Trouble on the Bloc

Los Angeles /
Apr.April 24, 2017 08:30 AM

From the April issue: The Bloc is a bellwether for the real estate market in Downtown Los Angeles, and for quite a while, it was signaling all good things to the industry, with promises of growth and prosperity for all.

But with previously announced tenants now jumping ship, a revolving door of retail leasing brokers and three pushed-back openings, the industry is beginning to suspect that the development was a false prophet.

After hip hotels and trendy restaurants started popping up in DTLA more than five years ago, retail was expected to be the next frontier. Mega-brands Target and H&M moved into shopping center FIGat7th, and the Bloc, The Ratkovich Company’s 1.8-million-square-foot mixed-use development, announced leasing news shortly after the developer snagged the property in 2013.

With 400,000 square feet dedicated to retail and restaurant tenants, the Bloc was a beacon to developers, a sign that the tide was finally turning in Downtown’s long-suffering retail market and that a true real estate renaissance was afoot.

Now many of those same industry insiders point to the troubles at the Bloc as a symbol of the increasing uncertainty in the DLTA market.

Gabe Kadosh of Colliers International said Downtown’s retail is still growing roots, but it’s happening more slowly than expected.

“I think there’s a little bit of uncertainty, particularly in Downtown where it’s an unproven market,” Kadosh said. “As you talk about the Bloc, everyone is [thinking], ‘Who is going in there?’ and using that as an indication of what is going to happen in Downtown.”

Before the boom

Anschutz Entertainment Group’s opening of the Staples Center in 1999 helped to make Downtown a destination, adding to the area’s growing nightlife scene. Prior to the arena’s opening, the neighborhood was seen as a ghost town after the work crowd went home.

But DTLA wasn’t attracting national retailers and trendy boutiques until FIGat7th announced plans for construction in 2006. Brookfield Office Properties purchased the site and spent $40 million renovating the existing 330,000-square-foot shopping mall.

Carol Schatz, chief executive of the Downtown Center Business Improvement District, also credits the 2007 opening of grocery store chain Ralphs as a revitalizing force in the neighborhood, which hadn’t been home to the brand in about 50 years.

“Bringing the Ralphs back 10 years ago was a catalytic event,” Schatz said. “It finally showed we had the critical mass to support a high-end grocery store.”

Breaking ground

Ratkovich purchased the Bloc, formerly Macy’s Plaza, in 2013 for $241 million with partners National Real Estate Advisors and Blue Vista Capital Management.

The plan was to implement a $180-million makeover of the 1970s-era mall, office and hotel complex, which sits in the center of Downtown’s Financial District.

The 23-story, 496-room Sheraton Grand Hotel on the site was extensively remodeled to include an upgrade to the hotel’s guest rooms, lobby and meeting rooms. Cabanas and a rock garden were added to the hotel’s outdoor areas.

The mall’s glass atrium roof was removed and an open-air food court and public plaza were built. In May 2015, the Bloc invited the press to witness the removal of an old metal roof to mark the project’s next step of building an open-air plaza.

At the time, the project was expected to open in the fall of 2015. However, many of the retailers, including Alamo Drafthouse, were delayed until the summer and fall of 2016, and so the opening date was pushed back.

Ratkovich was able to keep shoppers excited about the project when it hosted an unveiling of  “The Square,” a large public courtyard with a grassy patch and colorful patio furniture, in June 2016.

The Bloc held another grand opening last month to unveil a $9.3 million pedestrian passageway at the 7th Street/Metro Center subway station, in partnership with the Los Angeles County Metropolitan Transportation Authority.

Trouble brewing

There was plenty of fanfare when the Bloc first announced its list of incoming tenants in 2014.

Many leasing brokers were also told the Bloc was in negotiations with retailers such as Sephora, Apple, Trina Turk and Sugarfina before a letter of intent was signed. That’s a dangerous move, sources say, since deals can fall apart at that stage.

And indeed, they did — as did agreements with some of the tenants who had signed on.

San Francisco-based social club Wingtip was originally featured as one of the project’s biggest draws. With plans to build a private bar and smoking rooms, the first L.A. location for the club was expected to open in October 2015. However, following delays and unexpected changes to its leasing agreement, Wingtip did not to sign its lease.

Marina del Rey hot spot Killer Shrimp Restaurant and Bar also planned to open its 24-hour diner concept Killer Café at the site but opted out for similar reasons, sources said.

