Palo Alto Weekly
News - July 22, 2011
Downtown without Borders: retailers, brokers ponder the future
Palo Alto office market is hot while retail has struggled, landlords say
by Chris Kenrick
With the demise of Borders bookstore, an anchor of downtown Palo Alto, retailers lamented the loss of a gathering spot and real estate brokers speculated on who might fill the void.
Surviving local booksellers refused to admit much satisfaction in the failure of their outsized competition.
"We're all very sad when we see the demise of booksellers anywhere," Kepler's General Manager and Children's Buyer Antonia Squire said.
"It really is indicative of the state of consumerism right now. It's not that people aren't reading, but it's where they're choosing to put their dollars — outside the community.
"When a bookstore goes away, is there anything that replaces it? That's the question, and we're not sure of the answer yet."
While downtown Palo Alto retail has struggled with high turnover and falling rents in recent years, the market for office space is white hot, landlords and brokers said.
"The vacancy in office space is almost nil right now," said Fred Thoits, president of Thoits Bros., Inc. and a major downtown landlord.
"There's been a lot of money flowing into venture capital. Startups are scrambling, and they want to be downtown because they're attracting a workforce that wants to be downtown.
Thoits said office rents have spiked up to 25 percent since the first of the year and that there's "real competition for anything that comes up."
But with vacant storefronts up and down University Avenue, where will all the office workers shop?
Palo Alto is unique among suburban downtowns in having a large employee base, creating opportunities for retail, said Palo Alto developer and landlord Jim Baer.
"Very few downtowns have office tenants with spendable income the way Palo Alto does," Baer said.
"Facebook and Google started here, so you've got a lot of energetic guys that want to visit, have lunch, stay late for coffee. If they need flowers, they're going to get them here.
"That kind of stimulative characteristic is very rare in other suburban retail downtowns, so we're better off than most, and our sales per square foot reflect that," Baer said.
Dining and entertainment traditionally have done well here, but other retail categories have struggled recently. Responding to pleas from landlords, the City Council in 2009 amended the downtown zoning ordinance to reduce the size of the ground-floor retail zone.
The move to electronic distribution not just of books and magazines but of film and sound is a "for-real change in retailing" that is national — and has extra impact here because local residents tend to be early adopters, Baer said.
That change accounts for the demise of such national brands as Blockbuster, Virgin Records and Borders, he said.
"Those are really all under pressure from an appropriate and predictable technological shift," he said.
The recession also made things difficult for "lifestyle retailers" such as Z Gallerie, which vacated its large University Avenue space in early 2009.
The good news is that Apple is readying plans to move into the Z Gallerie space, and at least one local broker sees a pickup in downtown retail.
Menlo Park Realtor Sam Arsan said he recently leased the former site of A.G. Ferrari at the corner of Hamilton Avenue and Emerson Street, as well as the former Fashion Passion site at 425 University.
Arsan said he's also had three offers on the former Rococo kitchen showroom next door, at 435 University, which has been vacant for several years.
"Nobody has a crystal ball," Arsan said. "The retail market has kind of dragged a little bit behind the office market, but it's coming back."
Borders landlord Chop Keenan said he's considering various options for the looming vacancy, including building a glass atrium over the courtyard space.
"We'll see what the market tells us to do," Keenan said. "Retail is a tough business these days.
"If I can find a two-story retail user for 23,000 square feet, that's a good thing," he said.
It also would be possible to subdivide the space, with one tenant taking front-to-back in the portion facing University Avenue, and another tenant taking the interior ground-floor space, with access facing the rear parking lot.
"What we don't want to happen is for the thing to sit there empty.
"I hate to lose the book category, but time marches on."
Books Inc. CEO Michael Tucker said business at his nine Bay Area stores is up 5 percent over last year as the shops make extra efforts to focus on customer service and become community gathering spots.
Tucker, who has a shop at Town & Country Village, cited a recent non-book event that drew 120 people to his Opera Plaza venue in San Francisco — a discussion of composer Richard Wagner following a San Francisco Opera performance of a segment of the Ring Cycle.
"A group wanted a place to meet after the opera, so we set up chairs and ended up selling $2,000 in other stuff," Tucker said.
"A successful bookstore can be that kind of thing in the community."
Tucker called the Borders liquidation a loss to the industry.
"The unfortunate thing, from my personal perspective, is that 11,000 booksellers nationally are going to be out of work," he said.
"We've hired a number of people from Borders, and they are great booksellers."
Staff Writer Chris Kenrick can be emailed at email@example.com.
Posted by Shop,
a resident of College Terrace
on Jul 22, 2011 at 7:38 pm
"You would be very surprised to know the rents paid by every one of the businesses on University alone. It's a shame that one of the local papers doesn't do a little investigative reporting, and publish that data."
