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March 09, 2005

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Palo Alto Online

Publication Date: Wednesday, March 09, 2005

Hanging on by a string? Hanging on by a string? (March 09, 2005)

As vacant store fronts become commonplace downtown, long-time merchants question whether 'greedy landlords' are to blame

by Jocelyn Dong

On a wet morning last week, the storefront windows of Domus were plastered with a sign that's become a familiar sight in downtown Palo Alto: "50% off all inventory. ... This location will be closing on March 26, 2005."

Throughout the University Avenue shopping district, rumors that store and restaurant owners are pulling up stakes are spreading like wildfire.

"They're closing? How did you hear about that?" asked one businesswoman, informed of the latest shutdown.

"They've been talking about closing for years," said a property owner, knowingly.

Not only Domus, but Kiki's, Little Attitude and a handful of others have plans to give up their coveted addresses on the Peninsula.

Additionally, a number of storefronts have remained empty since tenants left downtown months, if not more than a year, ago. To alarmed downtown retailers, the vacancies are starting to add up. They want to know what's going on, who's responsible and what can be done about it.

"It's hurting the ambience downtown," Eric Hager, general manager of Palo Alto Sport Shop & Toy World, said of the extended vacancies. "One of the most frustrating questions asked of downtown merchants by those outside the downtown is 'Why? Why are prime retail locations remaining vacant?'"

The answer, according to some, is, understandably, complicated, reflecting such realities as competition from other shopping districts, a changing consumer demographic, independent corporate decisions and even, one developer charges, too much of a good thing -- restaurants.

But the man-on-the-street opinion is readily summed up in two words: "greedy landlords."

According to Hager, each report of a retailer closing due to unaffordable rent seems to blame money-hungry property owners. The way Hager sees it, downtown could be full -- if landlords so chose. There are spaces that have sat empty for months - or years - leading to speculation that landlords are stubbornly holding out for tenants who can plunk down boom-era fees.

"I think there are people who want to open stores, but the buildings aren't coming open," he said. "These landlords suffer from a myopia. ... Are you really going to get more money for your rent (by waiting)?"

Christy Weinstein, owner of Kiki's candy store on Emerson, has decided to relocate to south Palo Alto in the face of a rent increase to $10 a square foot. In an interview for a recent Weekly article, Weinstein complained: "I hate to leave downtown, but landlords get so greedy. They see you're doing well and they raise the rent. I don't know how any business can stay downtown unless you're a Restoration Hardware."

The thought of a landlord demanding even $6 a square foot sets off longtime developer Roxy Rapp, who believes such expectations are unrealistic for merchants in today's climate.

"Come on, get real!" he said. "That person doesn't know how tough it is to make it in retail."

These days, rents are going for $3.50 to $5 per square foot along University Avenue, according to Marilynn Krause of Coldwell Banker Commercial Wilbur Properties. Along side streets, prices drop to around $3.50, she added.

There is also the issue of out-of-town landlords, many of whom are more interested in "the monthly check" than the vibrancy of downtown, Rapp said

Other landowners say the situation's not that simple.

Elizabeth Wong owns 429 University Ave., the former site of Franklin Covey. She's signed on a new tenant, but it took months to settle on a retailer who would thrive, she said.

"There are a lot of calls, and a lot of people wanting a store," Wong acknowledged, but not every business is a "good match" for the space.

"Landlords are very well aware of what it takes to run a retail (store). ... Landlords like me want retailers to do well," she said. "You're better off in the long run putting the right retailer there. If I answer to every beauty and massage place, of course I'd have a renter instead of having space vacant.

"I don't operate that way."

Developer Chop Keenan, talking on his cell phone as he drove back from Stockton last week, agreed.

"It's expensive to turn over space," he said, referring to costly improvements that prepare properties to host new businesses. He doesn't believe ongoing vacancies are necessarily cause for alarm.

A number of properties downtown lay empty as they await redevelopment. The former home to the popular Caffe Verona on Hamilton, for example, was vacated a year and a half ago, then sold. Last fall, plans were revealed for a new 4-story office building with, ironically, a café at the ground floor. That project is winding its way through the city's approval process.

But other spaces are vacant because landlords are reluctant to upgrade their buildings, making them less viable for interested merchants, Rapp said. Property owners could do a lot to improve the vitality of downtown through major overhauls, but most are content to do minor improvements. They claim they can't afford it, he said, "and then they drive away in their Mercedes."

While some merchants point fingers at landlords, property owners hold merchants - and the market -- equally responsible.

"Retail's a tough business; it's always changing," Keenan said. "We're not immune to market forces."

The entrepreneurial spirit may be ingrained in Silicon Valley residents, but that doesn't mean all business ideas should be pursued, according to Rapp. Some store closings are inevitable.

He recalled a restaurateur who contacted him about a space farther south in Palo Alto, on Middlefield Road. The would-be renter, an engineer, wanted to put a fondue restaurant on the building's second floor, an idea Rapp called "crazy."