The percentage of the Bloc’s 720,000-square-foot office tower that was leased also dropped substantially in the first quarter, though sources could not say by how much. Ratkovich said 48 percent of the space is leased. Industry insiders speculate that tenants with short-term leases were booted in favor of finding tenants who could pay more. Ratkovich did not return requests for comment.

The development company has also been rocked by some internal issues, from the sudden departure of chief operating officer Clare DeBriere in January to the Bloc’s financial troubles last year.

In February 2016, Ratkovich came under scrutiny from lenders. A $121.8 million CMBS loan it inherited when it purchased the property had been transferred to special servicer CWCapital Asset Management because of concerns that the developer and its partners would be unable to pay the balance when it matured in April of last year. Ratkovich was eventually able to obtain a $225 million loan to replace the troubled CMBS loan, as TRD reported.

In another possible sign of trouble, recently the developer brought its retail leasing in-house, a move insiders described to TRD as unusual when a project is still in the works.

Richard Rizika of CBRE was leading the retail leasing, but as of March the company is no longer involved in the project. Retail leasing opportunities on its website are now being directed to Kathleen Miller, vice president of marketing and communications at Ratkovich, and Kristin Teufel, development assistant. CBRE is still handling the development’s office leasing.

Some brokers are also questioning the developer’s leasing strategy.

The Bloc’s website was recently redesigned, showing off an updated list of incoming tenants, which includes lifestyle shop BrandsWalk, retail concept Free Market, T-Mobile, Davio’s Northern Italian Steakhouse, Popbar, Starbucks Reserve, the Urban Oven, Qwench Juice Bar and DRNK coffee + tea. In March Everytable, a small fast-casual restaurant chain opened at The Bloc.

Brokers, including Kadosh, question the wisdom of seeking out unique brands in a high-traffic area near the metro that might be better served by stores with more name recognition.

Future tenant Alamo Drafthouse has plenty of buzz, but sources said the theater is facing construction delays. Alamo did not respond to requests for comment. It’s unclear when that space will be finished.

Currently, nine retailers are open for business in the shopping center: eyewear store Eyes on the Bloc, GNC, Jewelry Pavilion, Macy’s, Mr. G’s Toys, USPS, LA Fitness, Everytable and the restaurant District, inside the Sheraton. 

Gaining momentum?

Signs of progress elsewhere in the neighborhood should bolster confidence that the Bloc will land more tenants, said Justin Weiss of Kennedy Wilson. FIGat7th, for example, recently secured Nordstrom Rack for a 27,000-square-foot space that sat vacant for nearly a year after former tenant Sports Chalet left the property.

“That should be a testament that the Bloc will ultimately fill up,” Weiss said, adding that he believes the Bloc’s current leasing troubles are largely due to the firm’s internal issues.

Kennedy Wilson is handling 150,000 square feet of retail leasing space at Oceanwide Plaza, the $1 billion mega-development in South Park by Beijing developer Oceanwide Holdings Company. Weiss said brokers have been fielding numerous proposals for the project.

“Things take longer in Downtown,” he said. “Deals are a little tougher to do, but the future of Downtown is brighter than any other place in L.A. because we’re the only part of L.A. where you can experience true growth.”

Weiss remembers imploring clients to sign leases several years ago across the street from the Eastern Columbia Building off South Broadway, where the trendy 130-room Ace Hotel opened three years ago.

“They could’ve done deals there at $2 a square foot,” he said. “Some of those tenants didn’t do the deals and now they’re kicking themselves because rents by the Ace have tripled since the hotel opened.”

Weiss does not think the Bloc’s woes translate to a gloomy outlook for Downtown overall, as the area’s retail resurgence is still in its infancy. 

“In Downtown, a Class F location one day can become a Class A location within six months,” he said. “You have 16 districts in Downtown; about 12 of those districts are neighborhoods being built from scratch, with thousands of units.”

Others point to the residential boom as good reason for a positive outlook. Condominium development is at an all-time high since the 2008 recession. Trumark Urban’s 25-story condo building TEN50 at 10th Street and Grand Avenue has 100 of the 151 units reserved, according to sources. The billion-dollar Metropolis project has nearly 80 percent of its 308 units in contract for its first tower, and the second tower is 30 percent in contract and expected to open next year, according to Douglas Elliman Development Marketing, which is marketing the project.

