THE LOS ANGELES TIMES

The developer of the Grove says the future of retail is outdoors, with apartments atop shops.

By: ROGER VINCENT

With retailers breathing sighs of relief over the just-concluded shopping season, the relentlessly competitive shopping center industry already is looking for the next big thing.

A Southern California retail builder who thinks he has it is Rick J. Caruso, whose $200 million Grove shopping center was completed in 2002. Adjacent to the historic Farmers Market at 3rd Street and Fairfax Avenue in Los Angeles, the Grove drew an estimated 18 million visitors in 2003, about 5 million more than Disneyland, in part because of such details as hand-tiled mosaic footpaths, a concierge and flowers in the parking garage.

Caruso’s next endeavors literally will go up to the next level, with apartments atop two new retail developments. His real estate investments firm, Caruso Affiliated Holdings, is slated to build more than $500-million worth of retail and residential property during the next two years, primarily in downtown Glendale and the Playa Vista development south of Marina del Rey.

In a recent interview, Caruso discussed the future of traditional shopping centers and his upcoming retail projects.

Q: Many department store chains have struggled in the recent years. What are the prospects for traditional department stores in the 21st century?

A: The department store as we know it today, with a few exceptions, is soon to be gone. People have much less time and they are looking for value. Target is very good example of a store that provides value that the old-fashioned department-store format doesn’t provide, but it’s still trendy to shop there. Today, people shop at Target and Neiman Marcus. Nordstrom is doing well. The department stores caught in the middle are having a tough time finding out where they belong. There’s not a lot of reason for them to exist.

Q: That would be bode ill for the department store-anchored indoor malls that have become so common since the 1960s.

A: I’m not suggesting indoor malls are going to go away, but you won’t see much growth. They were more of an aberration than a preference by customers. The best shopping areas in the world have always been on streets; Michigan Avenue in Chicago, Fifth Avenue in New York. Stores such as Crate & Barrel, Barnes & Noble and Anthropologie want to be in an outdoor venue. The direction happening in retail is clearly in outdoor formats, either what I do in integrated centers or on streets fronts.

Q: Not everyone was smitten with the inward-focused design of the Grove. What do you say to the “new urbanists” who complain that you turned your back on 3rd Street?

A: The new urbanist and all of these planners who theoretically spend time in school should ask customers what they like. Third Street is not that inviting. If it were a smaller-scale, pedestrian-friendly street you could have made a better case for opening up to it. We are drawing from 78 Zip Codes, which is a very large area. A study we did eight months ago showed that the average shopper at the Grove stays longer and spends twice as much as the average shopper in an indoor mall. Our conversion rate – how many of the people who come onto the property actually spend money – is 92% compared with an average of 50% in indoor malls.

Q: Speaking of indoor malls, you ran into some opposition from General Growth Properties, the owner of the Glendale Galleria, over your plans to build Town Center next door. Where does you project stand?

A: Our environmental impact report was issued last week. We’ll go in front of the City Council by the end of March seeking final approvals and hope to start moving earth soon after that. We are building about 450,000 square feet of retail, 100 condominiums and 238 apartments. We hope to be finished by summer 2006. General Growth could end up delaying us if they file a lawsuit challenging the EIR, but even if they do, we are going to go ahead and start unless a court orders us to stop. What General Growth doesn’t see is that we will be driving people to them. People are going to come to Town Center and naturally they are going to walk across the street.

Q: The builders of Playa Vista selected you to plan and perhaps develop the main retail portion of their project. Is that going to happen?

A: We spent a lot of time laying out their town center and they are using our site plan in their environmental impact review. We’re negotiating a purchase of real estate and hope to have an agreement within the next few months and get started within a year and a half. We’ll probably build around 200,000 square feet of retail and we are going to do a couple of hundred apartments with that.

Q: Would your apartments in Playa Vista and Glendale be above the shops, as they are at the Paseo Colorado in Pasadena?

A: Yes, but Paseo Colorado falls very short in terms of quality. We will put our brand on ours so they have a high level of quality and service. In Glendale, for instance, there will be valet parking and concierge service. They’ll be able to have room service from the restaurants or have their groceries delivered. Crate & Barrel could decorate a unit from top to bottom for a tenant.

Q: That’s a lot of pampering.

A: We want to make life easy. People, more than anything today, need time. So the more services we can provide to give back time to them give us an advantage from a business standpoint.

Q: Do you have any other developments in the pipeline?

A: We expect to close the purchase of 125,000-square-foot existing shopping center in Marina del Ray this month. It’s called Marina Waterside, on the corner of Fiji Way and Lincoln Boulevard. We’re going to completely remodel the property and add new tenants. We’ll get started in 90 days and finish by the end of the year. The Marina is an untapped market with really great demographics.