Department store leases complicate redevelopment
DOWNTOWN — The future of a controversial development in downtown Santa Monica was further complicated by an announcement Monday that the parent companies of Macy’s and Robinsons- May plan to merge in a deal worth $17 billion.
The two retailers occupy a combined 300,000 square feet of space in the aging Santa Monica Place mall, which owner Macerich Co. hopes to demolish. Before Macerich can build a new project on the 10-acre site it will need approval from the new conglomerate.
A plan to raze the indoor mall and extend the thriving Third Street Promenade one block south has already faced intense scrutiny from elected leaders and the public alike. Macerich’s first proposal called for reworking the layout of its shops and restaurants, and adding five high-rise towers for apartments, condominiums and offices.
The Santa Monica City Council in January sent Macerich back to the drawing board, saying the property presented a valuable opportunity to connect downtown, but needed to be redrafted after taking input from residents and merchants. City Hall on Feb. 17 released a four-month plan for managing that process.
How the pending merger will affect the proposal was unclear Monday. City officials said they hoped to use the opportunity to attract a different type of retailer, perhaps along the lines of a Target or another discount store. Meanwhile, Macerich reiterated its commitment to redevelop the site, and a Santa Monica business consultant said the deal posed several new opportunities.
“This is all very new and even people that have seen it coming for a long time, now that it’s happened, this is still a big shock. This is still a big ripple effect in the industry,” said consultant Rob York, who tracks retail business in downtown Santa Monica.
One thing is for certain: With more than 60 regional malls nationwide, Macerich will be negotiating with the new retail giant in more than one market.
The merger calls for Federated Department Stores Inc., which owns Macy’s and Bloomingdale’s, to buy May Department Stores Inc. for approximately $11 billion, and inherit $6 billion of May’s debt. The new conglomerate will oversee about $30 billion in annual sales from more than 950 department stores, and some 700 formal-wear outlets in 49 states, Guam, Puerto Rico and the District of Columbia. The deal was expected to become final this fall.
“This is truly an exciting day in American retailing,” said Terry J. Lundgren, Federated’s chairman, president and CEO, in a written statement. “Today, we have taken the first step toward combining two of the best department store companies in America, creating a new retail company with truly national scope and presence.”
While no store consolidations or name changes were planned to take place before 2006, most of May’s regional department stores ultimately will be converted to Macy’s, according to Carol Sanger, a spokeswoman for the retail company.
Less than 100 malls nationwide have overlap of Federated and May department stores. Santa Monica Place is one, and it remains unknown if the company would move in one of its other retailers or seek to sell its second space at the mall.
Both Macy’s and Robinsons-May negotiated favorable, long-term leases at Santa Monica Place before the suburban-style mall opened in 1980, when major outlets were needed to attract customers. Though the two retailers had agreed separately to close their doors so Macerich could redevelop, the merger could complicate things.
Assistant City Manager Gordon Anderson said the pending deal offered a chance to obtain a different type of retail outlet.
“This could be an opportunity for us to have a shop that might respond to one socioeconomic level in our community and another shop that might respond to another level,” he said. “We’re hopeful that this merger could provide that opportunity.”
York said the merger raised a lot of interesting opportunities. One option for Federated would be to replace the Robinsons-May with another one of its retailers, like Bloomingdale’s. Another option would be to sell its space to an outside group. The key to deciding what to do, York said, will be determining if the mall is to be remodeled or redeveloped.
“In either case, there’s some potential upside, but I think it’s going to make for some very tricky negotiations,” he added.
Potential downsides, York said, were that Federated may want increased compensation for closing its doors during the two to three years the property is under construction. It also could ask Macerich to buy out its lease at a high price or make other demands that could be difficult to meet.
Macerich President Art Coppola in January urged the City Council to push ahead with the redevelopment plans, saying it had been difficult to get the retailers to agree to go dark during construction. The retailers retain power in the negotiations because of their favorable leases, which also are specific to the type of use and, therefore, not easily sold or transferred to other retailers who may want to reconfigure or remodel.
Randy Brant, a senior vice president for Macerich, said Monday it was too soon to comment on what might happen in Santa Monica as a result of the merger. Still, Brant said his company remained committed to redeveloping Santa Monica Place.
“The impending sale of Robinsons- May to Federated does not change Macerich’s position,” he said. “It doesn’t change our mind that it (Santa Monica Place) needs to be replaced to better serve downtown.”
No matter what happens, the new conglomerate will have an important presence downtown, York said.
“They’re going to have a lot to say about what happens in Santa Monica,” he added. “Federated will have a say in any major decision affecting downtown.”
Originally published in the Santa Monica Daily Press print edition on March 1, 2005. Read the original PDF.