Sunday, August 19, 2012

Tenants struggle in revamped midtown building - Sacramento Bee

Five years after the Midtown Arts, Retail, Restaurant Scene â€" MARRS â€" opened to high expectations on the corner of K and 20th streets, it's still searching for a mix of tenants that can make it over the long term.

Half of the original 10 retail tenants have left, and some past and present tenants say business is sluggish. The most recent departure was Lounge ON20, a high-concept restaurant and bar that closed in May.

Building owner Michael Heller, a pioneer of urban development in Sacramento, said the turnover is a reflection of the economy and the individual circumstances of the tenants that closed. Midtown is one of Sacramento's most successful retail zones, but even here, the downturn has made its presence felt.

"Today's economy is nothing like it was six years ago," Heller said. "It's rough. You've got to work really hard."

From the start, Heller has characterized MARRS as something special â€" a catalyst project aimed at enlivening midtown and Sacramento nightlife in general. Originally a state-owned warehouse, the building was transformed by a $12 million renovation into a row of storefronts along a serpentine, raised wooden patio. Architecture and engineering firms fill the second-floor office space.

With performances, DJs and outdoor vendors, the MARRS block has served as a focal point of activity during the city's monthly Second Saturday art walk. The building occupies one corner of a lively intersection with gay bars on the other three corners.

Heller said he has tried filling MARRS with independent, homegrown tenants, including an art gallery, a newspaper stand and local clothiers. Such businesses lack the deep pockets of large chains, and so tend to have a higher failure rate.

"The nature of this project was to attract local artistic people to open up their dream business," Heller said. "And there's risk to that."

He said a better measure of MARRS' success is how quickly he has been able to fill vacated spaces. Nine of the building's 10 retail storefronts are occupied, and Heller said a new restaurant is poised to move into the marquee space left vacant when Lounge ON20 closed.

In contrast, a vacant storefront in a loft and restaurant complex that he co-owns at 16th and J streets has sat vacant for two years, he noted.

Today, tenants include a yoga studio, restaurants and clothing shops, including the upscale athletic clothing brand Lululemon, which is conducting a yearlong trial tenancy to decide whether to open a permanent store in MARRS.

"They chose to be at MARRS; they could have been anywhere," Heller said of Lululemon. "I'm hoping they say, 'This is the perfect place. We want to sign a long-term lease.' "

Sacramento Assistant City Manager John Dangberg views MARRS as a success. "I wish every property in downtown was performing as well as that one," he said.

Still, some past and present tenants said the place isn't as hopping as they'd hoped during the daytime or on nights when there's nothing going on.

"The mornings and nights were devoid of life," said Terence Lott, owner of Newsbeat, a magazine and sundries store that left last November and still operates a store in Davis. "We never made any money. There was no prospect of growth or making a profit."

Current tenant Pete Haynes, owner of clothing retailer Denim Spot, wishes he "could be earning more per square foot."

On a recent weekday morning, only a few shops were open. Business was brisk at Peet's Coffee & Tea, the coffee shop chain, while its neighbors stood idle.

Jeremy Fuentes, manager of the Luigi's pizza chain, said "there's definitely been a downtrend" since they opened five years ago. Lowering prices hasn't solved the problem â€" Fuentes said his profits are down. The eatery is luring people in with lunch specials and special entertainers.

Haynes suggested that part of the difficulty in drawing customers may lie in the building's eclectic tenant mix, which targets a wide range of demographics.

Denim Spot, where jeans can fetch $200 apiece, attracts an older, more affluent crowd, while Luigi's draws teenagers with discounted pizza. The now-departed Lounge ON20 billed itself as an upscale restaurant whose chef used cutting edge cooking techniques.

"In a perfect scenario, it would be boutique row, but that would be just for Denim Spot," Haynes said. "But, as is, it's a great collection to draw people to the building."

MARRS opened for business at the height of the boom in 2007, when commercial real estate prices were around $3 a square foot, according to Heller.

For Newsbeat, that meant paying $7,200 a month for a 2,400-square-foot storefront â€" a cost that, Lott said, "wasn't justified."

"We were getting ourselves deeper into a hole," he said.

Heller contends the departed businesses were "undercapitalized and didn't have any experience."

Since the recession, rents at MARRS have fallen slightly. Heller said he charges anywhere from $2 to $2.75 a square foot at MARRS.

While Heller described leasing retail space in midtown these days as "brutally tough," commercial real estate brokers say the area is actually doing better than most suburban retail districts.

Vacancy rates for retailers sit at 4.4 percent in downtown, midtown and east Sacramento, the lowest in the region, according to consulting firm Terranomics. By comparison, Natomas has a vacancy rate of 11.9 percent, while Sacramento County's average is 13.3 percent.

"Relative to Sacramento, midtown is doing awesome," said Aaron Marchand, a broker with Turton Commercial Real Estate.

Heller said he's working hard to drive foot traffic. He has done everything from hiring bands to providing valet parking.

"Everyone's just doing the best they can," Heller said. "I can't control the economy."

© Copyright The Sacramento Bee. All rights reserved.

Call The Bee's Richard Chang, (916) 321-1018.

• Read more articles by Richard Chang

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