Tuesday, April 5, 2011

Cracks in the Wall: Rick Caruso’s Masterful Breach

Fashion is about keeping the competition in the dark while making big bets on the next break-out fashion trends.

Success in retail real estate is about keeping store concepts fresh.

Shopping center owners, too, practice the art of the new when waging the heated battles to land the best tenants. This is especially true in the hyper-competitive Southern California regional mall business.

Occasionally we see an elegant execution, a lightning bolt move in the stodgy, slow moving commercial real estate world. At first we did not appreciate all of the ramifications of the full page advertisement by Rick Caruso in March announcing that Nordstrom is to leave the Glendale Galleria and to reopen at Caruso’s Americana in 2013, his adjacent Glendale project, until we thought about it and the full meaning of the message had sunk in.

Caruso’s Americana and the Grove (near the Farmers Market and Melrose) are among the malls du jour in Los Angeles; these projects are case studies of rapid commercial real estate evolution viewed in real time. In the Glendale example the mid-20th century enclosed mall phenomenon (that had gutted many 19th and early 20th century Main Streets) was now about to be mauled a bit by the Americana’s nostalgic 21st century Main Street designs.

Adding insult to injury, Caruso a few years ago had won a sizable settlement in a lawsuit with General Growth, the owner of the Glendale Galleria, over alleged (and once common) anti-competitive leasing practices.

By buying the Nordstrom anchor building, Caruso had begun the process of breaching the formidable and seemingly impenetrable walls of a very massive and successful nearby enclosed mall.

Caruso’s wedge might mean that more financial cracks in the facade could develop. There might be co-tenancy issues. Often the stability of smaller, non-anchor tenant lease terms are predicated on the presence of a minimum number of anchor tenants who, like Nordstrom, spend more money on advertising and promotion, thereby drawing traffic to the mall and benefiting smaller tenants who ending up paying a greater share of mall operating costs. We are not forecasting the collapse of such a dominant mall, just an increased level of discomfort with its neighbor.

As the proud new owner of one of Galleria’s anchor buildings Caruso has, at minimum, started the conversation with General Growth and will likely become part of the Galleria’s planning process and potential renewal effort. No wrecking ball was necessary to start, just the Trojan horse Nordstrom transaction that may force change and pave the way for at least a section of the Galleria to be repositioned.

A master stroke like this doesn’t happen in a vacuum or without strategic alliances. With public pressure he was able to acquire the additional adjacent southern parcel necessary to expand for Nordstrom. Caruso has a high political profile in Los Angeles and Glendale. Real estate is local. Public/private partnerships are necessary in long-lead mega-developments as is popular support required to win development approvals put to vote. Fluid battle plans and transparency win over the cookie cutter approach; local, decentralized management often wins over more remote centralized ownership. In the heat of battle nothing can be taken for granted.

The bottom line is that Caruso’s shopping center designs, tenant mix and open air retail experience are what the people in LA desire today. And he will continue to win until the next development step in retail real estate evolution devours yesterday’s tired fashion.