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Thinking Outside the Box: Filling Vacancies with Unexpected Tenants in Southern California

February 1, 2023

Creative plays are the name of the game at retail and mixed-used properties throughout the U.S, especially in lot-constrained Southern California. To glean the latest market intel from high-end SoCal, Commerce + Communities Today contributing editor Steve McLinden caught up with two active leasing specialists at Kennedy Wilson Brokerage’s Beverly Hills office: executive vice president and director of retail brokerage Lee Shapiro and senior vice president Christine Deschaine.

What’s new and different in vacant shopping center spaces, freestanding buildings and mixed-use developments in Los Angeles and its submarkets?

Shapiro: Historically, traditional grocers with larger footprints, such as Trader Joe’s, and small convenience stores like 7-Eleven tend to thrive, but grocery retail is evolving and new midsize concepts are emerging. These midsize retailers, between 3,000 and 6,000 square feet, began popping up in Denver, Chicago and New York, and now they’re beginning to develop a Southern California presence. This is borne out of necessity. In order to penetrate urban markets, grocers needed to rethink store formats to accommodate smaller footprints in mixed-use buildings. Yummy, Mother’s Market, Foxtrot and Choice Market are all successful operators in this burgeoning category.

Are there any especially innovative adaptive reuses you’ve seen in the area marketplace?

Deschaine: One that comes to mind is at an iconic space, the former Pacific Dining Car on Wilshire Boulevard in Santa Monica. The landlord was unable to replace the restaurant tenant there and instead leased it to a large veterinary company. Conversely, retail tenants have started to understand that to gain a foothold in some core urban markets, they need to consider nontraditional spaces. Likewise, landlords are thinking more creatively about how to maximize the value of their real estate, and that may include leasing to a tenant category they hadn’t thought of previously.

What about creative reuses at properties that Kennedy Wilson is leasing?

Deschaine: We recently leased a 6,678 square-foot former 24 Hour Fitness space to Tia Women’s Health, a membership-model healthcare provider. The location was perfect for them, but it was challenging making the two-story space with a wraparound mezzanine work in a way that complied with city guidelines. The lease was signed in late 2021, when medical use with street frontage wasn’t allowed in downtown Santa Monica’s Bayside District, so we worked with the landlord and tenant to carve out a multitenant plan that allowed Tia to take a majority of the interior space, leaving about 3,000 square feet of streetfront space for co-tenants. And it worked. Tia is slated to open spring 2023.

Shapiro: We’re also seeing an expansion of the retail entertainment experience with concepts such as the [immersive] Van Gogh Exhibit Los Angeles. That took over the former Amoeba records location in Hollywood. While the concept of a retail entertainment experience isn’t new, more retail tenants are adapting to space in this way. Many start with an open box in a highly visible location in an industrial pocket where the tenant will test the space to see if the concept works. Another good example: LVMH’s Veuve Clicquot concept in Beverly Hills, which is a high-end brand experience with retail. We have several current listings for leases at historic buildings in downtown L.A. and Hollywood that we feel will appeal to creative retailers or office users, restaurateurs or health and wellness providers. For example, the Farmers & Merchants Bank Building on 4th Street and Main Street in the historic downtown L.A. core is a 19,000-square-foot space you can’t find anywhere else. It operated as a bank from 1905 into the late 1980s and has an incredible skylight. It won’t ever be a bank again, but a tenant with vision who is looking for a one-of-a-kind flagship L.A. location could make it something special. We’re also leasing 45,000 square feet at Howard Hughes’ former Hollywood headquarters. It was originally purchased by Hughes for a color film lab, but he ultimately ran his film projects, airline ventures and tool company there. We love working on adaptive-reuse projects like these where the right tenant finds a true home in an unconventional place.

How enthusiastic are investors and developers in general over these retail-space conversions and similar plays in SoCal?

Shapiro: There’s always a desire for well-located real estate and retail property with credit tenancy. Despite rising interest rates, we’re seeing a high level of activity.

Deschaine: There’s also a healthy appetite for owner-user buildings throughout Southern California, particularly in areas such as Santa Monica and in Venice along Abbot Kinney Boulevard. Owner-users are still seeking small buildings to purchase, and investors are continuing to look for thriving urban areas.

Shapiro: Our team has also sold a number of drive-thru locations in the last few years, mostly former bank branches. These are hot properties in urban markets where drive-thru space is limited. The retail banking model has changed considerably, so most of these properties have been or will be converted to fast-food use. For example, the former U.S. Bank branch we sold at 1750 W. Olive Ave. in Burbank is now a Raising Cane’s. However, most developers have to think long-term. With the cost of borrowing and the time it takes to develop land here after it is purchased, development can take three years or longer if entitlements or rezoning is required. The highest and best use for underutilized property in Los Angeles is often housing, and both the state and local governments have gotten behind incentives to build more.

Are there any market-specific lease trends you’re seeing in your immediate market area of Beverly Hills/Los Angeles?

Deschaine: Each market has its own personality. At 26th Street and San Vicente Boulevard in Santa Monica, for example, we did recent deals with The RealReal, Kalologie skin care, Elaine Kim and Equity Union. They rely on an affluent customer base as well as the luxury retail across the street at Brentwood Country Mart. The surge in restaurant tenancy is a trend consistent with other urban markets, as well. With more of the population returning to restaurants, the sitdown variety have been extremely busy. Second-generation restaurant spaces are in very high demand since tenants have a much quicker path to opening by using existing improvements. These restaurateurs don’t face as many operational obstacles, especially if they’re already permitted for commodity use, including alcohol permitting. This is happening from downtown to the ocean.

Shapiro: In downtown L.A., we’re also seeing a return to fine dining. Last year, we did significant leases at Hanjin Group’s Wilshire Grand Center and Silverstein Properties’ former Cafe Pinot building. Niku X at Wilshire Grand features modern contemporary Japanese cuisine, which is inspired by French influence under Michelin-starred chef Shin Thompson, has taken an avant-garde, 8,265-square-foot space. Global Dining is developing a new Italian concept, Settecento, in a 4,167-square-foot space in the old Cafe Pinot.

A new Italian concept, Settecento, will backfill downtown Los Angeles’ former Cafe Pinot building. Photo credit: Kennedy Wilson Brokerage

Deschaine: In addition to being home to streaming and news companies, Empire Center near the Hollywood Burbank Airport is one of the highest-grossing shopping centers in the nation. Burbank has a great mix of parking, restaurants and an ease of doing business, given that there’s no city income tax or gross sales receipt tax. The area is also a great transportation hub with Metrolink, so all the key components are there for a thriving commercial ecosystem. The city of Burbank is easy for businesses to work with, facilitating permits, entitlements and the like, so it continues to grow.

Demand for restaurants in areas such as Culver City is quite high. With an anticipated large daytime customer base from employees coming to Amazon, Apple and HBO, who together have all taken about a million square feet of large-block office space in new area developments, the Culver City restaurant market is surging.

Shapiro: In fact, we’ve seen commercial tenants of all shapes and sizes interested in planting a flag in Culver City. For perspective, restaurant and retail deals we’ve done in the last couple of years there have set high-water marks for rent — for some tenants, 50 to 65% above previous market rates. This has a follow-on effect with other tenants wanting to be a part of the mix despite premium rents.

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