Pico Boulevard. Other smaller commercial condo complexes are cropping up as well.
Alix Chang, operations manager of Khan Development Co. Inc., is responsible for attracting buyers for L.A. FACE’s units and said about 85 percent of them have been sold since they went on the market in 2004. The average price for a 1,200-square-foot space is now $750,000, up from $360,000 two years before and well over the county’s average residential condo price of $415,000.
“The popularity of this sort of a project is very, very high. The price has been doubled, but it is still cheaper than your average (rental) price in downtown,” said Chang. “It is like owning a house. You don’t have to worry about the lease, you pay your mortgage. It is your store, you own the land and the property.”
Depending on the down payment and the size of the property, the L.A. FACE selling price brings estimated monthly bills of around $3,000 to $4,000. Leasing space at comparable locations in the Fashion District starts around $2.50 per square foot and can, at the very best spots, go up to $10 per square foot. Using those figures, monthly rent at a 1,000 square-foot showroom ranges from $2,500 to $10,000, not including tenant improvement costs and other fees.
Niche practice
Sina Kangavari, managing partner of KI Group Inc., the developer of Stanford Regency Plaza, which is costing $30 million to construct, said interest in Stanford Regency is high. He’s already looking for other locations to build commercial condos. At the San Pedro Wholesale Mart, manager Jay Kim said there are now only two vacancies and even those have drawn serious prospects.
Despite the apparent demand for the condos, ownership isn’t widespread for wholesale apparel and retail businesses.
Part of the reason is that most large chains–the Best Buys and Gaps of the world–have historically leased, and properties designed to suit these chains have been arranged that way accordingly. For independent retail businesses, the failure rate is high, and lease terms reflect the chum of stores and restaurants in shopping centers. Buying a condo latches an owner-operator into a business that might not last two months, let alone several years, which raises the issue of a foreclosure that could leave a unit vacant for months or longer.
And even if business takes off, Mark Tarczynski, a senior vice president at CB Richard Ellis Group Inc., said that retailers like the freedom leases offer. They want to make a splash at a hot location, but not be stuck with depressed property if the neighborhood tanks.
“Retail is kind of a moving target,” he said. “Your store location one day could be a huge hit, and then five years later, the market has moved and you got to move somewhere else.”
That’s not as much of an issue in the Fashion District, which has been the heart of L.A.’s apparel industry for decades and still largely caters to wholesalers. But in addition to the inflexibility of ownership, banks have made it difficult to get loans for buying and building commercial condos.
Recalling the initial development of condos in the Fashion District, Cooke Sunoo, director of the Asian Pacific Islander Small Business Program, said banks weren’t keen on providing financing because they couldn’t grasp the concept. That meant that a lot of upfront cash was necessary.
“Somebody who is coming in for a construction loan, if it is for a supermarket or an apartment house, there are certainly formulas they use,” he said. “These things were anomalies.”