There are also numerous projects in South Park, from Oceanwide Plaza to the $500-million mixed-use development Circa that will include two 36-story towers featuring a total of 648 apartments.

Schatz of the Downtown DCBID said the Downtown residential market is on fire, with roughly 10,000 units currently under construction that will accelerate the retail sector.

“It’s a growth opportunity,” she said. “We have about 60,000 people living in Downtown L.A. That’s miraculous. But compared to Chicago or Manhattan, we are in our infancy.”

In 2010, there were just 27,849 people living in the area, Census data shows.Forty-eight new projects were proposed for the area last year, offering more than 15,000 residential units, 2 million square feet of office space, 1 million square feet of retail and nearly 2,000 hotel rooms, according to research from the BID.

The report also showed retail vacancy remaining at a near all-time low of 4 percent in the fourth quarter of 2016.

Several new retailers moved into the neighborhood last year, including Footaction and Unleased by Petco. Blue Bottle Coffee also opened its second Downtown location in the Bradbury Building last year. Qwench Juice Bar and DRNK coffee + tea will open their locations at the Bloc in April.

Andrew Keheyan, co-owner of Jewelry Pavilion at the Bloc with his brother Movses Demirjian, has been in business for more than 30 years. Keheyan said the company has remained in the same spot, witnessing several ownership changes to the property, including its new owner, Ratkovich.

“Back in the day, we would close the store and drive through the street getting to the freeway, and it was like going through a ghost town,” he said. “Now there’s a lot of people living in Downtown. It has changed a lot, and I think it’s still going to change.”

Reuben BenJehuda, founder and chief executive of New York gelato ice cream shop Popbar, said its location at the Bloc should open this summer.

“There’s so much rebuilding. It’s kind of exciting to be a part of that,” BenJehuda said. He went on to say he’s a bit concerned about the Bloc’s delays, but he still believes in the project.

“We have seen delays in other projects before, and we got assurance [from Ratkovich] it will be opening soon,” he said.

Kadosh said interest from retailers will only grow, thanks to the other tenants moving to the area.

“Retail follows retail,” he said. “Some of these multifamily developers are like, ‘What do you mean you can’t lease our ground floor at this rate?’ But it’s just a different beast. I think we’re heading in a good direction, but it’s just slow.”

Related Articles

Jamison Properties' Jaime Lee with the Pierce National Life Building (LinkedIn, Google maps)
Koreatown office building poised for residential conversion
Koreatown office building poised for residential conversion
The Home Depot's Ted Decker with 16830 Devonshire St
Home Depot plans to build 136K sf store in Granada Hills
Home Depot plans to build 136K sf store in Granada Hills
SteelWave's Barry DiRaimondo with 1382 Bell Avenue (LinkedIn, JLL)
SteelWave sells Tustin office building for $91M
SteelWave sells Tustin office building for $91M
Restaurant owner Tony Roman and Basilico’s Pasta E Vino, 21501 Brookhurst Street in Huntington Beach (Basilico’s Pasta E Vino/Facebook, Google Maps, Getty)
Anti-mask restaurateur in OC sues landlord
Anti-mask restaurateur in OC sues landlord
Cottonwood’s Mark Green and Silver Creek's Franck Ruimy with 8850 Sunset Blvd (8850 Sunset Blvd , LinkedIn, Stan Hope Capitol, Getty)
Reimagined Viper Room’s developer scores $60M loan
Reimagined Viper Room’s developer scores $60M loan
Lithia Motors' Mark DeBoer and rendering of new Porsche dealership (City of Los Angeles, Getty, LinikedIn)
Going up: Lithia Motors plans five-story Porsche dealership near DTLA
Going up: Lithia Motors plans five-story Porsche dealership near DTLA
Sprouts Farmers Market ceo Jack Sinclair with 1829 E. Orangethorpe in Fullerton (Sprouts, Google Maps, Getty)
Sprouts bags largest OC lease this year with 337K sf warehouse
Sprouts bags largest OC lease this year with 337K sf warehouse
National Real Estate Advisors ceo Jeffrey Kanne with renderings of the residential tower The Bloc at 700 S. Flower St in Los Angeles (Shimahara, National Real Estate Advisors)
The Bloc could add 53-story tower to DTLA skyline
The Bloc could add 53-story tower to DTLA skyline

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.