If Rapp had let the restaurant open, it probably would have died within a year, he predicted. "Then people would have said, 'Roxy Rapp is a terrible landlord.' "

"Some of it is the tenant themselves are bad. Some of it is the landlords are bad," he said.

Take a step back and greater market forces appear to be at play in the retail shuffle unfolding on the streets of downtown Palo Alto.

Developer Jim Baer of Premier Properties attributes the current situation to three things: an aging population, an over-abundance of restaurants, and regional competition.

"You've got an aging population that spends less on certain types of things," Baer said. When people have had affluence for longer, their real spending goes down, he added. "I don't need cloth napkins and candles anymore."

Krause of Coldwell Banker called it "demographic Darwinism": Stores that change with the population and its desires are most likely to survive.

What older consumers may do is dine out more, but even an abundance of restaurants can be a double-edged sword. Having too many restaurants in one area makes it harder to create a full retail experience for shoppers, Baer said.

Other developers disagree.

"Restaurants are our anchors in central business districts. You can't have too many," Keenan said. "That's what gives the whole area the vibrancy. The market is telling us what to do. Restaurants seem to be reviving nicely from the recession."

Competition from other malls on the Peninsula, all of which flourished during the height of the boom, remains strong - another reason why merchants may have a tough time downtown and throughout Palo Alto.

Property owner Warren Thoits acknowledged the market is challenged at this point, with consumers more cautious than five years ago. However, he's optimistic the economy will come around on its own.

Thoits recently received an offer on one vacant property, and has another business likely to move out. Otherwise the tenants are renewing leases, he said.

"Tenants are struggling and you have to give them a little boost" through rent adjustments, he said. "(But) I don't think doomsday is here."

As the downtown office population bounces back, employees and their spending dollars will return -- as will retail, he said. "That was a large part of downtown life (before)."

Is there anything to be done as Palo Alto's retail sector rides out the recovery?

Some in the community have wondered aloud about the role the city could play - wooing potential retailers, for example, or having a talk with recalcitrant property owners.

Surprisingly, the city already does some of that, albeit as more of a facilitator than a pursuer - or enforcer.

Susan Arpan, Palo Alto's manager of economic development and redevelopment, said "matchmaking" is absolutely part of her job description. She meets with businesses interested in setting up shop in Palo Alto and builds relationships with local property brokers and developers, keeping abreast of vacancies.

She recalled courting a biotech firm that eventually moved to Palo Alto, and working with HP to ensure that Agilent would also be headquartered in the city, she said.

The city has also convened a retail committee, headed by Council member Bern Beecham, to identify what can be done to attract retailers. The group includes developers, business people, real-estate managers, neighborhood leaders, city staff and officials.

Their focus is both to boost sales tax revenues (and therefore city coffers) and also help make sure the services citizens want and need are available.

Beecham said he expected no "magic bullet" to come out of the discussions, but rather to discover how the city can optimize what it does - from identifying community needs to streamlining approval processes, for example.

Despite the possible help that government can give retailers (see sidebar), everyone interviewed for this article firmly believed in the free-market system and in property owners' freedom to manage their buildings as they see fit.

Even Hager toes that line.

"I don't believe in forcing people to do things with their properties. ... With respect to vacancies, there's nothing anyone can do but call attention to it," he said. Indeed, his business hasn't been stalled by the retail shuffle; in December, the toy shop had its best sales month in the store's 75-year history.

Landlords and merchants alike point hopefully to the city's new business improvement district, formed last year to promote downtown as a mechanism for increasing downtown's vitality.

Known as the Palo Alto Downtown Business and Professional Association, the group hosts special promotions, such as the Dine Downtown prix-fixe dinners, and is in the process of developing other projects to benefit businesses.

That group is best poised to keep tabs of issues such as the mix of retailers downtown, businesspeople said.

In fact, the association surveyed its members last fall and asked whether they thought the "existing downtown mix is diverse and interesting."

Thirty-four percent replied "no."

One even relayed a customer's comment: "It's so sad. ... Palo Alto no longer has much to feed the cortex, only things for feeding the epidermis and the esophagus."

Susan Hemmenway, executive director of the group, said she looks forward to turning her attention to issues of that kind -- in time. Immediately, however, the members cited three more urgent concerns: the cleanliness of downtown, the loitering problem, and parking.

To that end, the association has launched a street-cleaning program on Ramona and Emerson streets that employs a team of four unhoused people. Hemmenway plans to buy a power sidewalk cleaner for the workers to use.

Thoits thinks that's the kind of thing that will return University Avenue to its glory days.

"We've got to clean up and dress up. There are things that need to be done," he said. "Palo Alto still has its place. It's in the process of coming around."

Senior Staff Writer Jocelyn Dong can be reached at jdong@paweekly.com.


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