How's this? I can't cite my sources, but have heard from very knowledgeable persons that Pizza My Heart puts out just over $20K per month for their space (as of 3 years ago). There's a cafe on University that serves multiple things in a small space than Pizza My Heart that pays $11K per month.
A business that operated on University in a moderately-sized place paid $14K (it did rent for a lot less than that - about half that amount - until a well known real estate developer bought the building and sent rents through the roof - I'd love to name the guy, but I won't, here.). Where is real retail development leadership in Palo Alto? I don't see it - not from City Hall, not from the developers.
How about a small space at T&C for $7.5K per month? I know for sure that that's what one retailer is paying, and s/he doesn't even have a front-facing (on el Camino) space.
btw, those rents don't include "triple-net" (gas, electricity, water, garbage and other maintenance); they don't include signage costs; they don't include certain kinds of insurance; they don't include permit costs; they don't include rent increases that can be as unpredictable as most landlords.
Look, Palo Alto is its own worst enemy when it comes to retail diversity. There are no limitations on business density. Los Altos has rules like that, and their downtown is far ore diverse (and I think) lively than PA's. There's so much money here that people can sit at home and order books - or anything else they want - online. How do you compete with that, as a retailer? Guess what? You can't, not unless you're working 7-day weeks and you give up your life to your business.
Another thing: I have seen, over years, citizens meddle in what kind of stores should or shouldn't be in Palo Alto. People will rail against chain stores, but nowadays chain stores are the only ones that can pay the rent. People complained and whined about JJ&F, but then how come one would see car after car filled with COSTCO or TRader Joe's bags brimming from their car as they stopped in JJ&F for their favorite "specialty" item. Do you really think that local retailers don't notice that kind of thing.
There is really no support for retail in Palo Alto; it's too easy to convenience oneself at large retail box stores that are only a few miles away.
Really bad retail development policies, over years, have hurt Palo Alto. How do all the whiners from years past look, now? - the ones that railed against large retail, the ones that could have brought in sales tax revenue and kept our infrastructure reserves solvent? Many of the same people who marched against retail are now decrying the state of Palo Alto's infrastructure, and its loss of services.
Look at Stanford Mall - it's pathetic, nothing more than a paean to high-end status shoppers. Everything that was human scale about the place - in terms of retail vernacular and easy-to-access affordable services has been forced out by high rents and a management that isi dedicated to drawing the high end shopper.
Landlords? Don't get me started. Look at the old coffee shop on Hamilton that closed down (across from Peninsula Creamery). That storefront was vacant for YEARS, in spite of pleas to get it re-rented. Why no penalties - hard-hitting monetary fines - for letting properties stay derelict? That might be an incentive for landlords to make temporary compromises when rental markets are down.
Actually, Palo Alto doesn't have that much of a commercial occupancy problem, but the retail mix sucks. It's not compelling. There are way too many restaurants. Why? Because it costs about $1M to construct a kitchen. Most restaurants fail. So, when one place closes, the landlords and/or their agents are all to happy to rent to the next guy who sees an easy entry to the Palo Alto restaurant scene at some obscene monthly square footage rate, thereby largely setting itself up for probable failure - wash, rinse, repeat. Also, and again, there are no business density rules. Why should the city let 3-4 similar businesses operate practically adjacent to each other? Look at things like beauty parlor density on California Ave. - it's ridiculous. It just makes it that much more difficult for retail to survive. Why are so many coffee shops permitted within close proximity? Absurd. If you lower the density of any one kind of store, you create more retail diversity (which brings people downtown) and you give the retailers a chance to survive and make a living.
There are some nice stores on University, and downtown is OK, but it's not vibrant. Nothing happening late night; the place turns into a ghost town after 10pm. Boring.
Altogether, Palo Alto is - compared to its recent past - in relative decline. That's not necessarily a bad thing, but Palo Alto as urban "anchor"? Those days are fast fading. We still have retail properties that have been so constrained and hounded to death by local gadflies that by the time they do get off the ground, the cost overruns from delay (which are always passed on to future retail tenants) practically doom many future businesses to failure.
As for Borders, it's no surprise that it closed; when Louis Borders left, he left at Border's peak (and promptly blew a wad on WebVan, remember that?). He should have stayed with Border's books - a business he understood - instead, he (ironically) and Borders books became victims of poor business vision on the one hand, and lack of business adaptation on the other.
There's not much more to say other than suggesting that Palo Alto needs to revisit its retail strategy. I doubt that will happen though, because there just isn't enough interest among the citizenry to get involved; that's the downside of an upscale community - people have the resources to divert themselves in multifarious ways...they don't need to go shopping, and when they do, they go to I Magnin, or Amazon, for instant gratification. Combine all that with no business density rules, landlords who think only bottom line (in spite of rhetoric to the contrary), and lack of cohesive retail development policies within city hall, and you have a tough row to hoe for retail.
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