'Blue Whale' Flounders : In an Era of Slimmer Wallets, Pacific Design Center Hits Troubled Waters


The Pacific Design Center seemed sure to succeed when it opened in West Hollywood 18 years ago--and for more than a decade it did.

Known as the Blue Whale, the mammoth structure at San Vicente Boulevard and Melrose Avenue was built in the heart of Los Angeles' hippest shopping area--a fashion-conscious neighborhood filled with free-spending yuppies and close to Southern California's wealthiest communities.

Snobbishly catering "to the trade only"--interior designers representing well-heeled clients--shopkeepers who rented showrooms there saw their business grow steadily throughout the late 1970s and well into the 1980s.

Designers from across the West flocked to the complex, buying everything from trendy Berber carpets to priceless antiques and providing added luster to the blossoming Melrose Avenue shopping district.

"It was truly the 'Age of Extravagance,' " remembers John Gallucci, who runs a high-end showroom where a complete dining-room set can still top $25,000.

But then came the stock market crash in 1987, followed by an economic slowdown that eventually led to the worst recession California has seen in 50 years. Showrooms in the center began to close, forcing the partners who own the project to slash rents in order to keep existing tenants and lure new ones.

Now the partnership--chiefly made up of Laguna Niguel-based Birtcher Development and San Francisco-based Catellus Development--has confirmed that the project lost money last year and that it has fallen behind on payments on its $200-million mortgage. The loan is being renegotiated.

The story of the design center mirrors the modern history of the Southern California economy and is but one of many commercial ventures in trouble today.

Many who prospered in the 1970s and 1980s are scrambling merely to survive as the region remains deeply mired in its toughest times since the Depression.

As a result, the blue whale may become a white elephant if it does not adapt quickly and expertly to new economic realities, some suggest.

"It's a fine, upscale project, but it has to adapt to the 'downscale' '90s," said Jim Schmitt, an analyst for WestCountry Financial in Moorpark. "It won't be an easy trick to pull off."

The owners of the center say they are trying to lure new customers in addition to their effort to lower its debt. And while Catellus President Vernon Schwartz acknowledges that the complex has problems, he predicts that "the Pacific Design Center will enjoy success for many years to come."

The idea to build a megacenter where designers could find everything they needed under one roof was hatched around 1970 by the late Burt Friedman, a local real estate broker.

The site for the center was a former railroad-switching yard owned by Southern Pacific Realty Co., which later changed its name to Catellus. The parcel was considered an eyesore by those anxious to polish West Hollywood's image as a hotbed of culture and fashion.

Instead of selling the site, Southern Pacific hired Friedman and his partner, Ron Kates, as consultants for the project. By the time the building opened in 1975, its size had doubled from the original plans to 750,000 square feet. "The first year or so was a little rough, but then business took off like a rocket," said Kates, who handled the project's leasing duties in its early years.

"By the late '70s, we were turning some tenants away because we just didn't have any space to put them in."

Small businesses around the center also sprang to life, feeding off the project's success. Dealers in antiques, furniture and carpets who didn't want to pay the center's soaring rents sprouted along Melrose, Robertson and neighboring streets, offering comparable merchandise at often lower prices.

"People would visit the design center and pick out what they wanted, then they'd come over here and I'd sell it to them at a discount," said Albert Case, who runs a small floor-covering shop across the street from the design center. "I didn't have the money to rent a place in the center, but I was making a good living off of it."

Business got even better after the 1981-82 recession, as the economy rebounded and the stock market soared.

The prolonged bull market, coupled with an unprecedented rise in home values in the late 1980s, pumped millions of dollars into the pockets of the center's most important group of clients--lawyers, doctors, celebrities and others who were spending $50,000 or more to give their homes a "new look."

So brisk was business that the center's owners decided to move forward with the project's second phase--a 450,000-square-foot, emerald building known as Center Green.

In retrospect, however, the expansion could not have debuted at a worse time. It opened in March, 1988, just a year before the real estate market began to cool and the regional economy began its long, slow slide into recession.

Even well-to-do homeowners started to scale back or cancel their redecorating jobs as the recession worsened. Vacancy rates at the center began to rise, as some shopkeepers moved to cheaper quarters or went out of business.

Making matters worse, the building's management team had to slash rental rates to lure new tenants and keep existing ones.

Officials at both Birtcher and Catellus won't discuss the center's financial details.

But in a filing with the Securities and Exchange Commission last November, Catellus confirmed that the center's falling revenue was not "sufficient . . . to service its debt" and that the project had "defaulted in payment" on its $200-million mortgage held by Teachers Insurance and Annuity Assn. in New York.

Catellus President Schwartz said the partnership recently reached an agreement in principle with Teachers to restructure its debt to make the center profitable again. Final documents are expected to be signed soon, he said.

"Every developer nowadays is getting their lenders to restructure their loans, and we are no exception," noted Ron Birtcher of Birtcher Development, the partnership's manager.

Not surprisingly, the design center's problems have spread to the same small businesses that were flourishing just a few years ago.

Case, who owns the floor-covering store across the street, said his business has dropped in lock-step with the center's. "It's like Death Valley over there," Case said, pointing out his window. "And since foot traffic is down there, foot traffic is down here."

Even the city of West Hollywood is feeling the pain.

According to City Manager Paul Brotzman, the center's woes have cost the local government about $400,000 in direct and indirect tax revenue over each of the last two years. "For a small city with a $36-million budget, $400,000 is a pretty significant amount of money," he said.

If the partners succeed in renegotiating their debt, an even more-daunting task may lie ahead: Getting new customers through the door.

"The rich just aren't spending like they used to, and furniture and antiques have always been a very discretionary purchase," said Robert Kahn, president of a Bay Area retail-consulting company that bears his name.

To expand its client base, the center's marketing staff has targeted a new group of consumers: Single people who make at least $75,000 a year and working couples who earn $125,000.

"We're going after what we call the 'Lone Stranger,' " said Mark McIntire, the design center's vice president of marketing. "He or she is between 28 and 40, making good money, but has never used an interior designer before."

Ironically, those efforts have upset some designers.

"The center needs more high-end showrooms and high-end products, but those kinds of companies aren't going to open there if the center stops focusing on the very affluent," said designer Ron Wilson, whose clients include entertainer Cher and other celebrities. "The rich made the center successful, and it's the rich who will save it--if it's going to be saved."

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