Swap Street

High-rent mercados may give way to chains that will pay much less
By: SARAH FILUS: Los Angeles Business Journal Online
As the buildings above Broadway’s mercados turn into luxury condos, residents may want national chain coffee chops and book stores.

Property owners along South Broadway in the Historic District downtown are facing a conundrum: what to do with the ground floor retail space?

For years the mercados between Second and Eighth streets have been known as a primary Hispanic shopping destination. Particularly on weekends, they bustle with thousands of shoppers, who buy jewelry, food, T-shirts and knick-knacks. Business is so good, in fact, that merchants there pay rents as high as $10 per square foot per month – about the same as rents along the famous Third Street Promenade in Santa Monica.

But as the long-underused space above the mercados is being adapted into higher-end residential, the same landlords feel pressure to bring in national coffee shops, book stores and the like to cater to the professional class that’s moving in.

Problem is, the national chains are not willing to pay those high prices because their sales per square foot are not as high as the mercados. Also, the chains aren’t sure that the downtown renaissance is mature enough for their arrival.

“The difference between what we get from the mercados versus what we will get from a national chain will be hard to take,” said Greg Martin, the U.S. representative of a triad of real estate companies called Begonia Development, Mideb, and 5th Street Funding, owned by Australian interests. “But if the right tenant comes along – Borders, Starbucks, Trader Joe’s – we would certainly rent them space.”

The Australian firms have held property along Broadway for more than 20 years and now manage more than 500,000 square feet in the area. They expect to open their first round of apartments within the next four months in a historic building, the interior units of which overlook an arcade that has long been an indoor mercado mall.

The 143 upscale apartments are expected to rent for $2 to $2.50 per square foot per month, comparable to other upscale areas around Los Angeles.

Residents – who will most likely be similar to the average renter downtown, 25 to 35 years old and about half making more than $150,000 a year – can either get to their apartment by walking through the bustling mall or by using a separate door.

When the apartments open, the merchants below will be required to move their merchandise into their stores and out of a central hallway. In the place of the merchandise, Martin will put kiosks down the center hallway that will serve both the residents and the shops and shoppers.

Some seem resigned to the lower rents they’ll get from the retail space.

Developer Fred Afari, for example is advertising lower retail rents on the first floor of his building under construction at Broadway and Eighth. The idea is to attract recognizable name brands.

“The retail rents are high along Broadway because of the high Hispanic traffic that moves through,” said Afari. “We feel we have to give some kind of lower rents to get national tenants. We are looking to accommodate the people on the upper floors and to promote the whole neighborhood.”

He signed a contract with Bakersfield-based Kelly’s Coffee and Fudge Factory, a chain with about 35 locations around Southern California, to open a shop on the ground floor of his building when it’s completed at the end of the year. And he’s looking for more tenants. A dry cleaner, market, and small restaurant are some of his top priorities.

He is willing to rent retail space for between $1.75 and $2.50 per square foot per month – a deep discount for the area.

Mercado moves

Some Mercado tenants said they think that national chains like Starbucks will revitalize the area. Others disagreed.

“No one that buys here sleeps here,” said Jim Meh, the owner of Discount Jewelry Plaza, a small jewelry store along Broadway near Eighth Street. He kept his store in Afari’s building until construction started about a year ago, he said. “One hundred percent of my customers are Spanish-speaking. They don’t pay $2 for Starbucks coffee; they go pay 50 cents to buy coffee and add water.”

Either way, more developers are expected to take this step, said Carol Schatz, president and chief executive of the Central City Association of Los Angeles.

“There are many, many buildings that are physically currently under development. It will be very interesting to watch,” she said. “As people start moving into a neighborhood, they have needs that need to be met. Everyone wanted to see a grocery store downtown. They want more places to grab coffee.”

Within the next year as construction projects are completed, up to 5,000 residents could move into the new apartments in the historic core along Broadway and on Spring and Main streets nearby, said J. Russell Brown, the president of the Downtown L.A. Neighborhood Council and the executive director of the Historic Downtown BID.

The transformation of Broadway certainly signals a continuing decline in the fortunes of mercados. Merchants and landlords said that business at the mercados has been falling off for years.

“Every day it goes down, down,” said Carlos Tejada, a merchant who pays $7,000 a month to rent a storefront for his men’s apparel shop along Broadway. “I’m not making any money. Never have I seen stores closed like this along Broadway.”

Tejada said he may have to close by next year.

The street took an initial hit in the ’90s when the MTA Red Line was built through the area, preventing easy travel along Broadway’s sidewalks, said Anne Peaks, vice president of Yellin Co., which owns the Grand Central Market, Homer Laughlin Building, and the Million Dollar Theater along Broadway. Business on the street never completely recovered, she said. Foot traffic lightened more when Angel’s Flight railway – which carried people from Bunker Hill to the Broadway area – closed in 2001 after a crash.

The Spanish-speaking population also gained a greater variety of places to shop. “The population has dispersed in a lot of ways,” Peaks said. “People can go to Wal-Mart and Sam’s Club and to the suburbs where they can get similar prices.”

Huntington Park and South Central are popular destinations for Hispanic shoppers looking for a more organized and upscale shopping experience, Brown said.

The companies Martin works for own real estate in Huntington Park that looks similar to the space on Broadway. “The people in Huntington Park used to ask us for space along Broadway. Now the people on Broadway want a spot in Huntington Park,” said Martin.

Upscale mercados?

Brown predicts that the slowdown in the mercados could help in the revitalization of Broadway.

“As the flea market atmosphere transitions, you will see more upscale dining and shopping experience,” he said. “There will always be a place for the Latino community, but right now there is not much more than a Tijuana-like shopping experience.”

Joseph Hellen, who leads the U.S. operations for the Australian firms, says he would like to see the block entirely converted to an upscale shopping mall akin to the Third Street Promenade or the Grove, but with more entertainment venues. He has been in talks with other developers in the area including Michael Delijani, who owns a number of the historic theaters along Broadway.

“Everything moves slow because there are a lot of restrictions because the buildings are historic,” said Hellen. When he first arrived on the scene, he wanted to knock down 75 percent of the district and build a mall from scratch, but he realizes the process will take a long time.

What’s more, many of the mercados could adapt and even thrive if the area goes more upscale.

For example, earlier this year he was involved in opening a Rite Aid at Fifth and Broadway, and the swap businesses were moved to new locations nearby. One bakery opened an upscale version.

“We brought the merchants in and told them we were going to upgrade the retail,” said Hellen. “They said, ‘if the area is going to improve, our business is going to improve.’

“If upscale is where the market is going, they will respond accordingly.”