With the recent closure of several stores and a vacancy rate topping 15%, Santa Monica’s Third Street Promenade is not immune from the nationwide shift away from brick-and-mortar retail.
While the Promenade’s total sales are up after two years of decline, the shopping district will, over the long term, need to become less dependent on traditional retailers like Banana Republic, which closed last month, and cultivate a mix of shops, restaurants, bars and entertainment venues that reflect changing consumer tastes, stakeholders said.
It’s a challenging task for a public street with 38 landlords who operate independently of each other. David Shulman, a senior economist at the UCLA Anderson Forecast, said retail districts in American “gateway cities” such as Los Angeles and Chicago attracted heavy retail investment in the mid-2010s, which drove up rents to a level that retailers impacted by the rise of online shopping could no longer afford. At the same time, private equity firms started acquiring retailers and selling their real estate assets to turn a quick profit, he said.
“Landlords are holding out for rents of the past that just aren’t possible today,” he said.
But local leaders and business experts have reached consensus on at least one way to get ahead of the so-called “retail apocalypse.”
Although most brands can’t justify the rent and square footage of spaces in major shopping districts like the Promenade, research has shown that physical stores can continue to provide financial value in the age of online shopping as small showrooms that offer customers the opportunity to interact with items before purchasing them online, said Kalinda Ukanwa, a marketing professor at the University of Southern California.
“Brick-and-mortar retail is not dead, it just won’t need nearly as much space,” Ukanwa said. “It’s still valuable for retailers because it gets consumers over the hurdle of deciding to make the purchase.”
Downtown Santa Monica, Inc. and the city of Santa Monica are changing the Promenade’s zoning regulations so landlords can subdivide their properties, allowing retailers to rent smaller, less expensive spaces that open onto the Promenade’s alleys, said DTSM CEO Kathleen Rawson. Additionally, property owners are experimenting with experiential retailers and pop-ups, which also use less space and offer experiences that can’t be replicated online.
“There isn’t a long list of retailers in today’s marketplace that want 40,000 square feet,” Rawson said.
Banana Republic was one such retailer. After 20 years on the Promenade, the retailer left its 45,000 square foot space at the end of January, said Jeff Kreshek, a senior vice president of Federal Realty Investment Trust, which owns a dozen Promenade properties. Steve Madden also vacated a space Federal Realty owns in January as it closed several stores across the country, Kreshek said.
Federal Realty's more recent tenants include Japanese household goods company Muji and South Korean skincare company Innisfree. The second outpost of a local Mexican restaurant will open soon.
"What you're seeing on the Promenade is not so different from what you're seeing nationally," he said. "A lot of brands have lost relevance. That means it's time to do something different, which is not a bad thing."
While the market for retail space has waned, demand for offices and apartments downtown is high, and with more people living and working nearby, the Promenade has an opportunity to refashion itself as a shopping, dining, nightlife and entertainment hub, Rawson said. To that end, the zoning changes will also make it easier to serve alcohol, offer live entertainment and open breweries and coffee roasteries.
“The more we have a diversified mix of uses downtown, the healthier it will be,” she said. “Our goal here is not for this to be above all else a shopping district, an entertainment district, a jobs center or a housing center.”
The rezoning efforts are part of the first phase of Promenade 3.0, a proposed $45 to $60 million plan to redesign the street by 2026. The plan would likely be funded by property owners and the city, which depends on sales tax from brick-and-mortar stores within city limits to fund essential public services and therefore has a significant financial stake in the Promenade’s future.
Shulman, said other shopping districts and malls have invested tens of millions of dollars in their physical environments to lure online shoppers. The Century City mall got a $1 billion makeover in 2017 and the Beverly Center finished a $500 million renovation last year.
“Malls have to invest a lot of money to make it nice enough for people to want to go there and not just shop online,” he said.
Rawson said DTSM and the city are also working to improve access to the Promenade by adding real-time parking signs to direct drivers to empty spaces and are exploring a new system to manage Uber and Lyft dropoffs. But with recent surveys showing that half of all Promenade visitors don’t arrive by car, parking capacity isn’t a major concern, Rawson said.
Nor is the impact of the homelessness crisis on the public street, she added, although last year DTSM set aside four staffers from its hospitality ambassador program to handle antisocial behavior downtown.
“When you look at it from a business standpoint, there are places in L.A. like downtown or the Arts District where homelessness is very pervasive, and yet people flock to them because they offer a unique experience,” she said. “While we’re continuing to manage antisocial behavior and ensure people feel as safe as possible in downtown Santa Monica, that’s not our biggest hurdle.”
Instead, Rawson said, DTSM will focus on enlivening the Promenade’s public space with major events, daily activations and eventually a comprehensive redesign that will bring new seating areas, event plazas, concession stands and stages to the street. Some new seating and play structures have already been added over the past year.
“We’re going to be in a remodel phase for a while, but when we come out of it, I’m very optimistic that we’ll be in a remarkable place,” Rawson said.
madeleine@smdp.com
